Italy's government is ready to pump €15 billion into Monte dei Paschi di Siena and other ailing banks, sources have said.
This comes as the country's third-largest lender pushes ahead with a private rescue plan that is widely expected to fail.
The world's oldest bank has until December 31 to raise €5 billion in equity or face being wound down by the European Central Bank, potentially triggering a wider banking and political crisis in Italy.
If needed, the government will pump €15 billion into the Siena-based lender and several other smaller banks to prevent that, two sources close to the matter said.
One source said unlisted regional banks Banca Popolare di Vicenza and Veneto Banca, which were rescued this year by a state-backed fund, would also get support from the state.
The government would make the €15 billion available in a decree on December22, La Repubblica newspaper said, adding that Banca Carige could also benefit.
Italy's banking sector is saddled with €356 billion of bad loans, around a third of the euro zone's total and a legacy of the 2008-2009 global financial crisis when, unlike Spain or Ireland, Italy did not act to help its banks.
Monte dei Paschi di Siena, advised by investment banks JPMorgan and Mediobanca, plans to raise equity to remove €28 billion in bad loans from its books.
The JPMorgan-led plan calls for Monte dei Paschi to raise €5 billion in equity through a share sale and an offer for holders of its subordinated bonds to convert them into shares.
Monte dei Paschi is in the process of renegotiating fees with JPMorgan and the other banks that will try to sell the bank's stock after they walked out of a deal to underwrite the share issue, sources have said.
Back in October, its CEO Marco Morelli had said that commissions for the cash call would only be paid in case of success.
Monte dei Paschi said yesterday that 65% of the share sale would be reserved for institutional investors.
It would also extend its debt-swap offer to include investors who hold €1 billion in hybrid securities known as "Fresh 2008".
It also wants retail investors to convert their subordinated bondholdings, totalling €2.1 billion, into shares.
Italian market watchdog Consob approved the offer last night, a source close to the matter said, paving the way for it to start as early as today.
Another source close to the matter also said Qatar's sovereign wealth fund, which bankers have said could invest €1 billion in the bank, had yet to make up its mind.
If Rome bails out the lender, European Union rules require that private investors share in its losses - a politically dangerous condition for Italy's main ruling Democratic Party given early elections are looming next year.
Hundreds of thousands of ordinary Italians have invested in shares and bonds of local banks. A bailout of four small banks last year hit thousands of small savers.
Italy is in talks with the European Commission over ways to shield retail bondholders who would see their notes converted into shares in the event of a state bailout, sources have said.
As in the case of the four rescued banks, the Commission would allow the government to spare small bondholders only if they can prove they were victims of mis-selling and did not understand the risk in their investment, one source said.
