(Bloomberg) -- Banca Monte dei Paschi di Siena SpA is holding preliminary talks with the Italian government over a potential capital increase of about 1.5 billion euros ($1.75 billion).Officials at the Italian Treasury and Monte Paschi Chief Executive Officer Guido Bastianini have reviewed options to boost the bank’s capital, said people familiar with the discussion, who asked not to be named as the matter is private.Discussions are at an early stage and the review may result in a decision against a further capital injection. A spokesman for Monte dei Paschi declined to comment. A representative for the Italian Treasury didn’t have an immediate comment.Monte Paschi fell as much as 3.6% in Milan trading and was down 1.1% as of 9:04 a.m. The stock has declined by about 28% this year.The bank’s capital, already stretched by the sale of bad loans, may be further eroded by additional provisions needed to cover legal risks after its former chairman and CEO were convicted of false accounting and market manipulation. The bank may need 1.2 billion euros to 1.8 billion euros of equity, and the ministry may tap the 1.5 billion euros set aside in August to back state-controlled companies, the people said. The amount could be much lower, depending on provisioning needed by the bank, another person said.Monte Paschi’s directors decided in a meeting Thursday to change the classification of some legal disputes from “possible” to “likely” after the court ruling, the bank said in a statement. Monte Paschi declined to provide information any amount of provisions allocated for those risks.The directors discussed an option to set aside as much as 500 million euros following the Milan court ruling, people with knowledge of the matter said.“Any change to government exposure to MPS would need to be discussed with European authorities,” Citigroup analyst Azzurra Guelfi said in a note on Friday. “MPS is often at the center of investors’ questions on the future of M&A in Italy, but we expect this to be a complex matter, given for example the litigation pending as well as the group’s profitability and capital.”Civil and criminal cases related to Monte dei Paschi’s former management have dogged the lender since it was bailed out by the state in 2017. In August, the bank said risks linked to disputes and legal cases rose to about 10 billion euros, for which it had set aside only a small portion of funds.What Bloomberg Intelligence Says“Monte Paschi’s recapitalization is inevitable, we believe, with the convictions of ex-Chairman Alessandro Profumo and ex-CEO Fabrizio Viola increasing the likelihood that more of the disclosed legal risk of 10 billion euros is realized. We calculate the bank could need 2 billion euros of capital to bring the CET1 ratio to 12.5%.”\-- Georgi Gunchev, BI banking analystClick here to read the full storyMonte Paschi Capital Injection Looms as Legal Risk Rises: ReactThe world’s oldest bank has already planned the sale of bonds to meet capital requirements after the transfer of about 8 billion euros of soured debt to state-owned firm Amco reduced its common equity tier 1 ratio below 10%. In August the European Central Bank gave the green light to the deal conditional on the sale of securities to restore capital buffers.While years of restructuring lowered costs and reduced its bad loan pile, the bank’s struggles with low profitability and a slumping share price have become worse since the Covid-19 crisis started. Low capital buffers may make it harder to realize the Italian state’s plan to dispose of its 68% stake in Monte dei Paschi by the end of next year.(Updates with share price in fourth paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.