Italy says banking system untouched by troubled lender

Italy's finance ministry on Tuesday said the crisis surrounding Banca Monte dei Paschi di Siena had no effect on the rest of the banking system, after the government gave the go-ahead for a 3.9-billion-euro ($5.3-billion) bailout for the troubled lender.

"The bank overall has a solid capital situation," the ministry said in a statement after a meeting of the government's financial stability committee.

"The tensions that have affected it do not affect the banking system as a whole," it said.

Banca Monte dei Paschi di Siena, the world's oldest surviving bank and Italy's third biggest, has been forced to resort to public aid to reinforce its core capital after being hit by the eurozone crisis.

The poor management of the bank and the giant loans from the government required to save it have come under intense scrutiny in austerity-hit Italy in recent days and there is an investigation under way over a particularly suspicious derivatives deal.

The aid has been dubbed "Monti bonds" after Prime Minister Mario Monti, although the bank's perilous financial situation dates back several years.

Finance Minister Vittorio Grilli told parliament also on Tuesday that "the state's intervention is not a bailout of an insolvent bank but a reinforcement of its capital" under European rules.

The government has been forced to step in so as to "limit the systemic risks and protect the savings of current account holders," the minister said.

He also said the bank's previous management faced possible "sanctions" following an internal investigation that has been nearly completed.

Monte dei Paschi's current chairman Alessandro Profumo said on a talk show on Tuesday that the bank could "potentially" be nationalised eventually, although he said its plan was to return the loans it is receiving from the government.

The bank is also under investigation for its takeover of another bank, Antonveneta, from Spanish bank giant Santander in 2007 for 9.3 billion euros.

Tito Salerno, a prosecutor in Siena where the bank is based, said the enquiry was "explosive".

But Grilli cautioned against questioning the solidity of Italy's banking system saying that such talk "does not correspond to reality and the recent events surrounding MPS do not alter the picture".

The bank scandal has erupted just as Italians prepare to take to the polls on February 24-25.

The bank suffered from exposure to the eurozone debt crisis and needs the aid to bring its core asset reserve ratio up to regulatory standards.

Despite the controversy, its shares ended the session on the Milan stock exchange up by 2.29 percent after suffering steep losses last week.