UPDATE 1-Italian bank rescue fund Atlante to buy more bad loans

(Adds comments from sources)

MILAN, Nov 22 (Reuters) - The Atlante fund set up to help free Italy’s banks of bad debt will make an offer to buy the impaired loans of three small banks that were rescued from bankruptcy a year ago, the head of Atlante said on Tuesday, rejecting concerns that it had run out of money.

Atlante is expected to buy up to 2.5 billion euros ($2.7 billion) in problem loans held by Banca Etruria, Banca Marche and CariChieti, paving the way for UBI Banca, Italy’s fifth-largest lender, to make an offer for the three banks.

However, fears remain that in the absence of fresh investment Atlante will run out of cash while Italy’s banks are still pressured by impaired loans totalling 356 billion euros.

“Atlante’s size is what it is, while that of the Italian bad loan market is much, much bigger,” top Treasury official Fabrizio Pagani told an industry conference on non-performing loans in Milan on Tuesday.

Atlante was hastily set up in April to help Italy’s struggling banking sector. It raised 4.25 billion euros from banks and insurers, as well as some funding from state-owned entities, but spent over half of that to recapitalise regional banks Popolare di Vicenza and Veneto Banca.

A spin-off fund - Atlante II - was set up specifically to buy up bad bank debts with the goal of raising up to a further 3.5 billion euros from investors.

But sources say Atlante II has only managed to raise 750 million euros so far, prompting the original Atlante fund to transfer another 900 million euros.

Top lenders UniCredit and Intesa Sanpaolo have together committed to provide an extra 300 million euros but have not paid that money in yet.

Atlante II has already pledged to spend 1.6 billion euros on buying up Banca Monte dei Paschi’s bad loans, which are being sold as part of a rescue plan aimed at keeping Italy’s third-largest bank in business.

That risks leaving it with little money to do anything else.

“We come up with good tools but then we leave them to their own devices,” Giuseppe Guzzetti, head of a group of Italian banking foundations that put money into Atlante, said recently. “If you don’t give Atlante money, then what can it do?”

Nevertheless Alessandro Penati, chairman of the asset manager running Atlante, said Atlante II would also buy the bad loans of Banca Etruria, Banca Marche and CariChieti, three of the banks rescued from bankruptcy in November 2015, to open the way to their long-awaited sale.

He declined to say how much money Atlante II had.

“We’ll present an offer ... we’ve got enough money,” he told reporters on the sidelines of the conference in Milan.

Penati also said Popolare di Vicenza and Veneto Banca would need to sell their bad loans and would require fresh capital to cover losses from loan writedowns. Analysts estimate the capital shortfalls for the two banks add up to a combined 2.5 billion euros.

Asked if Atlante would be able to back new share offers at the two lenders, Penati said: “If you have a good business plan ... with an adequate return on equity ... you can find all the money you need.”

However, shares in Italian banks trade at a small fraction of their book value and investors have so far shown little appetite for Monte dei Paschi’s proposed 5 billion-euro share issue. ($1=0.9414 euros)

Additional reporting by Silvia Aloisi and Paola Arosio; Editing by Greg Mahlich