ROME The Bank of Italy gave 2 billion euros ($2.71 billion) in emergency funds to struggling Monte dei Paschi (BMPS.MI) bank in 2011 but this was not a secret operation and was perfectly normal, a source at the central bank said on Thursday.
The Wall Street Journal earlier reported that in October 2011, the Italian central bank had provided a "covert loan" of 2 billion euros to Monte dei Paschi as it faced increasing liquidity strains despite saying it did not face problems.
The Bank of Italy source denied that the loan was covert.
"In the fall of 2011 the interbank lending-securities-against-collateral market was frozen, and the loan from the Bank of Italy - a perfectly normal over-the-counter operation - was the fastest way to resolve their low liquidity situation without creating more tensions in the market," the source said.
Monte Paschi, which is dependent on state loans, has been at the center of a financial and political storm over a series of derivatives and structured finance trades that have left it facing losses of 730 million euros.
European Central Bank President Mario Draghi will face tough questioning over the Monte Paschi scandal when he gives a monthly news conference in Frankfurt later on Thursday. As governor of the Bank of Italy at the time, he was ultimately responsible for bank oversight prior to his departure for Frankfurt in November 2011.
In a statement lodged with parliament last month describing the central bank's actions over the Monte Paschi case, the Bank of Italy noted that the struggling lender's liquidity position had become increasingly fragile by late 2011.
"In autumn 2011, the Bank of Italy was obliged to conduct securities lending operations in order to enable the bank to increase its recourse to refinancing from the European Central Bank," it said.
Monte Paschi got into trouble in the wake of its 9-billion-euro acquisition of smaller rival Antonveneta, a deal which left it badly weakened as the global financial crisis broke in 2008.
Its huge holdings of Italian government bonds made it highly vulnerable when the euro zone debt crisis in the summer of 2011 slashed the value of its portfolio.
(Reporting by Stefano Bernabei, writing by James Mackenzie; editing by Barry Moody)