FRANKFURT (Reuters) - Italian banks have made little progress in reducing the mountain of bad debts which has curbed their ability to lend new money, fresh data showed on Tuesday.

Italy's 14 biggest banks held 284.4 billion euros worth of so called non-performing exposures at the end of September, just 1.6 billion euros less than three months earlier, even as provisions on those loans rose, figures from the European Central Bank showed.

That corresponds to about one in every 10 Italian loans and almost a third of all soured credit at the 122 large euro zone banks supervised by the ECB, by far the biggest pile of bad debt in the currency union.

Across the entire euro zone bad loans totaled nearly 1 trillion euros ($1 trillion) at the end of September, leaving banks affected struggling to plug often massive holes in their balance sheets.


In Italy Monte dei Paschi di Siena <BMPS.MI> is working on a state rescue after the ECB said it needed to plug a capital shortfall of 8.8 billion euros. UniCredit <CRDI.MI> meanwhile said it plans to raise 13 billion euros after booking a 12.2 billion charge, partly due to bad loans.

A key issue is that the private market for bad loans is small and illiquid, resulting in excessively low prices, discouraging banks from offloading them at significant losses.

Anticipating some of these losses, top banks in Italy have already set aside reserves equal to 45.4 percent of all their bad debt, a higher 'coverage ratio' than in all but a few euro zone nations but still below prevailing market prices.

The ECB has set the problem of dealing with non-performing loans as a top priority but said it would take years to resolve, a timeline considered overly generous by some.

On Monday the European Banking Authority urged the EU to create a publicly-funded 'bad bank' to buy up part of the non-performing loans, suggesting that a fully private sector solution may not be viable.

Under the EBA's proposal loans would be priced at 'real economic value,' rather than a market price, and the bad bank would have about three years to sell on the loans at that real economic value.

(Reporting by Balazs Koranyi; Editing by Greg Mahlich)

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