Financial Report of Vatican Bank The Good, the Bad and the Ugly (apologies to Sergio Leone) [October 5, 2013]

Financial Report of Vatican Bank
The Good, the Bad and the Ugly
(apologies to Sergio Leone)
[October 5, 2013]

“A certain wisdom is needed here; with a little ingenuity anyone can calculate the number”
(Revelations, Chapter 13 Verse 18)

The 2012 Annual Report of the Vatican Bank, the Istituto per le Opere di Religione (IOR), was released on October 1 last. It covers financial activity for calendar 2012; the currency of account is the euro; and the results have been audited by the Swiss affiliate of the accounting firm KPMG, and certified as compliant with International Financial Reporting Standards.
In all of its glory, the report runs to 100 pages, available at

These results can be categorized as:

The Good:
Net Profit of €86.6 million (about $117 million); this is a four-fold increase from profits realized in 2011.

The Bad:
Net Trading income (profit) of €51.1 million (about $69 million); this is a radical swing from the previous year’s Net Trading loss of €38 million, and shows that the entire Net Profit of the bank of €86.6 million is exposed to its trading desk, which between 2011 and 2012 swung from negative to positive by €89 million.
Remember the TARP bank bailouts of a few years ago? There is no equivalent bailout mechanism in the Vatican.

The Ugly:
Reuters reports that the IOR “is likely to close all accounts held by foreign embassies [accredited to the Holy See], following concerns about large cash deposits and withdrawals by the [diplomatic] missions of Iran, Iraq and Indonesia [which is the most populous Muslim country in the world].”

The sections that follow discuss:

 Trading activity;
 Operating Expenses;
 Dividend remitted to the share-holder (the Holy See); and
 IOR Governance.

Trading Activity

As mentioned, the most note-worthy development is that between 2011 to 2012, the IOR’s net trading position swung by €89 million ($120 million) from negative to positive, i.e. from a €38 million loss to a €51.1 million profit.
This swing exceeded the IOR’s overall profit of €86 million posted in 2012, and it exposes the bank’s profit, dividend and clients to market volatility on the downside.
About 70% of the IOR’s assets are in euros, meaning exposure to the stresses of the foreign exchange markets when the bonds of individual countries in the 17-member euro zone come under speculative attack.
On January 1, 2014, the euro zone expands to 18 members, with the scheduled entry of Latvia.
And one-third of the IOR’s assets consist of the obligations of Italy and Spain, where the local economies remain mired in crisis.
Collectively, this means that several factors beyond the IOR’s control could affect its trading margins, for the worse.

Operating Expenses

The IOR’s expenses grew by almost 15% between 2011 and 2012, to a total of €23 million. It is likely that this expense category will grow considerably in the future for several reasons:

 The sudden resignations in June, 2013, of the bank’s general director and the deputy general director; as IOR employees of a few decades, their so-called spese di buonuscita (exit payments) are likely to be considerable;

 Between 2011 and 2012 the IOR switched its audit firms, going from Deloitte & Touche’s Italian affiliate in 2011 to KPMG’s Swiss affiliate in 2012; it is probable that the elaborate presentation of results for 2012 and the continuing in-depth review of the IOR accounts (approximately 25,000), will require more accounting and auditing effort in the future;

 A risk and compliance manager was hired in July, 2013; over time this function will probably grow considerably.

Dividend to the Holy See

From the report:

“The IOR posted earnings of EUR 86.6 million, which allowed us to contribute EUR 54.7 million [almost $74 million] towards the budget of the Holy See, while transferring EUR 31.9 million to our general operating risk reserves.”

This level of dividend payout to the Holy See as sole shareholder is consistent with previous guesses in the media, to the effect that the Holy See and its curia have grown very dependent on the IOR for an annual dividend of about €50 million ($67.5 million) as the mainstay for the Vatican’s operating budget.

It also suggests that notwithstanding some recommendations that the IOR should be disbanded and its banking functions turned over to arms-length financial institutions, the Holy See may be ‘hooked’ on its IOR’s dividend. And it raises the question of what happens to the dividend in bad years, something the IOR has experienced in the past.

Governance of the IOR

The governance of the IOR is currently under review by a papal commission appointed last spring. In its current structure the IOR’s governance is as intricate as the Russian matryoshka dolls, each nesting or nested within another; but not as transparent. What’s worse, each level of governance has been the subject of sharply negative media interest in the recent months.

Within the bank there is a directorate, consisting of the General Director and the Deputy General Director.
In June, both incumbents resigned suddenly, after many years of service, shortly after the arrest of a high-level Vatican finance official.

Above the directorate there is a bank president and a board.
The incumbent was appointed during Pope Benedict’s lame-duck period, i.e. the two-and-a-half weeks between the pope’s earth-shaking announcement of his intent to resign (February 11), and the effective date of his resignation (February 28).

Above the board there is a Cardinals Commission.
Its president, Cardinal Tarcisio Bertone, was reconfirmed to his five-year term during Pope Benedict’s 17-day lame-duck period. Curious timing.
President John Adams was criticized for his “midnight judges” appointed before turning over the reins to Thomas Jefferson in 1801. “Midnight bankers” at the Vatican in the 21st century?

And finally there is the position of ‘Prelate for the IOR’, essentially the pope’s eyes and ears focused on the bank.
This position had been vacant for about two years, when – last June – Pope Francis appointed a monsignore with very limited financial expertise. A few weeks after the appointment, one of the most prominent Vatican-watchers in the media published a ‘scandalous’ account concerning the monsignore, with detailed allegations going back more than a decade ago.

End Comment

The IOR has been an alcatraz (oops, I meant ‘albatross’; Boston joke, sorry) around the neck of several popes.

Pope Francis has made a heroic effort to strip away from the center of the Church the trappings of pomp and the over-the-top displays of luxury, at a time when economic hardship in Italy is deepening; according to official statistics:

40% unemployment today among the young (ages 18 through 29);
9% net loss in GDP (!) over the past 11 years.

And there are troubling warning signs ahead for the IOR:

 The significant turnover at the top levels of its management;
 The fierce infighting that has hit the highest levels of IOR governance, and may erupt again;
 The imprisonment of the senior Vatican financial official last June;
 The deeply entrenched interest groups who have benefitted immensely from their ability to launder funds through the bank;
 The recent allegations of IOR transfer services to the diplomatic mission of a government guilty of state-sponsored terrorism over several decades.

Which brings an observer full-circle back to the root question, why an IOR?
Is it worth it to a global Church with a vocation to spiritual leadership?

“Behold, I set before you this day a blessing and a curse”
(Deuteronomy Chapter 11 Verse 26)

6 thoughts on “Financial Report of Vatican Bank The Good, the Bad and the Ugly (apologies to Sergio Leone) [October 5, 2013]

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