UPDATE 1-Italian banks must cut costs, dividends and pay- regulator says
(Adds more quotes from central bank, background)
MILAN Oct 7 (Reuters) - Italy's banks need to use their own resources to fill potential capital shortfalls by skipping dividends, selling assets and cutting costs, including top managers' pay, the country's banking watchdog said on Monday.
Ignazio Visco, head of the Bank of Italy, said the weak economy continued to pose risks for the banks and that their difficulties would not easily be solved so that pressure on them to curb lending would continue.
"A weak macroeconomic picture, the uncertainties surrounding the strength of the recovery, fragilities still existing on financial markets are all factors that require Italian banks to continue to guard against liquidity and credit risks, strengthen their capital and rein in costs," he said, in the text of a speech.
Italy's banks are battling bad debts from the country's weak economy. Analysts have predicted that a banking health check-up by the European Central Bank next year will show Italian banks will need to raise more capital.
But Visco also said it was not the case that the Italian banking system had enormous recapitalisation needs.
"The opinions often expressed during the crisis that the Italian banking system would have enormous recapitalisation needs are unfounded," Visco said.
Last month, UniCredit board member and former European Central Bank official Lucrezia Reichlin said in an article in newspaper Corriere della Serra that Italian banks' potential capital needs were nearly 30 billion euros ($40.71 billion).
Some banks are already trying to raise cash. The board of Monte dei Paschi di Siena, Italy's third biggest banks, met on Monday to approve a restructuring plan which includes a 2.5 billion euro cash call.
Visco said medium- and small-sized Italian banks faced the biggest challenge, with governance structures that made it difficult for them to raise new capital.
He also urged Italian firms to overcome their reliance on bank credit at a time when the banks are under pressure to curb lending and keep credit risks in check during Italy's two-year long economic recession.
The banks, for their part, should rely less on ECB funding and work to regain access to capital markets, he said.
Bank of Italy data on Monday showed Italian banks had 235 billion euros in funds from the ECB at the end of September. ($1 = 0.7368 euros) (Reporting by Valentina Za; Editing by Jane Merriman)
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