As Italy’s banking sector continues to creak under the pressure of bad debt, the European Central Bank has ordered Banca Monte dei Paschi di Siena to take action. The ECB has asked the firm – the third-largest bank in Italy – to cut its non-performing loans (NPLs) by 40 percent within the next three years.

While just one of the country’s many struggling banks, Monte dei Paschi is the weakest. The bank, which is the oldest operating bank in the world, currently has €46.9bn gross of NPLs. News of the ECB’s request for the sharp cut in exposure to bad debt was greeted by a 14 percent fall in the struggling bank’s already-tanked share price.

Although the current economic and financial instability surrounding Britain’s recent vote to leave the European Union has exacerbated the problems engulfing Italy’s banks, a crisis in the sector had been gradually developing. In total, the country’s banking sector has €360bn-worth of NPLs, a figure that continues to rise.

The current economic and financial instability surrounding Britain’s recent vote to leave the European Union has exacerbated the problems engulfing Italy’s banks

Officials in the eurozone are increasingly worried that Italian banks may once again precipitate a union-wide financial crisis. The Italian Prime Minister, Matteo Renzi, has toyed with the idea of using public money to once again bail out his country’s troubled financial institutions, however such a move is now illegal under new EU regulations. These regulations now require creditors to fund the rescue of banks rather than taxpayers – so-called ‘bailing in’.

Italy is reluctant to use the bail in method to prop up its banks, due to the potential toll it will take on retail depositors. In Italy many retail investors and depositors are exposed to Italian bank bonds, and would take the hit from any bail in plan. The recent bailing in of smaller Italian banks in November 2015 caused uproar, with many customers misleading sold bonds and investment products facing ruin.

Italy has requested these new rules be temporarily suspended, although EU leaders have rebuffed such requests. Renzi, however, has stayed defiant and remains open to the possibility of Italy unilaterally injecting billions of euros into Italy’s banks – threatening the credibility of the EU’s new banking rules.