From a distance, Vicenza does not look like a city engulfed in turmoil. On the elegant Corso Andrea Palladio, named after the Renaissance architect whose work defines this city, a finely dressed woman clutches a Chanel handbag during her evening passeggiata. Locals sit back and enjoy their Campari spritz cocktails in the July heat. A black Maserati rolls slowly down the street.

But this apparent serenity belies an ugly truth. The regions of Veneto, where Vicenza is located, and Tuscany are the epicentres of Italy’s banking crisis, which has cost citizens hundreds of millions of euros.

Even the city’s mayor, Achille Variati, was personally hit when shares in the city’s bank, Banca Popolare di Vicenza (BPV), tanked earlier this year.

The mayor lost €25,000 (£20,904), money that he said he would never likely see again. The fear now is that the issues that gripped Vicenza will have damaging ramifications for all of Italy and the entire eurozone. The country’s third-largest lender, Monte dei Paschi di Siena, is expected to fail a stress test whose results will be released on Friday night, and a heated debate is under way between Rome and Brussels on how to save the bank.

For waiter Francesco Bertolda, 43, the problem started two years ago, when a local BPV bank manager told him and his father that they would be eligible for financial assistance – loans for everything ranging from homes to cars and businesses – if they each bought a minimum of €6,000 in bank shares.

Today, the combined €12,000 investment is worthless, but Bertolda – a father of three – tries to keep his troubles in perspective. “Many people, companies, have lost much more; they have lost millions,” he said. “Still, I do have my boys. That is money I could have used.”

The story of BPV’s demise is similar to the story of banks across Italy. Banks like BPV were relatively resilient immediately after the financial crisis hit in 2008, said Silvia Merler, a fellow at Bruegel, a European thinktank. “But then they turned complacent,” Merler said.

Italy’s economy stopped growing and banks like BPV became consumed by non-performing loans, tens of billions of euros that had been lent to small and large businesses that then failed under economic hardship. It was a burgeoning problem that politicians in Rome largely ignored. All told, Italy’s banks are now estimated to hold €360bn of non-performing loans. At the same time, BPV and other banks all shared similar problems: too many branches that were unprofitable.

“There have certainly been issues with the governance of the banks that should have been prevented, like mis-selling products to clients,” Merler said. In an effort to shore up the banks’ balance sheet, regular bank customers were sold investments that they wrongly believed were ironclad.

In April, the historic bank was rescued by a newly created Italian fund, Atlante (or Atlas in English) that was created to stop certain mid-size banks from collapsing.

The problem has been politically toxic for Matteo Renzi, Italy’s prime minister, who is locked in a debate with Brussels over the potential rescue of other banks, including Monte dei Paschi. Under new EU regulations, any emergency bailout of MPS would see some holders of the bank’s junior debt – including tens of thousands of ordinary Italians – lose their investment.

But there is also a potentially even bigger problem for Italy: that its tentative economic rebound is now under threat.

Wealthy northern Italian manufacturing strongholds like Vicenza were the financial engine behind Italy’s postwar economic boom, and are critical for the country’s hopes today. About 30% of Vicenza’s 100,000 companies have a direct relationship with BPV, according to Variati, and those companies need lines of credit and support.

“What I hope, as mayor, is that the bank stays as close as it can to the companies. Those 30% cannot be abandoned, they have to be supported if they are healthy. BPV will be able to survive over time if the territory is strong. There will be no future for the bank if the territory is poorer,” Variati said.

While Variati acknowledged that some of the bank’s problems were the result of poor lending practices – with the bank not being prudent enough in its standards – he said the future of the city was nevertheless an issue that ought to be a priority for the entire country.

“This is one of the richest territories of Italy. If this territory stops, there will be problems for all of Italy,” he said.

It is also unclear, for now, what the extent of the economic fallout will be for the BPV shareholders – ordinary customers of the bank – who have lost everything.

“Even here in the town hall, citizens come asking for help. They don’t have anything left and they need money to live,” Variati said. “Retirees, parents of students, people who can’t pay their gas bills, a parent who wanted to pay for a child’s wedding and now can’t. Life situations.”

A retiree who would once have relied on his savings to pay for a nursing home was now looking to the state for assistance, he added with a sigh.

While there have been a few bankruptcies so far, Variati said he feared more would be filed by the end of the year.

The financial impact of BPV’s near collapse – even if the bank is now on much stronger financial footing after being rescued – is something that will only be understood in the next years, said Giovanni Bossi, chief executive of Banca Ifis.

In Vicenza, locals are also concerned with seeing justice done, and the mayor has made a request from Rome for the city’s judiciary – prosecutors and judges – to be bolstered as shareholders lodge complaints of having been misled by the bank. Of roughly 118,000 BPV shareholders who have been wiped out, about 30% live in Vicenza, while about 56% live in the rest of the Veneto region.

Last month, about 500 BPV affected shareholders participated in a funeral for Antonio Bedin, a 67-year-old pensioner who committed suicide, plagued by health problems and by the loss of his savings.

In the town hall, Variati said the city would survive. “Is there shock? Yes, but us Vicentini are a tenacious people, used to working and resolving problems ourselves and rolling our sleeves up. In other parts of Italy, people would have cried and screamed. Here there is pain, but we want to go ahead. But we ask and expect justice.”