The European Central Bank has pulled the plug on two troubled Italian banks, sending them into insolvency proceedings as it pushes ahead with efforts to clean up weak banks holding back the economy.
The two banks, Veneto Banca and Banca Popolare di Vicenza, have struggled to overcome high levels of loans that were not being paid back.
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The ECB said Friday it had given the banks time to raise more capital but the banks had not been able to offer credible solutions. It ruled they were "failing or about to fail," and they will now face insolvency proceedings in Italy.
The Italian Economy and Finance Ministry said the government would meet over the weekend to "adopt the necessary measures to keep the banks fully operative, protecting all account holders, depositors and senior creditors."
Shareholders and holders of the bank's junior bonds, however, face being wiped out.
Weak banks that can't lend adequately to businesses have been a key vulnerability for Italy in particular and for the eurozone economy as a whole. The European Central Bank took over as top banking regulator in 2014 as part of an effort to strengthen oversight of the European Union's banking system. The ECB was given the job because national regulators were considered too slow to address troubles at their home banks.
The decision follows a similar ruling on Spain's Banco Popular earlier this month, the first time the ECB exercised its new powers to blow the whistle on a failing bank. In that case, EU banking authorities found that a sale for one euro to the larger Santander bank was an acceptable solution.
Another Italian bank, Intesa Sanpaolo, said Wednesday it would be willing to acquire some parts of Veneto Banca and Banca Popolare di Vicenza so long as that did not worsen its own finances. That meant it could not take over those banks' bad loans, for which another solution would have to be found.
The Italian banking fund Atlante invested 3.5 billion euros ($3.9 billion) in Veneto Banca and Banca Popolare di Vicenza in 2016, but, the financial position of the two banks continued to deteriorate. The ECB said they suffered not only from high levels of bad loans but "underlying challenges to their business models."