A three-year recession has left Italian banks saddled with nearly 200 billion euros (146.35 billion pounds) of non-performing loans that are unlikely ever to be repaid. This forces banks to set aside capital to cover potential losses and holds back new loans needed to bolster a fledgling economic recovery.

Rome has been negotiating with the European Commission for months about setting up a state-guaranteed "bad bank" that would take over the soured loans of Italian banks. But talks have faltered because of difficulties setting the right price for shifting the loans to the bad bank, and by European rules on state aid.

Banks say that if the price is set too low that would translate into massive writedowns for them, eating into their capital and possibly forcing them to tap the market for funds.

The EU, in turn, does not want losses to be essentially transferred from banks to taxpayers. EU Competition Commissioner Margrethe Vestager said last week in Rome she was confident an agreement could be reached.

Visco, who is a member of the European Central Bank Governing Council, said at the annual Euromoney conference in Milan that selling the bad debts to the new vehicle at market prices ruled out shifting losses from the lenders to the state.

He said such a vehicle - which he called an "asset management company" - would be different from bad banks set up in countries like Spain at the height of the euro zone debt crisis. It would be aimed at solvent banks, and therefore participation would be voluntary, he said.

Big banks like UniCredit and Intesa have already said they are not interested in taking part and can deal with their own bad loans.

The Italian government has already taken measures to help banks offload bad debts, allowing them to immediately deduct bad loan writedowns from their tax bill and seeking to speed up bankruptcy proceedings.

Bad loan portfolios have also been sold by banks on the market over the past two years, usually to private equity funds. However, Visco said the market for such loans was still "extremely thin and opaque".

(Reporting by Silvia Aloisi and Francesca Landini, editing by Larry King)