By Deborah Ball

MILAN--Banca Monte dei Paschi di Siena SpA has a far bigger hole in its balance sheet than previously calculated, according to the European Central Bank, significantly raising the amount the Italian government has to deploy to rescue the troubled lender.

The ECB told Monte dei Paschi that its capital shortfall is EUR8.8 billion ($9.19 billion), above the EUR5 billion expected when the government organized a rescue last week of Italy's No. 3 lender.

In a statement Monday evening, Monte dei Paschi said the ECB warned of a "rapid deterioration" over the past month of the bank's liquidity position. Monte dei Paschi has seen large outflows of deposits as it struggled in recent months to raise capital to meet an end-of-year deadline set by the ECB to shore up its balance sheet.

The need to raise EUR5 billion emerged from last summer's European stress-tests, which found that the bank's capital position would be severely compromised in case of an economic downturn. The ECB ordered Monte dei Paschi to raise that amount as part of a broader operation aimed at unloading nearly EUR30 billion in bad loans.

Last week, the government approved the creation of a new EUR20 billion fund to help support Italy's struggling banks, particularly Monte dei Paschi.

The new fund was expected to cover about EUR3 billion of the money Monte dei Paschi needed, following EUR2 billion in losses on the face value of some junior bonds held by institutional investors. The junior bonds would take a haircut in line with new European Union rules covering bank rescues which require that investors incur at least some losses.

Early Tuesday, Italian regulator Consob ordered Monte dei Paschi's shares to be suspended until further notice in light of the news of the greater shortfall. The shares were also suspended on Friday after news of the planned government bailout.

According to a person familiar with the situation, the larger shortfall stems from a change in the ECB's calculation of the bank's financial needs in light of the government's intervention.

In its statement Monday evening, the bank emphasized that it remains solvent. However, it also said that the ECB has notified the Italian government that its liquidity position has seen a "rapid deterioration" between Nov. 30 and Dec. 21. The bank's one-month liquidity had fallen from EUR12.1 billion, or 7.6% of its total activities, to EUR7.7 billion, or 4.78% of its total activities.

Monte dei Paschi's greater capital shortfall means the new government fund will have less firepower to help a clutch of other Italian banks which are struggling with large bad loans, meager profitability and thin capital cushions.

Write to Deborah Ball at

(END) Dow Jones Newswires

December 27, 2016 05:18 ET (10:18 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.