The Italian parliament have approved a public sector bailout for struggling bank Monte dei Paschi di Siena, in case it cannot scrape together the required funds from private investors.
Monte dei Paschi has been trying to raise 5 billion euros of fresh capital from private investors in order to keep itself afloat, but has so far raised just 500 million. It issued a debt-for-equity swap last week, as well as a share placement that ends on Thursday, but it is unlikely to achieve the required funds.
The new Prime Minister of Italy Paolo Gentiloni held a cabinet meeting earlier this week, putting forward a government rescue plan. On Wednesday the 20 billion public bailout was approved by the Italian parliament.
Monte dei Paschi is Italy’s third largest lender, and the country’s oldest bank. Should the bank fail the savings of thousands of Italian citizens would be at risk, as well as having a wider effect on the Italian banking system.
The rescue fund proposed by the government will be used to prop up Italy’s other banks as well, many of which performed badly in European stress tests over the summer.
The bank’s shares fell 8.5 percent on Monday after launching its last-ditch share offering to institutional and retail investors.
The rescue efforts take place against a difficult political backdrop, after Prime Minister Matteo Renzi resigned last Sunday after losing a referendum on constitutional reform. He was recently replaced by the Foreign Minister Paolo Gentiloni, an ally of Renzi’s from the same Democratic Party.
Monte dei Paschi di Siena is just one part of a network of problems in the Italian banking system. Italian banks carry around 360 billion euros worth of non-performing loans, amounting to an astonishing 18 percent of GDP which Italy has been repeatedly asked by the EU to take steps to reduce. After several previous attempts, the banks are having trouble recruiting investors to bail them out again.