Shares in Monte dei Paschi di Siena were suspended today after sliding by 8.5% on news of a stark European Central Bank warning for the Italian bank.
The ECB had flagged funding and profitability risks as well as a weakened capital position in a letter to Monte dei Paschi, the bailed-out lender revealed late on Friday.
The regulator also told the Tuscan lender to boost provisions against bad loans in the coming years.
Traders said the request for fresh loan writedowns was damaging for the stock and could also have negative implications for other lenders.
Monte dei Paschi said the ECB had told it to put aside more money to cover impaired loans by 2026, in line with rules requiring euro zone banks to perform full writedowns within seven years for new loans that turn sour after April 2018.
A request to apply such a rule to existing loans was unexpected, analysts said, adding that it raised doubts over whether the ECB may make similar demands to other banks.
Even after a record €24 billion sale of bad loans, Monte dei Paschi problem loans as of last September were equivalent to almost a fifth of its total lending.
Provisions covered 56.4% of existing problem loans.
Analysts calculated that Monte dei Paschi would need to book €8.7 billion in additional provisions to fully cover existing problem loans, though that did not take account of possible recoveries.
Monte dei Paschi is seeking to restructure after its €8 billion bailout.
Bankers say that a successful turnaround is essential to turn it into an attractive merger target, giving the Italian state a way out as demanded by European Union law on state aid.
Under the terms of the bailout agreed with the European Commission, Monte dei Paschi must meet given targets at set deadlines or adopt offsetting measures.
Additional cost cuts risk further complicating the bank's recovery efforts.
Italy's government must draw up a plan this year to liquidate its stake in Monte dei Paschi.
Cabinet Undersecreteary Giancarlo Giorgetti was quoted by Italian newspapers today as saying the government would make a decision on the bank's future in two to three months.