BRUSSELS/MILAN/ROME (Reuters) - The European Union has approved a 5.4 billion euro ($6.1 billion) state bailout of Italy's fourth-largest lender, Monte dei Paschi di Siena BMPS.MI, taking the total amount of Italian taxpayer funds deployed to rescue banks over the past week to more than 20 billion euros.

FILE PHOTO: The entrance of Monte dei Paschi bank headquarters is pictured in Siena, Italy, June 30, 2017. REUTERS/Stefano Rellandini - RTS19BD4/File Photo

Outside Greece, Europe has not seen such big state bailouts since the aftermath of the global financial crisis, raising political concerns about the continued use of public funds to mop up losses at badly run banks despite the introduction of new EU rules designed to prevent this.

In a statement on Tuesday, EU state aid regulators said Rome could inject the 5.4 billion euros aid into Monte dei Paschi after the bank agreed to a drastic overhaul, including the transfer of bad loans to a special vehicle and a salary cap for senior managers.

The bank’s overall capital shortfall is 8.1 billion euros, an Italian Treasury official said, down from the 8.8 billion euros previously calculated by the European Central Bank.

Monte dei Paschi, the world’s oldest bank, turned to the state for a bailout after failing to raise 5 billion euros on the market to shore up its capital.

Barely a week ago Italy pledged up to 17 billion euros, mostly in guarantees, to prevent senior bondholders, depositors and staff from being hit by the winding up of two regional banks, Popolare di Vicenza and Veneto Banca.

That deal also involved Italy's biggest retail bank, Intesa Sanpaolo ISP.MI, acquiring the two banks' best assets for a token euro.

The Italian government believes a profit can still be made from the bailouts. “I am confident state money will be recouped, perhaps at a premium,” finance minister Pier Carlo Padoan said on Tuesday, referring to Monte dei Paschi.

VIABLE

Monte dei Paschi’s five-year restructuring plan, due to be presented on Wednesday, will ensure the Tuscan bank’s long-term viability, EU state aid regulators said on Tuesday.

As part of the overhaul Monte Paschi will transfer 26.1 billion euros to a privately funded special vehicle on market terms, with the operation partially funded by Italian bank rescue fund Atlante II.

It will also change its business model to focus on retail customers, and small- and medium-sized companies.

Finance minister Padoan, who expressed full confidence in the lender’s top management, said bad debts at the bank would be eliminated by the first half of next year.

Monte dei Paschi said late last year it would be seeking a “precautionary recapitalization” under EU state-aid rules after its attempt to raise capital from private investors failed.

According to Padoan, the state will take a 70 percent stake in the Tuscan bank while the lender’s chairman said the state would exit in 2021, but added that nothing ruled out an earlier withdrawal.

“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,” said EU Competition Commissioner Margrethe Vestager.

Besides the state capital injection, junior bondholders and shareholders will contribute 4.3 billion euros from the conversion of junior bonds into equity.

At the same time Monte dei Paschi has earmarked 1.5 billion euros to compensate retail junior bondholders who are the victims of mis-selling, it added.

Burdened by bad loans and a mismanagement scandal, Monte dei Paschi has been at the forefront of Italy’s slow-moving banking crisis. It emerged as Europe’s weakest lender in stress tests last July.

($1 = 0.8817 euros)