Italian Bank Bailout

Just this past week, Italy and the EU announced that they would aid Banca Monte dei Paschi di Siena SpA, one of the world's oldest banks. Monte, as well as similar banks in the EU, have struck out trying to find capital from private investors as they suffer from non-performing loans on their balance sheets.

Monte Paschi was forced to turn to Italy for aid after it failed to raise extra capital from investors in December. The European Central Bank said then it needed to secure 8.8 billion euros ($9.9 billion) to bolster its balance sheet. The government would contribute about 6.6 billion euros, according to a Bank of Italy calculation, with the rest covered by creditors.

The agreement sets a precedent in how governments can help struggling financial institutions without triggering bank resolution rules forged in the wake of the financial crisis. EU law stipulates that the need for “extraordinary public financial support” normally means a bank is failing and should be wound down. An exception is made for temporary state aid to address a capital shortfall identified in a stress test if a number of conditions are met.