Italy orchestrated its biggest bank rescue on record, committing as much as 17 billion euros ($19 billion) to clean up two failed banks in one of its wealthiest regions, a deal that raises questions about the consistency of Europe’s bank regulations.

The intervention at Banca Popolare di Vicenza SpA and Veneto Banca SpA includes state support for Intesa Sanpaolo SpA to acquire their good assets for a token amount, Finance Minister Pier Carlo Padoan said Sunday after an emergency cabinet meeting in Rome. Milan-based Intesa can initially tap about 5.2 billion euros to take on some assets without hurting capital ratios, Padoan said. The European Commission approved the plan.

The agreement bolstered bank stocks across Europe, with Intesa leading gainers, while putting into question the effectiveness of European rules meant to ensure that private investors share the burden of bank bailouts. Just a few weeks ago, Spain’s struggling Banco Popular Espanol SA was wound down without state aid. Italy, which wants to avoid imposing losses on bondholders because many of them are mom-and-pop investors, is still in talks with European authorities to save Banca Monte dei Paschi di Siena SpA, the world’s oldest bank, through a so-called precautionary recapitalization.

In recent months, “bank intervention is specific to each troubled bank situation on its own conditions, with government and regulatory decisions on how to intervene influenced by multiple major macro factors,” said David Hendler, founder of Viola Risk Advisors, a credit analysis firm in New York state. “For global bank investors, the European banking sector and how to invest in it is very confusing, not uniform, and difficult to predict.”

Intesa rose 4.4 percent at 12:58 p.m. in Milan trading, pacing a 1.4 percent advance in the Bloomberg Europe Banks and Financial Services Index.

The two lenders will be split into good and bad banks, with the firms open for business on Monday, Prime Minister Paolo Gentiloni said. Intervention was needed because depositors and savers were at risk, he said. The northern region where they operate “is one of the most important for our economy, above all for small- and medium-size businesses.”

While an additional 12 billion euros will be available to cover potential further losses, Padoan said, the Italian Treasury estimates the fair value of the losses at about 400 million euros. That amount is already included in the funds provided to Intesa.

‘Good Deal’

"Under current terms, this is a good deal for Intesa as it would increase earnings and market share at seemingly no cost to capital," said Alexander Pelteshki, a fixed-income investment manager at Kames Capital Plc.

Intesa agreed to purchase the assets of the two banks for 1 euro, the lender said in a statement on Monday. The proposal excluded soured debt, higher-risk performing loans and subordinated bonds, along with shareholdings and other “legal relationships.” About 600 branches of the two lenders will be closed and 3,900 employees will exit.

Still, the intervention will safeguard other jobs at the banks as well as the savings of about 2 million households and the financial interests of 200,000 businesses, it said. The agreement gives Intesa the right to return certain risky but performing loans, with a face value of 4 billion euros, to the liquidators should their quality deteriorate.

Bank of Italy

The Bank of Italy appointed administrators for the two banks, including former Monte Paschi Chief Executive Officer Fabrizio Viola.

Italy ended months of talks with regulators turning to domestic insolvency law to liquidate the pair and making it easier to use public money to lubricate the process. The government tried for months to find a way to keep the banks afloat, including an appeal to wealthy businesspeople in the region to contribute to a rescue. Those efforts ended Friday when the European Central Bank said the two banks are failing or were likely to fail and turned the matter over to the Single Resolution Board in Brussels for disposal.

Since the ECB’s decision Friday, Italy rushed to assemble the measures to carry out the plan because a local regulatory framework was required to allow the banks to open Monday. The deal crafted over the weekend is in line with the bloc’s state-aid rules. Shareholders of the two banks as well as holders of subordinated debt “fully contributed” to the plan, limiting costs of the Italian state, EU Competition Commissioner Margrethe Vestager said in a statement.

The solution will limit competition distortions because the two Veneto banks will exit the market, or be significantly downsized in the case of those activities that are transferred to Intesa, according to the commission.

The decision to let Italy dispose of the two banks under national insolvency law was crucial in shielding senior debt from losses. The EU’s bank-failure law, known as the Bank Recovery and Resolution Directive, puts investors, including senior creditors, on the hook for losses if necessary to fund restructuring. The BRRD is part of the EU’s attempt to prevent the public bailouts seen during the financial crisis.

It was “a very pragmatic decision” to interpret the BRRD leniently in this case and shouldn’t affect investor confidence in the European banking union, said Marina Brogi, a professor of international banking and capital markets at Sapienza University in Rome.

“To be effective and avoid sizeable unintended consequences it would have been better to give banks more time to modify their liabilities before” the new rules on bank resolutions came into force, she said.

The two banks were forced to seek government aid after they failed to raise capital from investors in 2016. After reviewing their books, the ECB in April said they needed about 6.4 billion euros of new capital, prompting a search for ways to bridge the gap.

Previously, Italy sought to rescue the lenders through a so-called precautionary recapitalization, using a mix of state and private funds as well as debt and equity writedowns to finance the removal of bad debts. The private sector balked at the plan.

Intesa Offer

The finance minister reiterated that the measures will ensure that senior creditors and depositors of Popolare di Vicenza and Veneto Banca would be protected in the wind-down under national insolvency law, and customers would see no interruption in service. Retail junior bondholders involved in the burden sharing -- who can be reimbursed up to 80 percent according to rules -- will be totally refunded because Intesa said it can fill the gap.

Intesa CEO Carlo Messina said in a statement the bank will provide 60 million euros for the reimbursement of retail subordinated bonds. The lender will use voluntary exits during the integration of the lenders’ assets and said it will provide an additional 5 billion euros of credit for the local region.