November 9, 2018 / 11:21 AM / 5 days ago

UPDATE 2-Italian banks consider credit line to protect deposits -sources

* Top five banks ready to grant 2.7 bln euro

* The goal is to boost confidence in the financial system

* Govt policies are pushing funding cost up (Adds Economy Minister Tria, Bank of Italy)

By Paola Arosio and Stefano Bernabei

MILAN, Nov 9 (Reuters) - Italian banks are considering granting the country’s interbank deposit protection fund (FITD) a 2.7 billion euro ($3 bln) credit line to boost confidence in the financial system, three sources said on Friday.

The country’s top five banks have been talking with FITD for more than a year about granting the fund a credit line as an alternative to a direct injection of funds, the sources told Reuters.

Italian daily Il Messaggero said on Friday that the five banks had agreed to inject an extra 2.75 billion euros into FITD to strengthen support for weaker lenders in case of market turmoil.

Reuters sources, however, said the banks favoured a credit line.

According to one of the sources, the banks involved are Intesa Sanpaolo, UniCredit, Banco BPM , UBI Banca and Banca Monte dei Paschi di Siena.

Speculation over the soundness of Italian banks has resurfaced in recent months as controversial deficit spending plans by the populist ruling coalition sent bond yields higher.

Italy’s banks hold around 370 billion euros of government securities, whose value depreciates when interest rates go up.

Italian Economy Minister Giovanni Tria, speaking in a hearing in parliament, said that a crisis of one or more Italian banks must be avoided “in all ways”, adding however that there was no reason to expect one.

FITD, which operates under the Bank of Italy’s supervision, has a mandate to safeguard bank deposits under 100,000 euros in the event of a bank failure.

Setting up a credit line, rather than injecting money into the fund, would allow banks to book the money as a loan, avoiding any direct impact on balance sheets.

Other smaller lenders could come on board later this month, the source added.

Government plans to cut company tax breaks could make any future capital increases more expensive.

Rising risk premiums on Italian assets under an anti-austerity government have also made more expensive a state guarantee scheme devised by Italy’s previous government to help banks shed bad debts through securitisation deals.

However, bad loans on Italian bank balance sheets fell to their lowest level in about six years in September, central bank data showed on Friday.

Intesa Sanpaolo and Unicredit declined to comment, while the other banks were not immediately available for comment.

$1 = 0.8825 euros Reporting by Paola Arosio and Stefano Bernabei, writing by Giulio Piovaccari and Giselda Vagnoni, editing by Susan Fenton

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