Specialist Italian pension funds will consider a government request to pour money into a bank bailout fund at a meeting on Monday, days before European stress tests are expected to show the country’s third-largest lender is in need of urgent capital.

The Italian government is looking for ways to support struggling lenders without breaking European Union state aid rules that require investors to take a hit first to shield taxpayers.

Monte dei Paschi, Italy’s third-biggest bank by assets, is likely to be found short of capital under an adverse scenario when EU stress tests results are announced on Friday. A deeper financial crisis at the bank could further undermine confidence in Italy’s banking sector, the euro zone’s fourth-largest.

The chairman of ADEPP, the association of sector-specific pension funds, told Reuters that the government had asked association members to invest in the state-sponsored Atlante fund, which is working with Monte dei Paschi on the sale of 10 billion euros (£8.3 billion) in bad debts after writedowns.

“The government has made a request,” Alberto Oliveti said, adding each pension fund would decide independently after a meeting of association members later on Monday.

He would not comment on media reports that the funds could contribute 500 million euros in total.

Italian state financing agency Cassa Depositi e Prestiti (CDP) is also ready to provide up to 500 million euros and a similar amount would come from SGA, another Treasury-controlled entity, sources have said. However, their contributions must be limited to a minority stake to avoid breaking state aid rules.

Those EU rules have hampered Italy’s efforts to backstop Monte dei Paschi’s capital raising as the rules require that private investors – including holders of subordinated debt – must take losses before banks can be rescued at taxpayers’ expense.

European Central Bank supervisors have already asked the Tuscan bank to clean up its balance sheet. Monte dei Paschi has submitted a plan to the ECB for approval and hopes for a green light by Friday when it is due to release first-half results.

Under the plan, Atlante would buy the bank’s loans to borrowers deemed insolvent in a complex scheme that aims to leverage fivefold the fund’s residual resources of 1.75 billion euros, sources have said.

Atlante is ready to buy the loans at a higher price than investors specialising in buying distressed assets would offer, but that would still be below the portfolio’s net book value, blowing a hole in the bank’s account and forcing it to raise capital.

Investors worry Monte dei Paschi would struggle to find the money at a time when sector profits are being squeezed by negative interest rates and poor asset quality, so the government is trying to come up with a way for it to cover that capital shortfall.

A source with knowledge of talks between the Italian government and the European Commission on a rescue plan for weak Italian lenders said Rome now saw the possibility of state intervention in the recapitalisation of Monte dei Paschi as a last resort.

“A precautionary capital increase (for Monte dei Paschi) funded by the government is only a contingency plan … Rome is doing everything it can to avoid tapping public money,” the source said.

Monte dei Paschi shares were down 7.5 percent in afternoon trade. They have lost 76 percent this year.

Atlante, set up in April, has used the bulk of its initial resources of 4.25 billion euros to rescue two regional lenders and an injection of money from pension funds would help it to assist Monte dei Paschi.

Source: Reuters (By Stefano Bernabei and Francesca Landini, Editing by Susan Fenton)