This Op-Ed was first published in MNI-Euroinsight.

This year might be the year of reckoning for the Italian banking sector. After a few episodes of resolution involving small banks last year, a new fund, Atlas, was created with the aim of stabilizing the Italian banking system and helping ease the burden of non-performing loans (NPLs).

The fund, which is privately run but with a stake held by the Italian development bank, Cassa Depositi e Prestiti, is expected to buy junior tranches of securitized NPLs and act as an underwriter of last resort for banks needing to raise capital. It is, however, a controversial solution, presenting some problematic aspects that have been downplayed in the domestic debate.

To start with, the effect of Atlas on investors’ confidence in the Italian banking system is dubious. Ideally, a backstop should be reassuring enough for it never to be used. This was not the case with Atlas, which had to underwrite 92% of the capital that Banca Popolare di Vicenza (BPVI) raised last week. As the bank failed to meet the condition that at least 25% of the share capital floats, the Italian Stock exchange blocked the IPO.

So Atlas will ultimately have to underwrite the entire capital increase and hold 99.3% of the bank. It remains to be seen how much the fund will need to contribute to ensure the success of the capital raised by another Italian bank, Veneto Banca, later this month.

The more problematic aspect of this solution has to do with the resilience of the system as a whole. Atlas can in fact increase systemic risk in the longer term, because of its structure. The fund is mostly financed by Italian banks with Intesa and Unicredit contributing the largest share. By acting as a shareholder of last resort for banks that are not able to raise capital on the market, the fund effectively avoids the instability that could accompany bank resolution in the short run.

But it achieves this by piling up risk onto the balance sheets of a banking system that is already very interconnected, and that retains areas of weakness. The risk of a domino effect could worsen in the long term, as the fund increases the exposure of stronger banks to weaker banks, with potentially negative effects on the stronger banks’ creditworthiness.

The creation of Atlas needs to be read in the context of recent events that have brought the Italian banking sector back into the spotlight. While Italian banks have been resilient in the early phases of the global financial crisis, long-known problems are now coming to the surface. They need to be addressed, but the environment has significantly changed compared to when other countries acted earlier on. The reference framework is now the Bank Recovery and Resolution Directive (BRRD), which foresees a significant bail-in requirement for private sector creditors in case a bank is put into resolution.

It has long been known that this would happen, but Italy may not be entirely prepared for it. After the two episodes of resolution conducted last year, one fact could not be clearer: in a country like Italy that ranks poorly in terms of financial literacy, and where about a third of bank bonds are held by the household sector, even a limited bail-in can have painful consequences for people’s lives.

As the entry into force of BRRD made it impossible to envisage a public-only solution to banks’ problems, Atlas was set up to act as a shareholder of last resort and ensure that even a bank like BPVI that fails to raise capital is not resolved.

It is not the first time healthier banks come to the rescue of the rest of the sector: the resolution cases back in November 2015 saw the bigger banks advancing money in a resolution fund, so that bail-in at the banks that were resolved could be kept to a minimum regulatory requirement of junior debt. Yet this cannot be a long-term solution. Atlas is problematic and it has limited power, while the healthier part of the Italian banking sector has probably limited will and resources to pledge to the rescue of weaker banks.

More generally, regardless of whether we think that keeping weak banks alive at all costs is a good idea, the aim of EU-wide rules on bank recovery and resolution is to provide certainty on how banking problems will be dealt with.

For now, the Italian approach to bank resolution has been ad hoc, which achieves the opposite and appears at odds with the aim of making progress towards a solid European Banking Union. Ultimately, the most important question raised by Atlas is therefore what will come next.