Italy is looking at a €5bn state rescue of two struggling regional banks in the Veneto region as the eurozone’s third largest country seeks to shore up its troubled banking system.

The rescue, which still requires regulatory approval, would be a “precautionary recapitalisation”, according to people with direct knowledge of the discussions.

Italy is already in talks with Brussels about using the same mechanism, which allows eurozone states to pump state money into banks without infringing state aid rules, to undertake a €8.8bn rescue of the world’s oldest lender Monte dei Paschi di Siena.

Veneto Banca and Banca Popolare di Vicenza are Italy’s next trouble spots after Monte Paschi, say senior bankers. The two lenders banks based in Italy’s north east industrial region have suffered a plunge in liquidity and capital since Italy’s sovereign debt crisis and after alleged mismanagement.

The banks were taken over last year by Italy’s government sponsored, privately backed rescue fund Atlante. But the lenders have continued to leaks deposits, further eroding their capital base, say people with direct knowledge of the events. Veneto Banca tapped European liquidity assistance last July, according to two people with direct knowledge of the events.

A person familiar with the dossier sent to the European Commission said it requested the start of precautionary recapitalisation procedures for the two banks for “about €5bn”, a figure far high than estimates a year ago and a sign of the banks’ worsening capital position.

Nonetheless, Italian officials and senior bankers consider Italy’s troubled bank sector has turned the corner since the end of last year when it threatened to tip the peripheral European economy into a fresh crisis.

Crucial to the new found confidence was parliamentary approval in December of a €20bn fund to rescue failing banks, say senior bankers. These funds had already been earmarked for Monte Paschi, the Veneto banks were considered the next recipients.

A €13bn recapitalisation of UniCredit, Italy’s largest bank by assets which missed ECB capital targets at the end of last year, is also considered decisive to improving sentiment. The recapitalisation, which is fully underwritten by a consortium of international investment banks, is due to close by March 10.

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