From the Alps to the Adriatic Sea, small family-run businesses, mid-sized companies and the most cutting-edge international players choose the Veneto region in Italy to set up base. With superb art, food and style, Vicenza, a UNESCO World Heritage Site, is a city in the productive heartland of the North East, ranking third among the Italian provinces in terms of export. Though there are only approximately 120,000 residents in Vicenza, it is one of Italy’s wealthiest cities after Turin and Milan, and the local economy has gained significant market share both in Italy and abroad. Formerly overlooked in favour of nearby Venice, Vicenza boasts a turnover of €90 billion, a volume of exports of almost €15 billion and is a worthy destination in its own right. This may all seem picture perfect but all is not what it seems as there are real fears that events in Italy may trigger a broader financial crisis.

Last month’s vote for Brexit has brought about a fresh outbreak of apprehension about the European monetary system and Italy may be the next European country to endure an economic crisis. Italian banks are now thought to hold €360bn of non-performing loans and Vicenza is at the epicentre of the Italian banking crisis which could cost citizens hundreds of millions of euros. Vicenza’s local bank, Banca Popolare di Vicenza (BPV) one of the banks helped out by the Atalante fund that was fashioned to stop mid-size banks from crumpling, failed in an attempt to raise capital through an IPO earlier this year, culminating in a drop in share prices.

Stress tests set by the European Banking Authority found that Monte dei Paschi di Siena (BMPS), the world’s oldest bank, would have huge trouble defusing its bad loans. The country’s third-largest lender was the only one of 51 lenders examined by European regulators to have its capital wiped out, maintaining very low market confidence in a crisis. Intesa Sanpaolo SpA (ISP.MI), UniCredit SpA (UCG.MI), Banco Popolare SC (BP.MI) and Unione di Banche Italiane SpA (UBI.MI) – the 4 other Italian banks – exhibited strong capital levels in the tests, but investors remain sceptical about the results.

The tests, the first since 2014, show how Europe’s banks would weather a severe crisis, covering the Eurozone and the rest of the EU – including the UK. Germany’s biggest banks, Deutsche Bank and Commerzbank, were also among the 12 weakest banks in the test, along with British rival Barclays. BMPS hopes to sell up to €5bn of stock if it can offload a bad-loan portfolio and it could deplete thousands of ordinary Italians of their savings. We have witnessed a further drop in shares in Italy’s leading banks due to renewed uncertainties about their €360bn bad loans, many of which are set to mature in 2 years’ time.

“Stress tests set by the European Banking Authority found that Monte dei Paschi di Siena (BMPS), the world’s oldest bank, would have huge trouble defusing its bad loans.”

Italy’s banks are in chaos because they loaned irresponsibly to inappropriate borrowers, and it is now almost certain that politicians will have to step in. Already Italy’s prime minister, Matteo Renzi has reasoned that a solution to Vicenza should be a matter of urgency for the whole of Italy to avoid a crisis that could take down responsible banks along with irresponsible ones. To stop things going from bad to worse, Renzi wants to use approximately $45 billion in taxpayer funds to shore up the banks. But EU procedures make investors pay first (meaning thousands of ordinary Italians) before the country can bail out their banks, inhibiting the government from hemming in an economic crisis that might have much greater overheads down the line.

According to Bloomberg, just under half of the Italian bank debt is held by ordinary Italians. That means obeying the EU rules could see some Italians losing their life savings. The Italian banking landscape is looking fragile with numerous European banks still burdened with billions of euros in below par credits, hampering their capacity to loan and deterring investors in the financial sector.

The banking sector in Europe’s fourth-largest economy is still in disarray, with over a quarter of Vicenza’s 100,000 companies having a direct relationship with BPV. It is plagued by doubts around profitability, low interest rates, a flagging economy and a possible banking crisis, signifying that Brexit or even Grexit aren’t the main pressures on EU stability. The disjointed Italian banking sector with outstanding loans running into the hundreds of billions stands to be the biggest danger of all. Testing times in Europe This matter wouldn’t be so worrying if it were just about the creditworthiness of a couple of Italian banks but as banks cooperate both nationally and internationally through inter-bank borrowing and lending, this has turned into a Europe-wide problem.

Difficulties at one bank can roll out, contaminating other financial institutions. Banks play a fundamental role in modern economies and those from Italy, Ireland, Spain and Austria performed worst in the recent EU stress test, highlighting that there is still a lot to do to boost credit in the bloc’s economy. Generally the ECB seems fairly happy with the amount of capital held by the Eurozone’s banks but there is some concern around Italy’s resilience and the risk of contamination across the rest of the European banking sector.