The European Central Bank has asked Italy's third-largest lender, Banca Monte dei Paschi di Siena, to slash its bad debts by 40 per cent to €14.6 billion over three years, heaping more pressure on Rome and Brussels to stabilise the Italian banking system.

Monte dei Paschi is the weakest link among big lenders in the euro zone’s fourth-largest bank sector and may have to raise capital quickly to meet the ECB’s target, given that last month’s Brexit vote has hurt investor appetite for bad debts.

The Italian government wants a green light from the European Union to help lenders raise capital without triggering bail-in rules that would force bondholders and shareholders to share some of the losses.

Otherwise, ordinary Italians face huge losses as banks are forced to sell assets or shares at heavy discounts. – (Reuters)