Italy has decided to cut its losses and wind down two failed regional banks, at a massive price of up to €17bn (£14.94bn).
The Italian government’s cabinet convened an emergency meeting yesterday to start liquidation proceedings for Banca Popolare di Vicenza and Veneto Banca.
Intesa Sanpaolo, the country's biggest retail bank, will take on the lenders' good assets. Italy's government will pay it €5.2bn initially, and give guarantees of up to €12bn.
“Those who criticize us should say what a better alternative would have been. I can't see it,” said Italy's economy minister Pier Carlo Padoan.
The €17bn sum is three times more than had originally been estimated to recapitalise the banks with public money.
However, the EU Commission said in a statement that the "net costs to the Italian state will be much lower than the nominal amounts of the measures provided", without explaining why.
The two Veneto-based banks collapsed after several years of mismanagement and poor lending, and were taken over by the government-sponsored privately backed rescue fund Atlante last year.
Yet their performance stubbornly refused to improve, and the European Commission said yesterday that it had granted approval to wind down the banks.
The deal allows Italy to solve the banks' problems on its own terms, rather than under European rules which could have been tougher on investors than taxpayers.
It will have to be voted into law by parliament within 60 days, but in the meantime the banks' branches and employees will be run by Intesa Sanpaolo.
This move is designed to avoid a huge number of customers rushing to withdraw their money, which could have caused chaos across the whole industry.
The banks' soured loans, and its legal risks stemming from a mis-selling scandal, will be moved to a bad bank partly financed by the state.
Intesa Sanpaolo has been working hard to improve its own situation following the financial crisis.
In May this year, chief executive Carlo Messina said the bank would consider a reduction of its branch network under a new business plan, while at the beginning of this month it agreed to sell €2bn worth of bad loans to US firm Christofferson Robb & Company (CRC) and problem loan manager Bayview Asset Management.