MILAN (Reuters) - Italian bank Banca Popolare di Milano (BPM) PMII.MI is still working to seal a merger with rival Banco Popolare BAPO.MI but no significant development is expected in the short term, a BPM board member said on Thursday.
A tie-up between BPM and Banco Popolare would be the first in a long-awaited wave of mergers among Italian cooperative banks following a landmark reform of the sector which the government hoped would make it less fragmented.
But talks between the two banks have stalled because the European Central Bank raised objections related to governance issues and possible additional capital needed to support the sale of bad debts, sources have said.
The chief executives of the two banks met with ECB officials in Frankfurt on Wednesday and BPM CEO Giuseppe Castagna on Thursday informed a management board meeting about progress.
"We keep working," a BPM board member said after the meeting, speaking on condition of anonymity.
"In the very short term there is nothing ... hopefully we'll keep working until a solution is found."
A second board member said talks were taking longer than expected and said bad loan management was one of the sticking points in getting a green light from the ECB.
A tie-up would create a bank with nearly 18 billion euros net in problem loans.
Sources have said the ECB has asked the two banks to sell their bad loans more quickly than planned but this risks blowing a hole in their capital if they are forced to sell at a loss and the two banks want to avoid tapping investors for cash.
A source close to the matter said both banks and the ECB were determined to reach a positive outcome and that the need for a cash call had never been explicitly mentioned by the ECB during meetings.
"All three parties do not want to give up," the source said.
BPM, Banco Popolare and the ECB declined to comment.
Reporting by Andrea Mandala; writing by Valentina Za. Editing by Jane Merriman