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The market for non-performing loans is growing and is slowly establishing itself, Nicola Rossi, president of Banca Popolare di Milano (BPM), told CNBC in Italy on Saturday.
Italian policymakers and European Union (EU) officials have been pondering how to improve Italy's fragile banking system in recent months, which has been bogged down by non-performing loans estimated to total around 360 billion euros ($401 billion).
"Now things are getting slowly better and it takes time," BPM's Rossi told CNBC on the sidelines of the Ambrosetti forum on economics.
"It is not a matter of injecting public money to solve the problem, sometimes legal procedures can do much more to solve the problem," he added.
BPM, the third-largest bank in Italy by assets, recently posted a small rise in net profits for the first six months of the year. However, shares of BPM have been on a sharp downward run since mid-2015, knocked by fears regarding the large pile of toxic loans in the Italian bank sector.
However, much of the concerns around Italian financials' bad debts has centered on Banca Monte dei Paschi di Siena (BMPS), reputedly the world's oldest bank.
The latest stress tests by the European Banking Authority found BMPS would have the greatest difficulty out of 51 of Europe's top banks covering its toxic loans between now and 2018 in adverse economic conditions. The authority said BMPS's fully-loaded common equity tier 1 capital ratio — a key measure of a bank's ability to withstand shocks — would fall into negative territory, or -2.23 percent, in an adverse scenario.
BMPS secured approval from the European Central Bank for a privately funded rescue package in July, after months of concerns about its bad loans sent share prices plunging. The bank has repeatedly received bailouts in recent years. Shares in BMPS have been particularly volatile in the past few months and are down more than 80 percent since the start of the year.
Rossi told CNBC that BMPS needed more time to sort out its massive pile of bad debts and said markets should wait before drawing any conclusions.
"We should let BMPS try and try hard to get the deal done. I think it is a bit too early to say," he said.
"My feeling is that they are trying different ways to have that deal completed. We should wait until at least September when the final decision by BMPS will be taken," he later added.
Rossi forecast consolidation across the Italian banking sector in the future, but warned it might take a long time.
"Almost everything in Italy takes a long time," he told CNBC.
One example is bankruptcies, which Rossi said took a lengthy period to resolve in Italy.
"It (bankruptcy resolution) takes very long. It is very costly, so as to speak, and uncertain in the end. So solving that problem in the end might actually help the market and function properly," he told CNBC.
Rossi added that technology was changing the banking industry "fundamentally."
"The existence of non-banking lenders is increasing. There are a number of things that make the future of the banking system more difficult than the present," he told CNBC.
The bigger focus in Italy at the moment is the upcoming constitutional reform referendum in October. Italians will vote on reforms championed by Prime Minister Matteo Renzi, which include plans to strip the Italian Senate of much of its power.
Rossi did not attach much importance to the vote, even though Renzi has pledged to resign if the public do not agree to his proposed reforms.
Rossi said it was very unwise to transform a constitutional referendum into a political election.
"It is a constitutional referendum. It has nothing to do with the government. Constitutional reform is something that has to do with the Parliament and people. So let the people read if they read and decide on the constitutional reform. My feeling is that the two things are totally separate," he told CNBC.