The European Union Commission approved plans to support the struggles of two Italian banks through financial aid in order to maintain confidence in Italy’s banking system. The plans provide 4.8 billion euros in cash and 12 billion euros in guarantees to protect those that utilize the service provided by Banca Popolare di Vicenza and Veneto Banca. These events occurred as a reaction to the European Central Bank predicting that the two banks had failed or were likely to fail.

The two banks account for a sum total of 2 percent of Italian deposits, which on its own does not explain the large commission aid the banks are receiving. What motivates the compensation is the risk that the troubles afflicting these two banks could impose by undermining confidence in other Italian banks. Many other banks are suffering from portfolios swelling due to problem loans and thin capital cushions that act as a meek safety net.

The money in the rescue plan will come out of a €20 billion fund established by the Italian government for the banking system. While the fund has received preliminary approval from Brussels, the fund has received far less support and more criticism from the populace in Italy. This is due to the fund being at odds with vows made by the government authorities not to spend taxpayer money to save sick banks.

There is a fear that imposing pain on middle-class depositors and investors, including those who own senior bonds in Banca Popolare di Vicenza and Veneto Banca, might drive people who suffered losses into the arms of extremists of the left or right, adding to political turmoil in the country. This has been used as a justification for both the use of taxpayer revenue to help alleviate tensions that sick banks face, as well the large aid coming from the European Comission.

This aid that protects the two banks is another example of the newly implemented system to dissolve underperforming or overburdened banks with minimal disruption to the European Union financial system.  The new system faced its first test three weeks ago in order to smoothly facilitate the failure of Banco Popular, Spain’s fifth largest bank. Markets faced little tension and were for the most part calm as Banco Popular was sold and acquired by their much larger rival, Banco Santander. However, there is a difference in reaction to how Spanish banks and Italian banks respond to tension, with Spanish banks being considered generally more resilient.

As previously mentioned, a large motivator in the aid for two smaller Italian banks was the risk of market turmoil, which resulted in both speed and a large upfront injection of aid considerably larger than the Italian government’s anticipated amount of 5.2 billion euros. The Spanish government on the other hand did not spend any taxpayer revenue to rescue Banco Popular when it failed.

By late Sunday, the European Central Bank along with the European Commission and Italian authorities moved to ensure both Banca Popolare di Vicenza and Veneto Banca would operate as per usual. In addition to protecting depositors from losses, the aid also plans to spare owners of senior bonds in both banks. Bonds that in their nature that are safest from losses in cases of debt. Owners of junior bonds, which earn a higher rate but are riskier, as well as shareholders in the banks will lose their money, which will eventually be liquidated. Intesa Sanpaolo, Italy’s second largest bank, is expected to acquire the operations of the two banks which are deemed healthy for a symbolic purchase price.

The European Commission approved the rescue plan for Banca Popolare di Vicenza and Veneto Banca, but stated that it was up to the Italian government to liquidate the lenders, not the European bank resolution agency, in order to ensure the public interest was being served.