The Italian government has deemed €20 billion to be a sufficient amount to deal with the funding needs of all the struggling Italian banks under observation by the treasury and the Bank of Italy, including Banca Monte dei Paschi di Siena SpA, Reuters reported Dec. 27, citing a treasury source.

According to the ECB, Monte dei Paschi's capital shortfall has risen to €8.8 billion from the €5 billion previously estimated by the lender. The lender recently made a formal request to the ECB to move forward with a precautionary recapitalization.

Roughly a third of the €20 billion fund will be set aside for Monte dei Paschi. A capital injection of roughly €6.5 billion, more than initially expected by the government, will likely be needed to bail out Monte dei Paschi, resulting in the government having a 70% stake in the lender, "sources close to the matter" told the newswire.

The remaining €2.3 billion will come from the conversion of Monte dei Paschi's subordinated bonds into shares, as required under Europe's Bank Resolution and Recovery Directive, Reuters noted.

Italy's bailout plan for the lender, which is subject to EU approval, includes compensation for retail holders of about €2 billion of the lender's junior debt. Their holdings will be converted into shares, which retail investors will then be able to swap for senior bonds, with the government repurchasing the shares from Monte dei Paschi, the newswire wrote.