As speculation continues to swirl about an all-out rescue of the Italian banking system, one of the nation's largest and most troubled lenders has received an European Central Bank order to reduce its stock of non-performing loans.

Banca Monte dei Paschi di Siena (BMDPF)  , which claims to be the world's oldest bank, said Monday that it has been instructed by the ECB to devise a credible plan to reduce its ratio of non-performing loans to performing loans down to 20% during the 2018 year. It didn't say what its ratio of non-performing loans is now.

Monte dei Paschi said it has until July 8 to respond to the ECB and expects to hear back from the central bank by the end of July.

"The bank has immediately initiated discussions with the European Central Bank in order to understand all the implications that are included in this draft letter and to present its reasoning before the final decision..," it said.

The development follows protracted restructuring efforts at the Italian bank. Monte dei Paschi received a €4.7 billion ($5.23 billion) bailout from the Italian government in February 2013. The bank then failed ECB stress tests in 2014, triggering two separate capital raisings by the lender.

Monte dei Paschi's stock fell by 8% on Monday morning in Europe, bringing the shares to a record low of €0.34 and taking the total share-price decline so far this year to 71%. 

Banks across Europe have been cutting non-performing loans since the credit crisis, often by packaging them up and selling them on to specialist vehicles.

Government-backed Atlante is one such vehicle in Italy. However, it only has €4.25 billion of invest-able assets at present and may struggle to gain investor backing for further capital raisings.

According to data collected by PWC, the total value of non-performing loans across the EU fell in 2015, from €1.2 trillion to a little over €1.1 trillion.

However, during this time, PWC stated in a report last month that non-performing loans increased in Italy by almost 10% from €184 billion to €200 billion. And PWC noted that the figure excludes at least €141 billion of non-performing loan assets which didn't meet its definition of a marketable non-performing loan.

Analysts at Berenberg put the value of gross non-performing loans in Italy at €360 billion, which is equivalent to 18% of the Italian banking system's assets.

They also warn that the nation's banks may be clinging to another €45 billion of soured loans which are yet to be recognized on their balance sheets. The analysts noted that fair values recorded by institutions of €0.40  compare with mark-to-market values of Italian non-performing loans of between €0.18 and €0.20.

Should Italian institutions be forced to recognize higher levels of loan losses then the subsequent write-downs would hit the book value of the sector's equity hard and exacerbate capital worries.

However, European Union rules on state aid forbid governments from going to the rescue of beleaguered institutions unless private investors are "bailed-in."  An Italian government bailout last year of Banca Etruria prompted an uproar after 130,000 shareholders and bondholders saw their investments wiped out, and at least one private investor committed suicide. Italy has also bailed out one three other banks.

Fitch analysts wrote on Monday that the Italian government will struggle to engineer a rescue that is compatible with European Union rules, though it suggested that adhering to the rules could prove politically unpalatable for Renzi's government.

"State aid rules require private sector burden-sharing in most cases, which would increase the risk of a bail-in of junior debt in the event of precautionary recapitalization," Fitch analysts wrote. "We believe the Italian government would want to avoid a bail-in following the political repercussions when it had to impose losses on retail investors in late 2015. Retail investors hold roughly a third of total outstanding Italian bank debt, and their bail-in would disrupt financial stability and undermine depositors' confidence."

However, Paul Hastings lawyer Bruno Cova noted that in the wake of Britain's decision to quit the EU, political conditions have changed. Popular discontent in Italy, triggered in part by the bank bail-ins, have also played into that change of mood music, he noted.

Cova said that it is no longer inconceivable that the Italian government would be able to effect a large-scale rescue plan and spare private investors from losses at the same time. 

On the question of whether or not the sector remains invest-able, Berenberg analysts recently rated  Monte dei Paschi a sell along with UBI Banca and Intesa SanPaolo (ISNPY) . They rated  Banca Popolare di Milano, Banco Popolare (BPSAY) , Credito Emiliano and Unicredit (UNCFF) a hold.