The cost of rescuing Monte dei Paschi has escalated after the European Central Bank told the struggling Italian lender that it required €8.8bn (£7.5bn) to mend its finances.
The lender, Italy’s third-largest bank, has tried in vain to arrange a €5bn rescue package with private investors but the ECB said the sum would not have been enough.
Monte dei Paschi, whose history can be traced back to 1472, said it had asked the ECB to approve a “precautionary recapitalisation”, a type of state intervention that allows the institution receiving it to stay solvent.
The government is now expected to inject €6.5bn into the bank, according to reports, taking its stake in to about 70%. The remainder will come from institutional investors seeing their bonds converted into shares, ridding the bank of about €2bn in debt.
In a statement, Monte dei Paschi said the ECB had written to the Italian finance ministry warning that the bank’s liquidity position – its ability to turn assets into hard cash – had suffered a “rapid deterioration”.
This was partly down to a large number of loans made to people who cannot pay them back, among the factors that saw Monte dei Paschi come last out of 51 banks in stress tests to check lenders’ resilience to economic shocks.
“The bank has quickly started talks with the competent authorities to understand the methodologies underlying the ECB’s calculations and introduce the measures for a precautionary recapitalisation,” it said in a statement.
Monte dei Paschi said the ECB had told it that the €8.8bn bailout figure was determined by the results of stress tests that the bank failed this summer. It also noted that the bank’s liquidity position had worsened between the end of November and 21 December.
The European commission said on Friday it would work with Rome to establish conditions for a bailout of Monte dei Paschi, likely to involve tapping a €20bn rescue pot approved by the Italian government last week.
But the proposals have not met with support from more hawkish official in the ECB. Jens Weidmann, the president of Germany’s Bundesbank and a member of the ECB’s governing council, said the Italian government ought to consider whether it should rescue the bank if it was in a bad financial state.
“For the measures planned by the Italian government the bank has to be financially healthy at its core,” he said in an article published in the German newspaper Bild. “The money cannot be used to cover losses that are already expected. All this must be carefully examined.”
Monte dei Paschi has struggled to recover from the 2008 banking crisis, when it paid Santander €9bn (£7.6bn) for Banca Antonveneta. The deal doubled the size of the lender, transforming it into Italy’s third largest behind UniCredit and Intesa Sanpaolo.
Three years ago, Monte dei Paschi’s problems worsened and it was forced to ask the government for €4bn amid a scandal over loss-making derivatives contracts and alleged fraud. It will now go back to the government for funds after talks with private investors failed, with Qatar’s sovereign wealth fund thought to have scuppered the plan by refusing to take part. The Italian government already has a 4% stake in Monte dei Paschi.