UPDATE 1-ECB's Draghi defends his oversight of Monte Paschi
* Draghi says more oversight powers might have helped
* Says Italy election "noise" behind criticism of oversight
* Says he signed off on reports from Bank of Italy inspectors
By Eva Kuehnen
FRANKFURT, Feb 7 (Reuters) - European Central Bank President Mario Draghi denied suggestions on Thursday that he had been lax in his oversight of the scandal-hit Monte dei Paschi when he was governor of the Bank of Italy.
Italy's third largest bank, which is dependent on state loans, has been at the centre of a financial and political storm over derivatives and structured finance trades in 2006-2009 that have left it facing losses of 730 million euros.
In his first public comments on the crisis, Draghi told the ECB's monthly news conference in Frankfurt that the Bank of Italy had "done everything it should and appropriately and on time".
As governor of the Bank of Italy at the time, Draghi was ultimately responsible for bank oversight prior to his departure for Frankfurt to head the ECB in November 2011.
Stuttering slightly as he began his first answer on a scandal that has dominated Italian media for days, Draghi also cited a report by the International Monetary Fund which had supported the BoI.
He said much of the criticism of the central bank was due to "noise" ahead of Italy's national election this month.
"You should discount what you read in blogs as part of the regular noise that elections produce," Draghi said.
Prosecutors are investigating the central bank for alleged inadequate supervision as Monte Paschi ran into trouble and irregularities in its operations came to light.
Draghi has been targeted by some politicians and Monte Paschi shareholders and savers.
On Jan. 29 he flew to Milan to brief Italian Finance Minister Vittorio Grilli who faced parliamentary questions on Monte Paschi.
Draghi told reporters he had signed two reports into Monte Paschi by Bank of Italy inspectors, the first of which, from mid-2010, has been leaked to the press and raised several irregularities in Monte Paschi's operations and accounts.
This sparked much of the criticism of the central bank for not acting faster to sanction Monte Paschi executives even though it was aware of these irregularities.
Draghi said that as it does not have policing powers, the Bank of Italy was limited in its ability to counter fraud, one of the charges which prosecutors have levelled at Monte Paschi's former management.
The Bank of Italy could have benefited by having more powers to supervise effectively, he said.
He cited a power of veto over banks' executives and the ability to remove individual executives if they are not considered "fit and proper," and said this will be important for the ECB when it takes on the role of euro zone bank supervision.
"I think one thing this story shows in that having more powers would have helped, although when you have to deal with fraud, you never know," he said.
Critics of the central bank point out that it is not short of channels to curb improper behaviour, such as asking the Treasury and shareholders to act. It can also remove a bank's entire board if it sees fit.
From 2014 Draghi is set to become the head of banking supervision for the whole euro zone, as part of beefed-up powers for the ECB president.
Despite its specific and growing concerns about Monte Paschi's operations from early 2010, the Bank of Italy did not summon the bank's management until November 2011 and imposed no sanctions until after the executives had stepped down last year.
Monte Paschi's shareholders only found out about the central bank's inspections and complaints last month.
On Thursday Monte Paschi said there were no more derivatives losses beyond the 730 million euros ($988 million) it has disclosed and that the Treasury was likely to take a stake in the lender by 2014.
"There are no more Santorini," Chief Executive Fabrizio Viola said, referring to one of the three obscure derivatives trades at the heart of the fraud probe into former management of the bank.
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