(Bloomberg) -- Italy is considering injecting fresh capital into Banca Monte dei Paschi di Siena SpA to boost the finances of Italy's third-biggest bank ahead of stress test results, a person with knowledge of the plan said.
Italy would seek to use Article 32 of the European Union's bank failure rules that allows temporary state aid if regulatory stress tests reveal a shortfall, said the person asking to not be identified because the plan is not public. Italy is in talks with European regulators to get approval, the person said.
The plan under review by authorities includes selling new convertible bonds to the government and injecting at least 3 billion euros ($3.3 billion), through Italy's state-orchestrated bank-rescue fund Atlante, according to the newspaper La Stampa, which earlier reported the capital plan.
The European Central Bank has asked Monte Paschi to offload more than 14 billion euros of gross non-performing loans over three years, which would reduce the burden to 20 percent of total loans, the Siena, Italy-based lender said Monday. Chief Executive Officer Fabrizio Viola is struggling to restore the bank's finances hurt by accounting irregularities by previous management that already led Italy to provide aid to Monte Paschi twice since the financial crisis.
"A capital injection of size would certainly enable the group to add provisions and help add confidence," said Paul Fenner-Leitao, a credit analyst at Societe Generale SA in London. But "are they allowed to do it without bailing in bonds? If they bail in bonds, which ones and by how much? What does it mean for other banks?"
A spokeswoman for Monte Paschi and a spokesman for the Italian treasury declined to comment.
Monte Paschi shares fell as much as 7.6 percent in Milan trading on Tuesday to a new record low. The shares have shed 75 percent of their value this year. UniCredit SpA, Italy's biggest bank, added 2.8 percent as of 10:20 a.m., while Banco Popolare di Milano Scarl rose 4 percent.
Paschi's 379 million euros of 5.6 percent subordinated bonds fell 6 cents to 79.2 cents on Tuesday, the lowest level since February.
European Central Bank and European Banking Authority stress test results are due on July 29.
--With assistance from Francesca Cinelli and Tom Beardsworth To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net, John Follain in Rome at jfollain2@bloomberg.net, Chiara Albanese in Rome at calbanese10@bloomberg.net. To contact the editors responsible for this story: Simone Meier at smeier@bloomberg.net, Elisa Martinuzzi, Ross Larsen
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
