tapdance

First the EU has to take hands off the steering wheel and claim that the failing bank is to small not to fail which avoids wiping out equity and subordinated bonds

Then the country solvency procedures trigger with the government providing the buying bank with guarantees against capital deterioration, cash, and separation of assets (kinder gentler)

The buying bank in this case has a pre deal market cap of 44 bn eu trading at 17 x earnings

Just the opening scene

tapdance

The case of the Veneto banks is yet another example of Italy wriggling out of strict EU rules built after the financial crisis to prevent taxpayers from footing the bill in the event of the collapse of such institutions as banks.

When the EU authority in charge of winding down the bloc's failing banks -- the Single Resolution Board -- decided it wouldn't take the case, it handed all power over to Italian authorities.

The SRB said Friday night it wouldn't take action because neither of the banks would have "a significant adverse impact on financial stability."

So the two banks will be closed down under national insolvency procedures, and the painful process of EU bail-in -- under which junior and senior bondholders absorb the losses -- is averted. In Italy, a majority of bonds are in the hands of mom and pop investors.

By avoiding the SRB, Italian authorities could work under a softer set of rules dating from 2013 and only had to put forward a state-aid case to the commission.

Italian authorities tried in March to use another exception in EU rules to prop up the two Veneto banks. Under so-called precautionary recapitalization, Italy could have injected state money into the ailing lenders, but the commission didn't approve the plans.

Stress tests in 2014 found a multibillion-euro capital shortfall at Veneto Banca and Banca Popolare di Vicenza. A EUR3.5 billion capital investment by a government-orchestrated banking fund failed to fill that gap.

The two Veneto banks reflect the weakness in Italy's banking sector, which is struggling to digest about EUR200 billion in bad loans and has suffered from low profitability and insufficient capital for years. The two banks have a combined capital shortfall of about EUR6.4 billion. In March, they requested government help to stay afloat.

The government is set in the coming weeks to take control of Banca Monte dei Paschi di Siena, Italy's No. 4 bank and one whose problems have threatened the larger stability of Italy's banking system.