The top performer in the European bank universe today was Italy’s UBI Bank, whose stock price soared 5% after it acquired one of Italy’s four “bridge banks,” small banks placed under receivership last year.

This is a small but telling event: UBI issued Euro 400 million of new equity to make the acquisition, and at a 26% discount to its present market price. That’s a big dilution on a market cap of just 3.4 billion Euros, but investors applauded.

Why is this so important? Valuation of the nonperforming loans of Italian banks is the greatest mystery in world finance. Nonperforming loans are about 17.5% of total bank loans. Their recovery value is the critical issue. If the banks can recoup 35%-40% of loan value, they can survive. They can’t survive at 20%.

Attempts to sell portfolios of nonperforming loans have been less than satisfactory, with hedge funds bidding in the low 20% range (except for consumer receivables which have a higher recovery value). The Banca Marche sale is a small transaction, but the fact that the market greeted it with enthusiasm is important because it is one of the very few successes that Italian regulators can show.