ECB asks Monte dei Paschi to cut non-performing loans

News that the European Central Bank had asked Italian lender Monte dei Paschi di Siena to submit plans to reduce its non-performing loans weighed on the wider sector.

According to reports, the ECB sent a letter to the stricken lender asking that it cut its non-performing loans below 20.0% of its assets by 2018, versus about 41% at present.

The Eurozone´s monetary authority set a deadline of 3 October for the bank to draw-up its plans and submit them for approval.

On 26 June, the EU approved government credit guarantees for Italian banks, which some reports put at up to €150bn, for a period of six month, in a bid to help prop-up liquidity in the country´s financial system during the market turmoil following Brexit.

Some published estimates pegged the amount of NPL´s on Italian banks´ balance sheets at roughly €360bn, with the sector´s market capitalistion having been cut in half since the start of 2016.

“As this decision and other precedents demonstrate there are a number of solutions that can be put in place in full compliance with EU rules to address market turbulence,” a spokeswoman for the European Commission said on that occasion.

Acting as a backdrop, reports on Monday indicated Rome had drawn up plans to inject €40bn of fresh capital directly into banks to help recapitalise them, which would go against EU rules on state-aid to banks.

However, over the weekend Prime Minister Matteo Renzi told local media he preferred "market solutions" for lenders´ woes.

Shares of Monte dei Paschi di Siena were off by 7.11% to €0.36 and those in Banca Popolare were losing 2.72% to €0.35.

The Stoxx gauge of banks´ shares fell 0.70% to 125.12.