Beleaguered Italian banking giant, Monte dei Paschi (BMDPF) , was granted a stay of execution on Wednesday after London's Financial Conduct Authority joined Italian regulator Consob in imposing a blanket ban on the short-selling of the bank's stock.
The ban will remain in place throughout Wednesday and comes after Monte dei Paschi shares fell by 13% on Monday and a further 17% on Tuesday, as investors dumped the stock en masse and short-sellers speculated on the likelihood that the bank might soon require a bailout.
Noting the volume of trading in Monte dei Paschi shares in the U.K., and matching price falls, the FCA said in a statement "it is necessary to take the action set out in this notice to assist Consob."
The shares responded positively to the announcement, rising by almost 5% in early European trading, but the bank's real fortunes will probably depend on whether or not it is able to find buyers for its growing stock of bad loans during the months ahead.
Italian banks have been hit even harder than British banks so far in 2016. Share of the five largest players in the London have shed 25% of their value on average. Monte dei Paschi shares are down by 76% so far this year while Banco Popolare (BPSAF) shares have lost 76% year to date. Larger and less beleaguered banks have been hit equally hard in Italy, with Intesa Sanpaolo (ISNPY) and UniCredit (UNCFF) having seen their stocks plunge by 68% and 48% respectively.
Monte dei Paschi is reeling from the after effects of a multi-year recession that has seen the stock of bad loans in Italy become equivalent to 18% of the banking system's assets. The bank announced on Monday that it had received a letter from the ECB instructing it to reduce its own stock of bad loans to a level where they are equivalent to 20% of its assets.
Shortly after, a European Commission spokesperson confirmed that the EC is working with the Italian government to devise a plan that would enable the nation's banking system to be bailed out in a manner that would protect retail investors, while not breaching European Union rules on state aid.
Italy rescued several medium-sized banks during the last 18 months in a series of highly controversial moves. The bail-ins saw swathes of retail investors lose large chunks of their life savings, which led to a backlash against the Italian government and European Union rules.
Under European Union competition rules a bank cannot be rescued using public funds unless private investors are "bailed-in" first, which means bond and equity holders have to take the hit before the public purse does. However, in Italy, around one third of bank bonds are owned by retail investors.