Italy began winding up two failed regional banks on Sunday in a deal that could cost the state up to 17 billion euros ($19 billion) and will leave the lenders' good assets in the hands of the nation's biggest retail bank, Intesa Sanpaolo. The government will pay 5.2 billion euros to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of Popolare di Vicenza and Veneto Banca, which collapsed after years of mismanagement and poor lending. Economy Minister Pier Carlo Padoan said the total funds "mobilized" by the state would be for up to 17 billion euros - three times more than had initially been estimated to recapitalize the banks with public money. The deal, approved by the European Commission, allows Italy to solve a banking crisis on its own terms, ensuring the two Veneto lenders are not wound down under potentially tougher European rules. The cost for taxpayers, however, is hefty. "Those who criticize us should say what a better alternative would have been. I can't see it," Padoan told reporters after the government spent the weekend drafting an emergency decree to liquidate the two banks.

A customer uses an automated teller machine (ATM) at a Veneto Banca SpA bank branch in Rome, Italy, on Friday, Dec. 23, 2016. The nationalization of Banca Monte dei Paschi di Siena SpA could be followed by rescues for lenders including Veneto Banca SpA and Banca Popolare di Vicenza as part of the government package. Alessia Pierdomenico | Bloomberg | Getty Images

The decree effectively means that the Veneto banks' branches and employees will be part of Intesa Sanpaolo by Monday morning, a move designed to avoid a potential run on deposits that could have spread chaos across the whole banking industry. The decree will have to be voted into law by parliament within 60 days. Under the plan, the banks' soured loans, as well as legal risks stemming from a mis-selling scandal, will be moved to a bad bank, partly financed by the state. Junior bondholders and shareholders in the two banks will suffer losses, but senior bonds and depositors will be protected. Padoan said that on top of the 5.2 billion euros payment to Intesa, which includes 1.3 billion euros to cover job cuts, the state will offer guarantees to fund potential losses arising from due diligence of the two banks' soured and risky loans. A treasury source said the government estimated that the total 12 billion euros in guarantees would translate into a fair-value exposure of just 400 million euros for the state, but did not explain how it arrived at that figure.

The EU Commission also said in a statement that the "net costs to the Italian state will be much lower than the nominal amounts of the measures provided". It too did not explain. Banking analysts, however, said the state could ultimately be on the hook for up to 17 billion euros, even though some value could be salvaged once the soured loans were fully analysed, limiting the final bill for taxpayers.

'Tough conditions'