* Italian finance sector to set up $5.7 bln banking fund
* Fund to be backed by state-owned lender CDP
* Fund to buy shares and distressed debt of weaker banks (Recasts after announcement)
By Giuseppe Fonte and Silvia Aloisi
ROME/MILAN, April 11 (Reuters) - Italian financial institutions have agreed to set up a 5 billion euro ($5.7 billion) fund to shore up weaker banks, two of the fund’s backers said on Monday, in a state-orchestrated plan to avoid a crisis in the euro zone’s fourth-biggest banking sector.
The Italian government is anxious to ease concerns about its banking system, which is groaning under the weight of 360 billion euros in bad loans, a third of the euro zone total, and has fared badly in EU-wide stress tests.
Rome has been keen to portray the fund as an industry initiative to ensure it does not fall foul of European rules against unfair state aid, and it left the announcement on Monday to a private fund manager, Quaestio Capital Management.
“Following meetings with a vast number of institutional investors, banks, insurers, banking foundations and (state lender) Cassa Depositi e Prestiti, Quaestio has gathered many subscribers to launch the Atlante Fund,” the fund manager said.
Quaestio did not give an overall size for the fund, but earlier on Monday Alessandro Vandelli, chief executive of mid-tier lender Banca Popolare dell’Emilia Romagna, put it at 5 billion euros.
Quaestio said the fund would help buy shares in upcoming stock issues at distressed lenders and purchase non-performing loans, focusing on junior debt, where investor demand is weakest.
It did not say how many investors had committed to the fund, whose name refers to Atlas, the god of Greek mythology who bore the heavens upon his shoulders.
Prime Minister Matteo Renzi, who has made strengthening Italy’s banking industry a priority, hailed the fund’s creation and said the government would in the next few days pass measures to speed up bankruptcy procedures and loan recovery.
But investors and banking analysts warned the scheme would be no panacea for Italy’s banking sector, which is crowded with weaker lenders and has difficulty recovering bad debts.
Cassa Depositi e Prestiti will contribute up to 300 million euros, a source familiar with the fund said, with the bulk of the money expected to come mostly from top banks Intesa Sanpaolo and UniCredit, as well as insurers and asset managers.
Rome, struggling under a public debt equivalent to 132 percent of GDP, wants the fund to be majority-owned by private investors to comply with European rules limiting state aid.
Shares in Italian banks - which have lost around a third of their value this year amid concerns over the solidity of the system - rose for a second straight session on Monday as investors anticipated the announcement.
The two banks with the biggest bad loan mountain relative to their loan book - Monte dei Paschi di Siena and Banco Popolare - both soared 10 percent. UniCredit was up 2.4 percent.
Weeks of talks over setting up the fund took on added urgency due to a 1.76-billion euro cash call at Banca Popolare di Vicenza, to be completed by May 10.
UniCredit is sole guarantor for the capital increase and its own capital ratios could suffer if it was left with a lot of unsold shares. Two other rights issues totalling 2 billion euros loom: one at Veneto Banca and one at Banco Popolare.
“We struggle to see there being demand for the three Italian banks looking to raise capital,” Berenberg said in a note.
“We worry that a bail-in of an Italian bank may cause a chain reaction with the ripple effects felt across the European banking system.”
Analysts said Italy’s top banks appeared to be willing to put money in the fund out of fear that a bank collapse could trigger a run on deposits and drag down the whole industry.
But they said the scheme was a backstop, not a cure-all for Italy’s banking sector, which has long suffered from low profitability, weak governance and an excess of branches.
“In the long term, Italian banks need to consolidate, restructure and change their business models,” said Luigi Tramontana at broker Banca Akros. ($1 = 0.8770 euros) (additional reporting by Stefano Bernabei and Stephen Jewkes; Editing by Kevin Liffey)