Italy's Banca Monte dei Paschi di Siena is racing against time to win regulatory approval to sell least €1-billion ($1.25-billion U.S.) of bonds to the government to plug a capital shortfall by the end of June.
Sources close to the situation told Reuters at the weekend that the world's oldest bank was in close talks with the Treasury and the Bank of Italy for a capital fix that would make it the first Italian bank to resort to state aid since 2010, when the euro zone crisis deepened.
Citing "organizational reasons", the bank has delayed to Tuesday a board meeting initially scheduled for later on Monday at which it is due to approve a business plan under new chief executive officer Fabrizio Viola and new chairman Alessandro Profumo, Italy's best known banker.
The fact that the board meeting was pushed back by a day suggests MPS hopes to get an informal nod from the Bank of Italy, which oversees Italian banks, by Tuesday afternoon.
"It would be a logical conclusion," a source close to the situation told Reuters.
The Bank of Italy, which would give formal approval to the capital-strengthening plan only after it is presented, declined to comment, as did the Treasury and MPS.
Italy's third biggest bank has managed to fill around two-thirds of a €3.3-billion gap identified by the European Banking Authority thanks to capital management and asset sales.
MPS's CEO said last month it could issue contingency capital bonds to boost the bank's capital base, but these would command double-digit interest rates in current choppy markets.
Bonds underwritten by the Treasury and similar to those allowed during the first leg of the financial crisis under former Economy Minister Giulio Tremonti would be cheaper.
"Issuing a fresh round of 'Tremonti bonds' seems the most reasonable option. Co-co bonds are too expensive. MPS has no other option," an Italian banker told Reuters.
MPS already sold to the Treasury €1.9-billion of such 'Tremonti bonds' in 2009, with a coupon of 8.5 per cent rising to 9 per cent from July next year.
Issuing more of these bonds would add to Italy's already ballooning public debt of nearly €2-trillion, but they can be paid back early if the bank's capital base improves, and the annual coupon is due only if the lender makes a profit.
Italian banks are in better shape than Spain's, which are being shored up by a euro zone bailout of up to €100-billion, as they have limited exposure to the real estate market and retail bank deposits are relatively large.
Italian lenders have avoided any form of direct state aid as all major banks, including UniCredit and Intesa Sanpaolo, managed to boost raise capital on the private market in the last 12 months.
MPS has been hit hard by the euro zone debt crisis because of its €25-billion exposure to domestic government bonds - which is proportionally higher than that of its domestic peers.
Negative investor sentiment towards Italy has increased the cost of funding and sunken the value of sovereign debt held by lenders, requiring them to find additional capital.
On Monday, Italy's banking association and industry lobbies urged the European Central Bank to ensure market liquidity and resume sovereign bond purchases on the secondary market.
Any delay in filling the capital shortfall would further weigh on MPS shares, which have lost 50 per cent in the past three months. On Monday, the stock shed 7.2 per cent to €0.20 in line with a weaker sector.
The shares had risen as much as 10 per cent on Friday when talk of a possible fix to its capital problems first emerged.
As it seeks to raise cash quickly, Monte dei Paschi reached a deal to sell its 60 per cent stake in small unit Biverbanca for around €200-million euros ($251-million U.S.), two sources close to the situation said on Saturday.
The Siena-based lender has limited financial flexibility because its top shareholder, a charitable foundation with close ties to local politicians, is just emerging from months of wrestling with creditors to restructure its own debt.
The foundation has been forced to sell down its MPS stake to 36.3 per cent and insists it would not fund a capital increase.