SIENA, Italy — The long, tortured saga of Monte dei Paschi di Siena, the scandal-plagued Italian lender that is the world’s oldest bank, may be coming to an end, but Italy’s broader banking troubles are far from over.
Shareholders of Monte dei Paschi di Siena are expected to agree on Thursday — under duress — to lift ownership restrictions on the bank, ending five centuries of cozy local control and political patronage. That might attract new capital, some from overseas, to help Italy’s third-largest bank work its way through financial problems. Earlier this year the bank received a 4.1 billion euro ($5.4 billion) bailout.
But the same insular ownership structure that shielded Monte dei Paschi, even while it fell ever deeper into debt, still persists at dozens of other lenders in Italy. Economists say this tradition may be prolonging the recession that has made Italy a threat to euro zone stability, by insulating the financial institutions from the rigorous restructuring they need if they are to resume the main role of banks: lending to businesses.
At a special shareholder meeting on Thursday, Monte dei Paschi, under new management since last year, is expected to abolish a rule that has limited the voting rights of outside investors.
Eventually, that and other changes could wrench control away from the bank’s largest shareholder, the Monte dei Paschi Foundation, which has long dominated the bank and used its profits to act as Siena’s shadow government, helping to finance everything from ambulance service to the local professional soccer team. Profits from the bank even helped finance the Palio, the bareback horse race in the town square that is the city’s trademark event and main tourist draw.
As long as Monte dei Paschi was profitable, the system served almost everyone. Politicians used it to dispense patronage and jobs and sometimes landed lucrative management posts themselves. The foundation used bank profits to help finance hospitals, church restorations, low-cost housing and local museums.
“Monte dei Paschi is extreme,” said Lucrezia Reichlin, a professor of economics at the London Business School who is on the board of directors of UniCredit, Italy’s largest bank. “In Siena there is no one who did not benefit from this crazy bubble.”
Monte dei Paschi is just one example of the pervasive influence that Italy’s powerful foundations, or fondazioni, exert over the banking system as dominant shareholders in publicly traded companies like the country’s two biggest banks, UniCredit and Intesa Sanpaolo. The foundations’ influence may have made it more difficult for Italian banks to raise new capital, analysts said. Not many investors, particularly wealthy foreign ones, are willing to buy shares in a company in which they have no influence.
“All the banks need capital,” said Stefano Micossi, an economist who is director general of Assonime, an association of publicly traded Italian companies in Rome. “This structure makes it difficult to raise capital.”
One reason Italy has been stuck in recession since the end of 2011 is that small Italian businesses have not been able to get credit they need to invest in modernization and expansion and to create new jobs. The credit squeeze has grown worse this year. Lending has fallen more than 5 percent during the first quarter of 2013 compared with a year earlier, according to the country’s central bank, the Bank of Italy.
The problems at Monte dei Paschi have led to a wider debate about fondazioni influence in the Italian banking system. In a speech to a bankers’ group last week, Ignazio Visco, the governor of the Bank of Italy, said that the foundations had in some cases become too involved in bank decision-making. He called on them to let in new investors.
Approval of governance changes at Monte dei Paschi is virtually certain after the foundation said on Monday it would vote in favor of lifting a rule that prevented any one investor except the foundation itself from exercising votes worth more than 4 percent of the total.
The foundation’s stake in Monte dei Paschi has already sunk to 33.5 percent, from more than 50 percent two years ago, and it is likely to sell more shares to cover its own debts, pushing its stake as low as 10 percent.
The changes in Monte dei Paschi governance are designed to make shares in the bank more attractive to investors, and pave the way for the bank to sell 1 billion euros in new shares by the end of 2014. The bank is also responding to pressure from the Bank of Italy and the European Commission, whose approval is needed for the bank to receive state aid.
The shareholder meeting on Thursday will also make other changes, like term limits for directors, that are likely to weaken the foundation’s influence on the bank’s board.
Even if the changes are a done deal, Thursday’s shareholder meeting is likely to be loud. Past meetings have drawn hundreds of angry citizens, political leaders and former bank employees whose severance pay has been partly converted into devalued bank shares.
“We are breaking a century-old bond here,” said Eugenio Neri, a heart surgeon and leader of a civic movement that placed a close second in Siena’s mayoral elections a month ago. “The function of the bank and of the foundation is crucial for this region. We need to restore the bank ourselves and kick politics out of it. That is what we need.”
Gaia Pianigiani reported from Siena, Italy, and Jack Ewing from Frankfurt.
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