MNI EXCLUSIVE: Bank Of Italy Shifts As Government Pressures

     LONDON (MNI) - The Bank of Italy has heightened its opposition to new rules

calling for bondholders to bear the brunt of bank failures amid other policy

shifts as it comes under pressure from the Italian government to work more

directly to change EU rules to favour of the country's banking system.

     The Bank has also sharpened criticism of opponents of eurozone-wide deposit

insurance and thrown its weight behind the government's drive for a revision of

state aid rules.

     Its changes in language come as Italy's governing coalition, which has

slammed the BOI's record as a banking supervisor, pushes for it to adopt a more

critical approach towards Germany and to defend national rather than

pan-eurozone interests.

     The government respects the central bank's independence but also believes

that as a major European Central Bank stakeholder it should more directly pursue

policies in benefit of Italian banks, according to key economic officials at the

populist 5-Stars and far-right League parties.

     "It's about time the BOI starts advocating for new banking rules at EU

level," said one source, expressing confidence that "things will change" at the

central bank.

     "Not everything can be decided and controlled in Frankfurt."

     --GOVERNMENT PRESSURE

     The government is using its power to appoint new Bank of Italy board

members to put pressure on the institution. It has failed to reappoint Deputy

Governor Luigi Signorini, whose term expired in February, and people close to

the Bank fear that another two of the Board's five spots will be left vacant

when their current holders' terms end in May, potentially affecting its ability

to perform key functions.

     The governing coalition has taken a similar tack with Italy's insurance

authority IVASS, controlled by the central bank, which lost two board members

after their mandates expired without new appointments being made.

     While not acknowledging that government pressure was responsible, a person

familiar with Bank of Italy thinking noted how its criticism of European rules

on bailing in bondholders in the event of bank failure has become more

forthright in recent speeches and papers. Another person linked to the

institution said that life for senior officials at the Bank has been difficult

under the current government.

     The Bank of Italy had long held that the bail-in measures included in the

EU's Bank Recovery and Resolution Directive, had been introduced too abruptly,

without giving lenders time to adjust. This language has now hardened, with the

BOI's head of banking supervision calling the rules damaging and "practically

unenforceable" in a speech earlier in March.

     Carmelo Barbagallo's comments came as the Italian government seeks to ditch

the bail-in rules, never applied in Italy, and to revise at an EU-level existing

legislation against state aid forbidding any public rescue of ailing banks.

     The BOI is also calling for European rule changes to allow the creation of

a public deposit insurance body to back the industry-funded interbank deposit

protection fund, and of an asset management company to support an orderly and

gradual disposal of NPLs. Both of these stances resemble government policy.

     There are even signs that the government's confrontational approach towards

its EU partners is also beginning to filter through into the usually cautious

language of the Bank of Italy.

     Deputy Governor Salvatore Rossi openly pointed at "the governments of the

countries of Northern Europe" when he said in a recent speech that resistance to

burden-sharing arrangements across the eurozone effectively serves to defend the

banks of some countries from troubled lenders in others.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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