Italian authorities won permission from the European Commission today for an aid package for their banks caught up in the credit crunch.
The commission, which polices competition in the 27-nation European Union, said in a statement that the scheme was in line with EU guidance on state aid to overcome the financial crisis.
This means the programme is limited in time and scope while, interest paid to the state is priced according to market. There are also incentives for the banks to redeem the state participation over time.
"The Italian recapitalisation scheme provides effective means of strengthening confidence in the markets ... while at the same time establishing safeguards to limit distortions of competition," EU Competition Commissioner Neelie Kroes said.
The statement said the measures allow Italy to subscribe subordinated debt instruments, which will be counted as bank core tier 1 capital, a standard of capital held against risky assets. The scheme's global budget will be up to €20 billion ($27 billion) and only fundamentally sound banks are eligible.
The commission said capital endowment for the banks is to be within 2 per cent of their weighted assets and in principle within a level of 8 per cent of tier 1 capital.
The banks taking advantage of the programme will also have caps on dividends, management pay and an ethical code.
The Bank of Italy will monitor how the banks' new funds will be put to use to sustain lending to the real economy, the commission said. Italy will have to report to the Commission every sixth month on how the scheme functions.
"This will enable the Commission to verify that the measures are maintained only as long as the financial crisis so justifies," the EU executive said.