By Francesca Piscioneri
ROME (Reuters) - Italy has allocated 500 million euros ($548 million) over the next three years to help commercial banks finance early retirement schemes, a government source told Reuters on Thursday.
Italy's sprawling banking system, weighed down by some 200 billion euros in bad loans, is under pressure to reduce staff in a bid to raise profitability and boost capital.
In a budget approved by Prime Minister Matteo Renzi's cabinet on Saturday, 100 million euros have been set aside for 2017 and 200 million euros per year for 2018 and 2019 to help cover the costs of up to 25,000 redundancies, the source said.
"The banking system is crucial for economic stability and the government's intervention recognizes that," the source said.
Several banks have announced job cuts to rein in costs and whittle down a branch network that banking association ABI says is much bigger than the European average.
Banking union FABI estimates that about 16,000 employees are due to leave Italy's five main banks alone by 2020, and further reductions to the 317,000-strong workforce are likely.
Until now, Italian banks have paid for redundancies using their own fund but some 50,000 costly schemes since the turn of the century have helped to reduce its firepower.
The banks have also paid into a state fund to cover unemployment benefit, but have not drawn on it as they prefer to offer early retirement packages instead.
"Banks do not fire anyone except full-blown thieves," ABI president Antonio Patuelli said in Brussels earlier this month.
(Writing by Isla Binnie; editing by John Stonestreet)