The bruised reputation of Italian finance has taken another battering in recent months because of a row about the conduct of Antonio Fazio, the governor of Italys central bank, the Bank of Italy (BOI).

The affair has led to a call from the International Monetary Fund for clarification, investigations by the European Commission and the European central bank and the resignation of Domenico Siniscalco as Italys minister for the economy and finance. The ensuing political earthquake prompted prime minister Silvio Berlusconi to ask the governor to quit. But, at the time Wanted in Rome went to press, Fazio was still hanging on.

The controversy broke out in the summer when newspapers published wiretaps of telephone conversations between the governor of the BOI and Giampiero Fiorani, former chief of a small northern-Italian bank, Banca Popolare Italiana (BPI). The conversations were gathered by prosecutors investigating BPIs bid to take over Padua-based Banca Antonveneta, Italys ninth biggest bank. That bid was an attempt to trump Dutch bank ABN Amro, which was also trying to get its hands on Antonveneta.

It is no secret that Fazio was not keen on the prospect of the Dutch bank arriving on the scene. The governor was known to be a champion of maintaining Italys hold on its banking system, even though this is at odds with European single-market rules that forbid protectionism. Naturally he could not openly block ABN Amro, but he was suspected of favouring BPI when he should have acted as an independent arbiter. The wiretaps were explosive because they seemed to confirm suspicions of Fazios favouritism, revealing his cosy relationship with Fiorani.

It also emerged that, in order to give the green light for the takeover, Fazio had to overrule two senior BOI officials. They had rejected BPIs bid because of their concerns that it didnt have a large enough capital base to purchase Banca Antonveneta and because of misgivings about the deals that were done to find the necessary funds. As well as overlooking BPIs flaws, there have also been allegations that Fazio was deliberately slow in processing ABN Amros offer in order to buy time for Fiorani.

Soon after BPI had apparently won the battle for Antonveneta though, Italys stock-market regulator, Consob, froze the banks offer. It too was worried about the state of BPIs balance sheet. Fiorani was suspended, has since resigned as the banks chief executive officer and could face criminal charges for allegedly indulging in illegal share trades. The takeover has collapsed and, ironically, BPI has agreed to sell its 29.4 per cent stake in Antonveneta to ABN Amro, which looks set to become the new owner after all.

However, the previously good reputation of the BOI has been damaged and the countrys credibility in the world of finance much diminished.

Many will argue that the affair has highlighted the inability of the nations political class to act swiftly and decisively when Italys credibility is on the line.

The opposition and the then minister for the economy and finance, Siniscalco, immediately called on Fazio to quit. But, after much dithering, the government only managed to introduce a meek reform of the BOI. Under this part of a watered-down package that seeks to solve problems uncovered by the Parmalat scandal in late 2003 the governors term will, in future, last seven years; at the moment the job is for life. However, this reform must first be approved by parliament, and will only come into force after Fazio has gone.

Berlusconi had been reluctant to intervene on the grounds that the BOI is an independent body. Technically this is true only its superior council can revoke Fazios mandate. But the resignation of Siniscalco, who walked out in frustration at the governments passivity, forced him to be more energetic.

The prime ministers initial reluctance to ask outright for Fazios resignation may have been motivated by political reasons. Throughout the affair, Fazios staunchest supporters have been the Lega Nord. The party is grateful for the governors past support of local lenders in the north and it liked the idea of a big, strong bank emerging in northern Italy. With elections coming early next year, forcing Fazio out would undoubtedly lead to friction. The governments dithering, however, has caused much more damage than a squabble with the Lega Nord ever would have.