The action was announced by the government and Banka Slovenije, whose Governor Boštjan Jazbec told the press that the move was designed to preserve the stability of the banking sector and protect all depositors in the bank system.

While only holding a combined market share of 4% (each about 2%), the central bank fears that the collapse of the two banks which have for months been unable to raise fresh capital could undermine trust in the whole banking system.

The main aim of the action was to avoid outright bankruptcy since this could bring uncontrolled effects for the banking system, said Jazbec.

In the event of bankruptcy, the repayment of deposits would be limited to the EUR 100,000 envisaged by the bank guarantee scheme, with the rest making up the bankruptcy estate. But as part of the action launched by the central bank all deposits held by households and business will be guaranteed with the help of a government-sponsored guarantee scheme.

As part of the action, the government issued Friday guarantees to Banka Slovenije - EUR 540m for Factor banka and EUR 490m for Probanka - to secure liquidity in case the assets of the two banks prove insufficient to cover their liabilities.

In this way it enabled Banka Slovenije to take out direct loans of last resort from the eurozone central bank system which would provide liquidity all until the "last deposit" is repaid, said Jazbec.

Jazbec announced that today's decision by the central bank was prompted by "failure of both banks to secure the expected capital adequacy, the long and uncertain recapitalisation procedure and very weak, and worsening, liquidity."

He explained that the central bank was forced to act when speculation began to mount that the banks were on the verge of liquidation after recent attempts to secure fresh capital failed.

"If we failed to enter into these banks, they could act as a rotten apple in a basket of apples which would cause the rot to spread," he said, rejecting comparisons to the bank crisis in Cyprus.

"This is exactly what we are trying to prevent with this measure of an orderly wind-down," he said. Nevertheless, he admitted that a bank run could never be ruled out, but stressed that "there was no basis for this".

"We are convinced that the other banks have the required capital adequacy and are sufficiently stable...which is why they do not require such action," said Jazbec in announcing that the measure for Probanka and Factor banka was "extraordinary" and "not a model for other banks".

The two banks will now continue to operate under a crisis management appointed by the central bank, but would not accept new clients or business. The aim of management will be to repay liabilities, collect outstanding loans and cash-in the assets, Finance Minister Uroš Čufer said.

"When the banks open on Monday, it will be a perfectly normal day, [clients] will be able to manage their accounts, use their cards. When their contractual obligations expire, the bank will gradually shrink," Čufer added.

The crisis managements, headed by foreigners experienced in managing similar procedures in the EU, will take over the running of the banks on Monday, with one of their first tasks being to conduct a precise assessment of the state of assets.

The management at Probanka will be headed by Imre Balogh, a former bank executive from Hungary, and will also include Igo Gruden and Marko Novak, while the management at Factor banka will be headed by Klaus Schuster, a former manager at Austria's Volksbank and management consultant, and will also be made up of Matevž Slapničar in Vitomir Krašovec.

Meanwhile, the cost of the wind-down will be primarily borne by shareholders and holders of subordinated instruments, said Čufer, who added that the state would cover the gap between the assets and the liabilities.

He assessed that the final cost to the state from the issued guarantees could stand at up to EUR 400m, although the sum would not be an immediate burden to the national budget as the process of winding down the banks could take between two and three years.

The guarantees were approved by the European Commission, which said the measures were "necessary to preserve financial stability in Slovenia without unduly distorting competition."

The measures, designed to "stabilise the liability side of the two banks' balance sheet and to reassure the markets", have been approved as temporary rescue aid for two months or until the Commission has adopted a final decision.

An unnamed source in Brussels added that the Slovenian authorities had taken the right action given the long-running problems at the two banks. This view was echoed by Slovenian economist Jože P. Damijan who labelled it a "logical and necessary" start of a serious consolidation of the banking system in Slovenia.

The biggest shareholder of Factor banka is the ACH holding, with 40%. The investment firm CG invest holds 10%, while the NKBM, Slovenia's second largest bank, has 9.9%.

The biggest shareholders of Probanka include financial firm Medaljon (15.8%), which recently entered receivership, poultry producer Perutnina Ptuj (10.7%), car dealership Avtotehna (7.8%), industrial group Trimo (6.2%) and brewer Pivovarna Laško (5%).