Banca Monte dei Paschi di Siena or MPS is the first of the Italy's banks to receive some form of state aid.
The Italian cabinet revealed that the government will underwrite up to 3 point 9 billion euros worth of bonds for Italy's third largest bank, which will closely resemble Tremonti bonds.
Tremonti Bonds are bonds issued by banks and bought by the government with the proceeds going to shore up the bank capital which can then be converted into equity at the lender request.
The news comes after the IBTimes UK reported that MPS was frantically trying to sell 1billion worth of bonds to the state by the end of this month in order to plug a capital shortfall that is required to be filled by European Union (EU) regulations.
The European Banking Authority (EBA) published its formal Recommendation in December last year, and the final figures revealed that a number of Italian banks had a significant shortfall on their balance sheets with MPS needing 3.267 billion euros by the end of June this year.
Top management at the bank suggested it could issue contingency capital bonds to fill the remaining capital hole, after the EBA findings were released.