Italian treasury is reported to be exploring merger options for troubled lenders Banca Carige and Monte dei Paschi.

Banca Carige and Monte dei Paschi may be merged with stronger domestic lenders in a bid to prevent another downturn in the banking sector, sources familiar with the matter told Reuters.

Earlier this month, Banca Carige was placed into temporary administration by the European Central Bank (ECB) due to growing bad debts and to restore capital compliance requirements.

Currently, Banca Carige is being governed by three temporary administrators and a three-member surveillance committee. They are also engaged in exploring possible merger partnerships to revive the bank.

In 2017, the government also bailed out Monte dei Paschi, struggling with bad loans and lawsuits. Currently, the Italian government owns 68% stake in this bank.

The government started considering merger options for the two struggling lenders as the crisis emboldened recently threatening to affect the stability of the banking sector.

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The options that are being considered also include a three-way merger involving Monte dei Paschi, Carige and UBI, one of the sources told the news agency.

Currently, the discussions are at the preliminary stage and the final decision is yet to be taken. However, the Italian treasury and the related lenders did not confirm the move.

Any potential merger of the banks will require an ECB approval and increase in the capital strength to ensure financial stability of the new entity.