Thursday 30 June 2016 8:11 pm

EU gives thumbs up to government guarantees for Italian bank support scheme

The European Commission has extended a lifeline to Italy's struggling banks, by granting a guarantee scheme.

The scheme will allow Italy to use government guarantees to create a precautionary liquidity support programme for banks in need, although it only applies to institutions which are solvent and will only be valid until the end of the year. 

According to reports, the Commission agreed on the scheme on Sunday, but it was only confirmed by a spokesperson today.

The Wall Street Journal reported that the support scheme includes up to €150bn (£125.4bn) in government guarantees.

Read more: Deutsche Bank and Santander fail US banking stress tests

"As this decision and other precedents demonstrate there are a number of solutions that can be put in place in full compliance with EU rules to address market turbulence," the spokesperson added. 

The intervention is the first of its kind since the UK voted to leave the EU last week.

The announcement of the Brexit decision sent many banking stocks around the world plummeting in the following days. For example, on Monday, share price in both Barclays and Royal Bank of Scotland had dropped at least 18 per cent by lunchtime and shares in Deutsche Bank and Credit Suisse fell to their lowest levels ever. 

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However, the issue was especially problematic for Italian banks, which are struggling with a combined €360bn in bad loans. 

Unsurprisingly, this has had a knock-on effect for the share price of the region's banks. Unicredit, for example, has seen its share price decrease by around 68 per cent over the course of a year, while Banca Monte dei Paschi di Siena shares fell by over 75 per cent during in the same timeframe. 

Read more: Moody's slashes outlook for eight UK banks to negative after Brexit

There have also been reports that the Italian government could be looking into arrangements to inject €40bn worth of capital into the banking system, but it is believed that this is separate to the guarantee agreement announced today.