Italy's Treasury wants to find a buyer for Monte dei Paschi di Siena by the end of the year to help the bailed-out bank to clean up its remaining problem loans.
This is according to two sources familiar with the matter.
The government rescued Monte dei Paschi in 2017, taking a 68% stake for €5.4 billion, but must sell its holding next year to meet the terms of the bailout negotiated at the time with European Union competition authorities.
To attract buyers, Monte dei Paschi plans to offload €8.1 billion in impaired loans to state-owned bad loan manager AMCO.
The deal would cut the ratio of Monte dei Paschi's problem loans to 4% of total lending, below the industry average and down from peaks of more than 40% before the bailout and 12% currently.
But the European Central Bank has set strict conditions for the deal, which would deplete the bank's capital buffers.
To comply with ECB demands, Monte dei Paschi last week issued €300m in second-tier capital, offering an 8.5% return.
It now needs to issue 'Additional Tier 1' (AT1) capital to rebuild its reserves as it transfers the loans to AMCO with a portion of its equity capital.
Sources have said the AT1 issue could total €750m, which some analysts say the loss-making Tuscan lender cannot afford.
The Treasury hopes to avoid the AT1 issue by finding a buyer that will help it shed the bad loans as part of an acquisition, said the sources, who declined to be named because discussions are confidential.
One of the sources said that the government sees Banco as a good partner for Monte dei Paschi despite the Milan-based bank having strongly denied any interest.
A spokeswoman for Banco BPM said nothing had changed in that respect.
Banco BPM has said it remains on alert for further industry consolidation after rival UBI was snapped up by heavyweight Intesa Sanpaolo and a third source familiar with the matter said that its CEO Giuseppe Castagna was looking to move quickly on a potential deal.
Monte dei Paschi, laid low by years of mismanagement, faces €10 billion in legal claims from disgruntled investors, seen as a major hurdle to a merger.
Carla Ruocco, a member of the ruling 5-Star Movement who heads a parliamentary inquiry into banks, on Saturday urged the government not to sell Monte dei Paschi, currently worth just €1.6 billion.
The government will soon approve a decree paving the way for the sale of its stake.