The European Union (EU) has given the green light to the €5.4bn bailout of troubled Italian lender Monte dei Paschi di Siena (MPS) by the state.

MPS faces a capital gap of €8.1bn. The bank asked for the state aid after failing to raise required capital from private investors to bolster its balance sheet.

In lieu of the state rescue, the bank agreed to an overhaul strategy that will be carried out over five years.

The plan includes reorientation of its business model to focus on retail customers and small and medium-sized businesses, sale of around €26bn of bad loans by transferring it to a privately-funded special vehicle, and salary cap on senior managers.

Apart from the state funds, shareholders and junior creditors have contributed €4.3bn to MPS rescue from the conversion of junior bonds into equity.

Commissioner Margrethe Vestager said: “We have approved Italy’s capital injection into MPS in line with EU rules, which will help MPS meet capital needs in case economic conditions were to worsen unexpectedly. To ensure MPS’s long-term viability, the bank will re-focus its business model and move more than €26 billion in non-performing loans off its balance sheet.

“This capital injection could only be approved after junior bondholders and shareholders have contributed to the costs of restructuring, in line with “burden-sharing” requirements under EU state aid rules.”