* UniCredit, Intesa, KKR in talks over plans to set up vehicle for restructured loans
* UniCredit CEO says decision must be taken by mid-2014
* Bad bank debate rages in Italy as souring debts mount
MILAN, Feb 11 Italy's top two banks, UniCredit and Intesa Sanpaolo, are in talks over a joint project to deal with their restructured loans, the head of UniCredit said, as the country's lenders strive to tackle their large stock of problematic debt.
UniCredit CEO Federico Ghizzoni confirmed the discussions with Intesa and U.S. fund KKR, after sources said last week the three were in preliminary contact about setting up a vehicle to hold the two banks' restructured loans.
"It's a project concerning (loans to) restructured companies, so it's not a bad bank," Ghizzoni said. "There is also the possibility of injecting equity into these companies," he said, adding that a decision would have to be taken by mid-2014.
As of September 2013 Intesa and UniCredit had a combined 10.6 billion euros ($14.5 billion) in gross restructured loans.
A string of initiatives by Italian lenders to deal with bad loans, which have soured during the country's longest post-war recession as companies struggle to pay back debts, has emerged over the past week.
The government has said it sees no need for a publicly funded bad bank to hold the riskiest loans. An EU Commission source told Reuters the crux of the matter was the writedowns that the lenders were prepared to make on the problematic loans they were separating in ad-hoc vehicles.
"The real issue is the price at which the assets are transferred to the bad bank," said the source, speaking on condition of anonymity.
"If the price reflects the losses then there is no problem because the losses will be then absorbed by the transferring bank.
If, by contrast the transfer price is higher, then it means that losses are not recognised by the transferring bank but by the bad bank. This is not ideal because finally those losses will be absorbed by the state or by the rest of the banking system," the source added.
Ghizzoni said he had not discussed the option of a systemic bad bank with Prime Minister Enrico Letta, who attended the inauguration of UniCredit's new Milan headquarters on Tuesday. He also said he was not aware of such a plan nor of the possibility the state may offer some guarantees to help banks offload bad debt.
"These could perhaps be solutions that are useful for banks with a different size (than ours), we think we can manage on our own. If there are any proposals we will listen to them," he told reporters.
Bank of Italy Governor Ignazio Visco urged Italian lenders at the weekend to take ambitious steps to get bad loans off their books while European regulators conduct a health check of the sector.
A spokeswoman said he was referring to private sector action or possible joint public and private initiatives.
UniCredit has already sold 700 million euros of non-performing loans to Anacap Financial Partners and 950 million euros to private equity fund Cerberus European Investments.
Intesa Sanpaolo, Italy's largest retail bank, is working on plans to create an internal bad bank for problem loans, according to a source close to the situation.
Investment bank Mediobanca is studying setting up funds to hold the bad loans of smaller banks that may not have enough capital to deal with the problem by themselves.
Italy has lagged behind Spain and Ireland in restructuring its banks, analysts say, but an asset-quality review by the European Central Bank is pushing lenders into action.
Gross non-performing loans at Italian banks, the ones least likely ever to be repaid, rose by nearly 25 percent in December to 155.8 billion euros, double their level at the end of 2010, according to Bank of Italy data. Think-tank Prometeia expects these bad debts to keep rising through 2016.