Italian financial institutions have agreed to set up a €5 billion fund to shore up weaker banks, two of the fund's backers said.

The move is part of a state-orchestrated plan to avoid a crisis in the euro zone's fourth-biggest banking sector.

The Italian government is anxious to ease concerns about its banking system, which is groaning under the weight of €360 billion in bad loans, a third of the euro zone total, and has fared badly in EU-wide stress tests.

Rome has been keen to portray the fund as an industry initiative to ensure it does not fall foul of European rules against unfair state aid.

It left the announcement yesterday to a private fund manager, Quaestio Capital Management.

"Following meetings with a vast number of institutional investors, banks, insurers, banking foundations and (state lender) Cassa Depositi e Prestiti, Quaestio has gathered many subscribers to launch the Atlante Fund," the fund manager said.

Quaestio did not give an overall size for the fund, but earlier lessandro Vandelli, chief executive of mid-tier lender Banca Popolare dell'Emilia Romagna, put it at €5 billion. 

Quaestio said the fund would help buy shares in upcoming stock issues at distressed lenders and purchase non-performing loans, focusing on junior debt, where investor demand is weakest.

t did not say how many investors had committed to the fund, whose name refers to Atlas, the god of Greek mythology who bore the heavens upon his shoulders. 

Prime Minister Matteo Renzi, who has made strengthening Italy's banking industry a priority, hailed the fund's creation and said the government would in the next few days pass measures to speed up bankruptcy procedures and loan recovery. 

But investors and banking analysts warned the scheme would be no panacea for Italy's banking sector, which is crowded with weaker lenders and has difficulty recovering bad debts. 

Cassa Depositi e Prestiti will contribute up to €300m, a source familiar with the fund said, with the bulk of the money expected to come mostly from top banks Intesa Sanpaolo and UniCredit, as well as insurers and asset managers. 

Rome, struggling under a public debt equivalent to 132% of GDP, wants the fund to be majority-owned by private investors to comply with European rules limiting state aid. 

Shares in Italian banks have lost around a third of their value this year amid concerns over the solidity of the system. 

Weeks of talks over setting up the fund took on added urgency due to a €1.76-billion cash call at Banca Popolare di Vicenza, to be completed by May 10. 

UniCredit is sole guarantor for the capital increase and its own capital ratios could suffer if it was left with a lot of unsold shares. Two other rights issues totalling €2 billion loom: one at Veneto Banca and one at Banco Popolare. 

Analysts said Italy's top banks appeared to be willing to put money in the fund out of fear that a bank collapse could trigger a run on deposits and drag down the whole industry. 

But they said the scheme was a backstop, not a cure-all for Italy's banking sector, which has long suffered from low profitability, weak governance and an excess of branches.