Rescued banks propose deal to rebuild lost trust in Italian banks

Alessia Pierdomenico | Bloomberg | Getty Images

Two Italian banks have proposed a deal to settle shareholder lawsuits as they try to raise billions of dollars to cover bad loans.

The deal is the latest episode in Italy's long battle to clean up its banking system, however, it could dent confidence even further.

Banco Popolare di Vicenza and Veneto Banca, two banks rescued by the Italian bailout fund Atlante, have offered shareholders more than 600 million euros ($634.92 million).

Although shareholders have yet to approve the deal, the banks would "re-pay shares at a pre-defined value in next few months, avoiding the risk of uncertain evolution of huge claims by shareholders and clients," Maria Paola Toschi, global market strategist at JPMorgan Asset Management, told CNBC on Tuesday via email.

Last October, the European Central Bank demanded both banks cut their bad loans valued at 17 billion euros. The ECB declined to comment on this subject.

According to Toschi, both banks may need to raise about 2.5 billion euros in fresh capital.

"This situation is a big obstacle for recreating interest for new shareholders to invest and underwrite capital increases. Investors are not willing to put in money due to the uncertainty on the eventual impact of these claims in terms of costs and losses on profits and on the net worth," Toschi added.

This has been a recurrent theme when trying to improve the state of the Italian banking system.

Recently, the Italian government had to step in to help the oldest lender in the world –Monte dei Paschi di Siena – after the Italian bank failed to attract enough private capital to boost its balance sheet.

The Italian banking system has been a problem for the third-largest euro zone economy since the financial crisis due to the high level of bad loans across all institutions. Several attempts to deal with each one of them have also affected customers' confidence on the system.

In the cases of Banco Popolare di Vicenza and Veneto Banca local clients withdrew money, leading to deposits plunging by 30 percent, Toschi told CNBC.

"These two small banks are not the next big problem. They are the latest symptoms of the slow-burning non-performing loan crisis that Italy will have to tackle," Erik Jones, professor of international political economy at Johns Hopkins University, told CNBC via email.

According to the International Monetary Fund, Italy's non-performing loans represent 18 percent of loans, one of the highest in the euro area.

Furthermore, the ongoing problems with the banking system are set to continue impacting the political scene. Italy is being governed by an interim government after the resignation of Prime Minister Matteo Renzi and is expected to hold elections this year.

Further issues with the banks and potential big losses for shareholders could spark further support for anti-establishment and anti-euro parties.

"This all depends upon how much more pain the shareholders of the bank are willing to take. I am sure it will generate significant complaints," Jones added.

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