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Italy's Monte dei Paschi bank, the oldest surviving bank in the world.

The deal concludes months of talks between the European Commission and the Italian government on a rescue and restructuring package for troubled lender Monte dei Paschi (MPS).

European Commissioner for competition policy, Margrethe Vestager, said it marked a “positive step forward” for the bank and Italy’s banking sector, which is burdened with €360bn worth of bad loans.

The bank has been in trouble since 2016, when a stress test found that the bank would face a shortfall of capital if the economy performed worse than expected. MPS attempted to raise the funds itself, but to no avail. The government stepped in, applying to use state aid to support MPS, as well as other ailing banks in the country. 

It now faces a $9.9bn shortfall in capital, as well as $23bn in bad loans. Talks had centred on whether MPS could be trusted to restore its viability. 

Vestager said today’s deal, which only covers MPS, allows Italy to inject capital into MPS “as a precaution, in line with EU rules, whilst limiting the burden for taxpayers”.

The agreement makes use of a bank rescue rule that allows governments to inject capital into a bank as a buffer, so long as it is solvent, profitable in the long term, and the private sector shares the burden.

“MPS will undergo deep restructuring to ensure its viability, including by cleaning its balance sheet from non-performing loans,” Vestager noted.

The deal is still subject to confirmation from the European Central Bank that MPS is solvent and meets the capital requirement, as well as from private investors that they will purchase MPS’s portfolio of non-performing loans.

Under the deal, the commission said the state must be sufficiently remunerated for its capital and the bank must take a number of measures to substantially increase efficiency, including by imposing a cap on the total remuneration package of its senior management. This can be no higher than ten times the average salary of MPS employees.

MPS’s shareholders and junior bondholders, who stood to benefit from their investments in the bank, will contribute to the costs of restructuring before any taxpayer money is put at risk, the commission said. Depositors will be protected throughout.