World’s Oldest Bank, Banca Monte dei Paschi di Siena S.p.A.  Is In Big Trouble

The world’s oldest bank, Banca Monte dei Paschi di Siena S.p.A.  or MPS as it’s known in the finance world is on the verge of collapsing unless the Italian government moves to nationalize it. A move that many in Italy don’t expect to happen.

Banca Monte dei Paschi di Siena was founded by order of the Magistrature of the Republic of Siena as Monte di Pietà in 1472, when its statute was approved by the leaders of the city-state. The bank has been in operation since then and because of that is considered the oldest bank in the world.

Its current form dates from 1624, when Siena was incorporated in the Grand Duchy of Tuscany and the Grand Duke Ferdinando II granted to depositors of Monte, in their warranty, the income of the state-owned pastures of Maremma (the so-called “Paschi” which gave the bank its name). The bank consolidated and increased its banking activity during the 17th and 18th centuries.

With the unification of Italy in the 19th Century, the bank expanded its business throughout the Italian peninsula, initiating new activities, including introducing the concept of mortgage lending on the Italian peninsula.

The world’s oldest bank thrived until the beginning of the global financial crisis when the bank began losing money. As several of their operations began creating huge loses and MPS’s management decided to enter into derivative contracts with Deutsche Bank and the Nomura Group to hide the loses of what was later discovered to be 750 million Euros from the their balance sheets.

MPS needs to tap investors for cash to pay back 4.1 billion euros the bank received in state aid earlier this year to avert nationalization after it was hammered by the euro zone debt crisis and loss-making derivatives trades.

The capital increase is part of a tough restructuring plan was apart of an agreement hammered out with the European Commission in order to receive clearance for the state bailout.

An Italian Treasury spokesman said the government’s priority was to give the bailout money back to taxpayers and it had no interest in nationalizing MPS. Treasury officials did say they will continue to encourage all parties involved to find a solution.

MPS Chairman Alessandro Profumo, an internationally respected banker said on Saturday he and chief executive Fabrizio Viola would decide whether to step down next month. A board meeting is expected around mid-January.