Italian PM says EU bad loan measures must not hamper lending

The European Central Bank - which supervises the euro zone's biggest banks -- has proposed that banks should set aside larger amounts of money against new bad loans.

Investors are concerned that will lead to further loan writedowns, with Italian banks -- which ECB data shows hold nearly 30 percent of the bloc's 915 billion euros ($1.1 trillion) of problem debt -- prominently in the firing line.

Prime Minister Paolo Gentiloni said on Thursday he would raise the issue of bank loans with European Commission President Jean-Claude Juncker.

"I will ...insist on the necessity of the banking union being a tool to improve bank lending," Gentiloni told reporters at a meeting of center-left leaders ahead of an EU summit.

"There should not be inappropriate or untimely measures that could hamper lending and reduce the protection of savers."

Gentiloni made no direct reference to the ECB, which is independent of the Commission and has faced criticism from Italy over its proposal.

Euro zone countries have launched a scheme to strengthen their banking system under a plan known as banking union.

Under the scheme, banks have a single supervisor -- the ECB's Single Supervisory Mechanism -- and a single set of rules on resolution if they collapse.

The missing part of the union is a pan-European system to protect bank deposits, which Germany does not want to agree to until euro zone banks reduce their bad loans.

(Reporting by Francesco Guarascio; writing by Philip Blenkinsop; editing by Jan Strupczewski and John Stonestreet)