By Francesco Guarascio
BRUSSELS (Reuters) - European banking supervisors have stepped up their monitoring of liquidity levels at Italian banks after a sharp increase in the country's government bond yields, although there is no cause for alarm, a senior EU source said on Tuesday.
The source told Reuters the monitoring was being carried out "more intensely than usual" due to market turmoil in recent days.
The checks involve both customer deposits and the interbank market that banks use to lend to each other without requesting collateral, the source said, adding that "no sign of alarm" had been detected.
Both the Bank of Italy and the European Central Bank, the euro zone's single banking supervisor, declined to comment.
The ECB, along with national supervisors, regularly monitors lenders' liquidity conditions and adjusts its monitoring, including its frequency and depth, during periods of stress or market volatility, a source at the ECB said.
A budget standoff between Rome's anti-establishment government and European Union authorities on Tuesday pushed Italy's benchmark 10-year debt costs
The ruling coalition last month set a deficit target of 2.4 percent of economic output for 2019, tripling the previous government's goal for the heavily indebted nation, unnerving investors and prompting sharp criticism from the European Commission.
Italian banks are vulnerable to sovereign debt problems because they hold around 375 billion euros of domestic bonds - or 10 percent of their assets - and the spike in yields, by hurting the value of those holdings, eats into their capital levels.
Shares in the country's lenders have fallen sharply in recent months and the cost of insuring major banks' debt against a potential default has increased.
However, the ample liquidity provided by the ECB during years of ultra-expansionary monetary policy is shielding the interbank market from any tensions, Milan traders said.
Banks have not suffered any deposit flights either, based on the latest available data. Italian banks' deposits stood at 2.39 trillion euros in July from 2.41 trillion euros in June, when the new government was sworn in, and have been broadly stable in recent months.
(Additional reporting by Valentina Za in Milan and Balazs Koranyi in Frankfurt, editing by David Evans)