Italy’s parliament has approved a €20 billion plan to prop up the banking system but the decision did little to ease fears about cash-strapped Monte dei Paschi di Siena, the country’s oldest and third largest bank.

Expectations are growing that the Tuscan bank’s plan to raise €5 billion by the end of the month will fail and that the new government of prime minister Paolo Gentiloni will be forced to rescue it or risk it being wound down by European regulators.

Shares in Monte dei Paschi plunged by more than 18 per cent in early trading on doubts about its liquidity after the latest prospectus for its recapitalisation deal warned that it could run out of liquidity in four months rather than the previous estimate of 11 months. It clawed back losses after the parliamentary vote to trade down 6 per cent.

Investors are wary of the plan launched on Monday which includes a share offering to institutional and retail investors and a debt-for-equity plan for bondholders to clean up a balance sheet with €28bn of bad loans. The offer for institutional investors ends tomorrow, while retail investors have to decide by today.

If Monte dei Paschi fails it would also make life harder for UniCredit, Italy’s largest and most important bank. It, too, is trying to raise capital and could spark writedowns on non-performing loans and unsettle Italy’s banking system, which is the eurozone’s fourth largest and holds a third of its bad loans.

Parliamentary approval for the government safety net was needed to allow the state to take on new debt. Italy’s debt burden, at about 133 per cent of annual output, is already the second highest in the eurozone after Greece.

Before the vote, Pier Carlo Padoan, economy minister, vowed to shield savers from losses. “The impact on savers, if an intervention should take place, will be absolutely minimised or non-existent,” he told parliament.