The agreement struck with the EU allowing banks to offload soured loans after buying a government guarantee will not clean up the financial system and revitalise lending as fast as some in the markets had hoped.
Banking shares dropped on the plan, which stops well short of the clean ups organised in Spain and here following the financial crisis.
“The uncertainty in the Italian banking system will persist,” said Emanuele Vizzini, who manages €3.5bn as chief investment officer at Investitori in Milan.
“The deal may help banks to offload part of their bad debt, but for sure doesn’t solve the problem, in particular for the weakest banks, which may need recapitalisation.”
The ills of the banking sector dogging Mr Renzi not only threaten his reputation for managing the eurozone’s third- biggest economy, they also jeopardise bank lending and support for the fledgling recovery after a record-long recession.
A rout last week drove shares of Banca Monte dei Paschi di Siena and Banco Popolare down more than 20% on concerns over their bad loans and capital levels in the absence of a bad-bank agreement.
Mr Renzi saw off a challenge on Wednesday evening, winning a vote of confidence in the senate over the government’s rescue of four banks in November.
Forza Italia, the party of ex-premier Silvio Berlusconi, alleged mismanagement and conflicts of interest.
The deal on the mechanism to help banks dispose of their troubled debt was sealed after a five-hour session late into Tuesday night involving finance minister Pier Carlo Padoan and EU competition commissioner Margrethe Vestager which capped months of talks.
Banks will be able to bundle their bad loans into securities for sale, while purchasing a state guarantee for the least-risky portion to make the debt more appealing to investors, the Italian treasury has said.
Addressing lawmakers in Rome, Mr Padoan said a government guarantee under the plan will not have any impact on public debt or the deficit.
“The agreement is a lot less dramatic than some people were expecting,” said John Raymond, an analyst at CreditSights in London.