[MILAN] Italy's government is under pressure from banks and their allies in parliament to water down a landmark reform of large cooperative banks, which the lenders fear will make them prey to foreign rivals and speculative investors.
The reform will turn the country's 10 largest "popolari" banks into joint-stock companies, scrapping ownership limits and abolishing rules that grant investors one vote each regardless of the size of their stake.
Affected banks include UBI Banca, Banco Popolare and Banca Popolare di Milano.
The move, part of Prime Minister Matteo Renzi's plans to reform the banking sector, aims to make it easier for the banks to raise funds by making them more attractive to investors. It is expected to lead to consolidation in the sector as lenders seek to boost their size and profitability.
The banks were taken by surprise when the government announced the reform in January and are demanding changes to the decree, which parliament must approve by the end of March.
They have requested that voting rights be capped at 3 or 5 per cent of capital and loyalty share schemes introduced to reward long-standing investors.
The Bank of Italy, which welcomed the reform after trying for years to overhaul the large popolari banks, has said that temporarily watering down the reform could help ease the banks'transition to their new structure - unless they need to quickly raise cash from investors.
The government is reluctant to soften what it sees as an important and long-overdue reform for the banking sector.
However, lawmaker Marco Causi of Mr Renzi's Democratic Party said on Wednesday that changes were being considered along the lines of the Bank of Italy's suggestions.
"There is a risk that changes to introduce caps to ownership or voting rights hobble the reform," said Stefano Caselli, a professor of banking and finance at Milan's Bocconi University.
Representatives of Italian cooperative banks voiced concerns during parliamentary testimony last week that the reform would make them vulnerable to foreign takeovers and speculative investors.
Claudio Scardovi, managing director at consultancy AlixPartners, said private equity firms could be interested in a sector where more efficient management and economies of scale could significantly boost returns.
"If they're smart enough the popolari will eventually start consolidating," he said. "It will take time but an outside threat should lead to a beneficial sector shake-up."
Banca Popolare di Milano has said it wants to remain a cooperative bank but added last week that if the reform goes ahead it would be interested in becoming part of a larger Italian banking group.
Italian prosecutors are probing suspicions of insider trading after a sharp rise in cooperative bank shares in the run-up to the reform, a source told Reuters.
Mergers should strengthen Italian cooperative banks, the European Commission said in a document on Thursday, boosting their ability to deal with problematic loans. Bad loans accounted for 9.6 per cent of Italian banks' overall loans at the end of 2014, according to the Italian Banking Association.