Italy Underwrites Banca Monte dei Paschi di Siena Bonds [VIDEO]

Banca Monte dei Paschi di Siena (MPS) is the first of the country's banks to receive some form of state aid, after the Italian cabinet revealed that the government will underwrite up to €3.9bn worth of bonds that are similar to Tremonti bonds, for Italy's third largest bank.

Tremonti Bonds are bonds issued by banks and bought by the government with the proceeds going to shore up the bank capital and can be converted into equity at the lender request.

The Italian cabinet discussed on Tuesday of the possibility of offering state backed bonds in order to support MPS and later decided that it would formally offer the underwritten bonds in order for MPS to plug a €1.3 - €1.7bn gap in funding.

On Monday, IBTimes UK reported that MPS was frantically trying to sell €1bn worth of bonds to the state by the end of this month in order to plug a capital shortfall that is required to be filled by European Union (EU) regulations, after kicking off talks with the Treasury and the Bank of Italy for a capital fix.

The European Banking Authority (EBA) published its formal Recommendation in December last year, and the final figures, related to banks' recapitalisation needs, which revealed that European banks must raise €114.7bn of additional capital buffers by June this year, which is 8 percent more than its initial estimate of €106bn.

The EBA also revealed that a number of Italian banks had a significant shortfall on their balance sheets with MPS needing €3.267bn by the end of June this year.

Top management at the bank suggested it could issue contingency capital bonds to fill the remaining capital hole, after the EBA findings were released.

MPS shares were down some 3.5 percent as of 1210 GMT at €0.19, following todays report and have fallen nearly 63 percent since July of last year.

In tandem, shares in Italy's largest banks, including Unicredit, Intesa SanPaolo and MPS, have continued to fall sharply this week after the head of Italy's banking association and its biggest industry lobbies called on the European Central Bank (ECB) buy bonds.

After Italian banks shares were halted for some of today's and yesterday's trading session, Unicredit, Intesa SanPaolo and MPS stocks have fallen significantly.

In a joint letter to European Union officials, the heads of banking association ABI, insurance lobby Ania, employers' lobby Confindustria and other industry groups called for the ECB to act to ensure market liquidity and resume buying bonds on the secondary market.

In line with recent pleas for the Europe to become more unified and to adopt a common regulatory framework, the letter was sent ahead of the Thursday and Friday EU summit to European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso.

Banca Monte dei Paschi di Siena, have fallen sharply Monday after the head of Italy's banking association and its biggest industry lobbies called on the European Central Bank (ECB) buy bonds.

After Italian banks shares were halted for some of today's trading session, Unicredit, Intesa SanPaolo and Banca Monte dei Paschi di Siena stocks fell by over 10 percent as of 1400 GMT, on investor fears that the banks are finding it difficult to shore up capital.

In a joint letter to European Union officials, the heads of banking association ABI, insurance lobby Ania, employers' lobby Confindustria and other industry groups called for the ECB to act to ensure market liquidity and resume buying bonds on the secondary market.

In line with recent pleas for the Europe to become more unified and to adopt a common regulatory framework, the letter was sent ahead of the Thursday and Friday EU summit to European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso.