Italy's Central Bank Governor Ignazio Visco has told CNBC that there is no question about the stability of Monte dei Paschi bank after it suffered a nearly $1 billion loss on derivatives trades.
Shares of the bank have tumbled more than 20 percent this week after it revealed it could face losses of up to 720 million euros ($956 million) on past trades.
"As far as the stability of the bank,there is no question that the bank is stable," Visco told CNBC at the World Economic Forum in Davos, Switzerland.
(Read More: Monte Paschi Shares Plunge on Derivative Loss Fears)
Visco said an investigation of the bank was under way by a judge.
Shares in the bank rose over 10 percent in Friday's trading session recovering from Thursday's sell-off. The bank's shareholders met on Friday and approved two capital increases of up to 6.5 billion euros, which is a condition of the 3.9 billion euro state aid that the bank requested last year.
The size of the loss and how it emerged into public light have surprised the market.
The Italian central bank, which supervises the Italian banking system, released a statement on Wednesday claiming that "the true nature of some of the transactions involving Monte dei Paschi di Siena emerged only recently, following the discovery of documents kept hidden from the supervisory authority and brought to light by the new management of MPS."
The case triggered criticism against the Italian central bank and Mario Draghi, as the derivatives transactions were made during the period when Draghi – the current European Central Bank President – was the governor of the Italian central bank.
Visco put the responsibility for the losses on the old management of Monte Paschi and defended the central bank's actions.
"It's not an issue of the government. It's an issue of the management of the bank."
"The situation of Monte dei Paschi di Siena was known and under careful consideration since a long time. We have clearly pointed out that there was a need of further capitalization," he added.
According to Visco, the Italian central bank is looking into the health of Italian banks and whether they can sustain more loan losses.
"Our definition of a bad loan is much wider than many others, we are much more severe," he said, adding that loan loss provisions are already high but may be increased over time, if needed.