UPDATE 1-Bank of Italy knew about risky Monte Paschi trades-newspaper

Fri Jan 25, 2013 6:21am EST

ROME Jan 25 (Reuters) - The Bank of Italy expressed concern as long ago as 2010 over derivative investments at Monte dei Paschi di Siena bank despite its denials it knew about the full risks, an Italian newspaper said on Friday citing an official document.

Monte dei Paschi this week revealed derivatives trades that could cost it as much as 720 million euros. Two of the loss-making contracts were the so-called "Alexandria" trade with Japanese bank Nomura and the "Santorini" trade with Deutsche Bank.

On Wednesday, the Bank of Italy said information about the derivatives trades had been hidden from it, but Corriere della Sera daily reported that a 2010 central bank inspection document mentions both the Alexandria and the Santorini trades as being insufficiently monitored.

"Some of the long-term investments have risk profiles that are inadequately controlled and were not referred to the executive administrative body," the document cited by Corriere reads.

"In particular ample liquidity (1.8 billion euros) was invested in two operations with a nominal value of 5 billion euros with Nomura and Deutsche Bank in London."

In 2010, European Central Bank President Mario Draghi was still Bank of Italy governor. An ECB spokeswoman contacted on Thursday declined to comment on the matter, saying that it was "the responsibility of national authorities."

Contacted by Reuters on Friday, a Bank of Italy spokeswoman had no immediate comment on the Corriere report, but current Bank of Italy Governor Ignazio Visco addressed the controversy at the World Economic Forum in Davos, Switzerland.

Visco said the bank was not aware that other loss-making operations were tied to the derivatives trades. He denied any failure of oversight by the central bank.

"It is wrong to insinuate that there was a lack of supervision by the Bank of Italy," he told CNBC television, adding that his institution had nothing to hide.

In a separate interview with Bloomberg television, he said: "It has emerged that certain operations that were risky - the ones that reduced liquidity at the bank - were connected with other operations which had losses we were not informed of."

In November, Monte dei Paschi asked for 3.9 billion euros in state aid to plug a capital shortfall identified by the European Banking Authority.

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