Why Italy's banking 'revolution' is long overdue

Shares in Italy's cooperative banks rose strongly Wednesday after the government passed an emergency decree forcing the largest "popolari" to change their governance rules and become joint stock-companies.

Banco Popolare, Banca Popolare Milano and Banca Popolare Emilia were all up over 5 percent in morning trading Wednesday following the decree – which is likely to speed up consolidation in the sector. Italian business leaders also told CNBC that it would help to strengthen Italy's sclerotic banking system as a whole.

Carlo Messina, the chief executive of Italy's second largest bank by assets, Intesa Sanpaolo, called the move a "revolution," saying that it opened up the Italian banking system to international investors.

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"It is a revolution because this sector was not looking at the market with a friendly approach and now it is open to interest from international investors so I think it will be a good point for Italy (too)," Messina said Wednesday, speaking to CNBC at the World Economic Forum in Davos, Switzerland.

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He believed that there could be some kind of "bad bank" structure set up for bad loans among Italy's smaller and weaker cooperative banks too.

Bad loans are something of thorn in the side of Italy's banking system. The number of non-performing loans (NPLs) continues to rise and reached a total 181 billion euros ($210 billion) in November, up from 179.3 billion euros a month earlier, the country's banking association reported on Monday.

Showing that there is wider awareness of the problem facing Italian banks, nine out of the 13 banks on the European Central Bank's blacklist of banks following its asset quality test were Italian with a combined capital shortfall of 9.7 billion euros ($12.1 billion).

Mario Greco, the chief executive of Italian insurer Generali, told CNBC that the banking reforms were a very "significant move" for Italy as a whole.

"Italy needs to have a stronger banking system and this move allows the banking system to start reforming, becoming bigger and the banking system can than help the economy to grow much more than it has done in previous years."

Some banks would have to merge, Greco believed, but this would make the "national banking system much better and stronger."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.