Banca Popolare di Vicenza and Veneto Banca have been in trouble since the eurozone debt crisis. The two banks are likely to be broken up with Italian taxpayers footing the bill for the toxic assets of the two.
Italy will pay up to 17 billion euros ($19 billion) to break up two insolvent Venetian banks, which have posed a threat to country's banking system, the government announced on Sunday.
Both face bankruptcy and European authorities had urged Italy to devise a rescue framework, selling off the good assets of the stricken Banca Popolare di Vicenza and Veneto Banca and transferring their toxic assets to a "bad bank", essentially financed by Rome.
The Italian government will stage the rescue with support from the country's biggest retail bank, Intesa Sanpaolo, which will take up the good assets to protects the two Venetian banks' customers and to minimise staff layoffs.
The European Commission in a statement said it "has approved, under EU rules, Italian measures to facilitate the liquidation of BPVI and Veneto Banca under national insolvency law."
She added that "Italy will support the sale and integration of some activities and the transfer of employees to Intesa Sanpaolo."
European Commissioner for Competition Margrethe Vestager said that Italy considers state aid necessary "to avoid an economic disturbance in the Veneto region."
Money set aside
Padoan said 4,785 billion euros would be set aside immediately to "maintain capitalisation" of Intesa Sanpaolo, which has made that a condition of any cooperation.
For its part Intesa has put one symbolic euro on the table and attached a further string to the deal by insisting its share dividend policy remain unaffected.
"The total resources mobilised could reach a maximum of 17 billion euros – but the immediate cost to the state is a little more than five billion," said Finance Minister Pier Carlo Padoan.
"This decree allows the stabilisation of the Venetian economy and safeguarding of the economic activity of the Venetian banks," said Padoan.
Italian Prime Minister Paolo Gentiloni portrayed the move as necessary to shore up the situation of current account holders and ordinary savers as well as of bank workers, in order to bolster "the good health of our banking system."
Perilous state of Italy's banks
The 19-member eurozone has expressed concern at the perilous state of some Italian banks as Rome tries to address piles of risky loans sitting on the books of some of them.
In a statement released Friday night, the Italian finance ministry said Rome would "adopt necessary measures to ensure banking activity is fully operational, with protection for all current account holders, deposits and senior shares."
Media reports suggested the bill to the Italian taxpayer from the "bad bank" would be around 10 billion euros.
There is also the issue of some 3,500 to 4,000 bank employees set to lose their jobs as well as associated early retirement costs, La Repubblica reported Saturday.
Earlier this month, the EU anti-trust authority approved Italy's massive rescue of another troubled bank, its third-largest and oldest, Monte dei Paschi di Siena (BMPS).
Founded in Siena in 1472, BMPS has been in deep trouble since the worst of the eurozone debt crisis.
Rome is set to take a majority stake on a provisional basis to prevent bankruptcy and inject capital in line with EU rules, while limiting the burden for Italian taxpayers after the lender failed to raise funds on the market last year.
In exchange, Rome must accept a drastic EU-approved restructuring plan for BMPS expected to involve mass layoffs.
The European Central Bank said in December that BMPS was short of a staggering 8.8 billion euros in capital.