Draghi informed of Monte Paschi doubts but not at fault - source
* Draghi didn't have responsibility for punishing Monte Paschi
* BOI vigilance is slow but deliberate - senior source
* Says Monte Paschi vigilance did not fail, but would welcome more powers
By Gavin Jones
ROME, Feb 4 (Reuters) - Mario Draghi was informed of doubts raised by Bank of Italy inspectors about the Monte dei Paschi bank but had little control over what has been widely criticised as ineffective oversight of the scandal-hit lender, a senior BoI source told Reuters.
The roots of the corruption and derivatives scandal at Monte dei Paschi all stem back to when Draghi, now president of the European Central Bank, was chief of Italy's central bank from 2006 to 2011.
The Bank of Italy (BoI) says it did everything in its powers to oversee Monte Paschi, including forcing it to raise new capital and applying behind the scenes pressure to force out its executives, who left last year.
Last month, the BoI approved 3.9 billion euros ($5.3 billion) of state loans needed by the ailing Siena bank to shore up its capital.
But the BoI, under Draghi's leadership, is under fire for not acting faster to sanction those managers and make its doubts public even though its inspectors had spotted the derivatives contracts at the centre of the scandal back in mid-2010.
The criticism has come from Monte Paschi shareholders, savers and politicians fired up by the campaign for a national election this month, but also from some banking and regulation experts.
However, the senior BoI source stressed that the decision on launching a sanctions procedure, involving publicly blaming and fining bank officials, does not depend on the BoI governor and its five member executive board, but on the bank's inspectors and then a series of lower committees.
"The inspectors are the only people responsible for initiating a sanctions procedure so if they don't find anything in the course of their inspection then it's not possible for the top management to start the process," said the source, who asked not to be named.
"We instruct the staff to be absolutely free from any influence from us, to present exactly the case, so if a sanction is decided then they present a proposal to the board and the board decides on the actual implementation of the sanctions."
In the summer of 2010 BoI inspectors uncovered two opaque derivatives contracts that could cost Monte Paschi 720 million euros and are now at the centre of fraud investigations, yet did not propose that sanctions be launched.
That decision "had nothing to do with the board," the official said, though he added that Draghi was shown the inspectors report.
He declined to say whether he thought it was a good decision not to propose sanctions at that time.
SLOW BUT DELIBERATE
That 2010 inspectors' report was leaked to the press and sparked much of the current criticism of the BoI because the sharp criticisms of Monte Paschi's accounts and operations made by the inspectors were not followed by pressing action.
The BoI did not summon Monte Paschi's executives, now under criminal investigation, until November 2011, after Draghi had left to head the ECB. It did not launch a sanctions procedure - which is still not completed - until the following year, after the officials had left the bank.
Monte Paschi's shareholders did not find out about the irregularities until last month.
The Bank of Italy said it informed Siena prosecutors about their concerns over the derivatives contracts some time in 2012, but the prosecutors had already been investigating Monte Paschi since November of the previous year, and possibly earlier.
"We may perhaps appear to be slow, but I think we are deliberate," the official said. He also stressed that although Monte Paschi failed to comply with the BoI's requests, the wrongdoing was already done at the time of the 2010 inspection.
"What took place afterwards was to try to disguise the losses but it wasn't a recurrent or growing pattern of misbehaving," he said.
The BoI is itself under investigation by prosecutors for allegedly not controlling Monte Paschi properly, in a case brought by a consumer body.
Centre-right politicians, led by former Economy Minister Giulio Tremonti and Northern League chief Roberto Maroni, have strongly attacked the central bank and Draghi.
Tremonti himself is also under the spotlight because, as economy minister, he was responsible for overseeing the banking foundation which was Monte Paschi's controlling shareholder as it piled up debt.
The centre-left has generally been more cautious, calling for more powers for the central bank rather than openly blaming it for laxity.
The idea that the BoI lacks sufficient powers for effective oversight has become a common theme in the Italian press, with attention focusing on the fact that while it can replace the board of an offending bank, it cannot fire individual managers.
The BoI source made clear that giving the bank this power would be a welcome step, though he was careful not to acknowledge any blame for the Monte Paschi scandal.
"If we get that power it will certainly be an additional tool but I don't subscribe to the idea that we don't have sufficient powers and that the exercise of our powers wasn't effective," he said.