trading portfolio exposures have been increased and the prudential treatment of the risks associated with securitizations and off - balance - sheet vehicles has been tightened. basel iii has increased the stringency of the calculation of the capital requirements for counterparty risk in connection with derivative transactions. the whole matter is now undergoing a fundamental revision by the basel committee in order to eliminate any discrimination of loans with respect to trading assets. the bank of italy is working in the technical fora to proceed in this direction with determination. at the same time ( it is worth recalling ) the new rules confirm the facilitations, already present in basel ii and invoked by the italian supervisory authorities, that, other things being equal, allow a lower weighting for loans to small and medium - sized enterprises. the italian banks and the action of the supervisory authorities italian banks have shown, and continue to show, an ability to resist and react in times of difficulty, not only at the height of the financial crisis, when they were saved by a model firmly rooted in core banking business, but also in its aftermath, when the crisis gave way to a deep recession in all the advanced countries that hit italy particularly hard because it came after a decade of stagnation and was followed by a slower recovery than elsewhere. in the three months to may bank lending to households and firms grew at an annualized rate of 5. 7 per cent, well above the euro - area average of 2. 2 per cent. lending to firms grew by 6. 1 per cent and that to households, driven mainly by loans for house purchases, increased by 5. 2 per cent. the rapid expansion in lending to firms is ascribable to the growth in demand, sustained by the need to finance inventories and working capital. the deterioration in credit quality was much less serious than during the recession of the early 1990s, which was not as deep. although still substantial, the flow of adjusted bad debts, especially of firms, is beginning to show signs of slowing. compared with a year earlier, in april there was a decrease in banks ’ exposure to borrowers reported for the first time with positions classed as bad debts. there has not been a housing bubble in italy ; the banks ’ losses in this sector have been limited on the whole and have not sparked a crisis. the low level of nominal interest rates has helped to avoid a vicious circle in which borrowers with temporary liquidity difficulties suddenly become submerged by financial burdens even when the

“ last in, first out ” approach was that the fomc does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual and 2 / 7 bis central bankers'speeches prospective economic conditions. indeed, as the so - called taper tantrum of 2013 illustrated, even talk of prospective changes in our securities holdings can elicit unexpected abrupt changes in financial conditions. given the lack of experience with reducing our asset holdings to scale back monetary policy accommodation and the need to carefully calibrate the removal of accommodation, the fomc opted to allow changes in the federal reserve ’ s securities holdings to play a secondary role in the committee ’ s normalization strategy. rather than balance sheet shrinkage, the fomc decided that its primary tool for scaling back monetary policy accommodation would be influencing short - term interest rates. as we explained in our “ normalization principles ” issued in september 2014, the fomc decided to maintain the overall size of the federal reserve ’ s securities holdings at an elevated level until sometime after the fomc had begun to raise short - term interest rates. 8 once normalization of the level of the federal funds rate was “ well under way ” and the committee judged that the economic expansion was strong enough that further increases in short - term interest rates were likely to be warranted, the fomc would gradually and predictably reduce the size of the balance sheet by allowing the federal reserve ’ s securities holdings to “ run off " — that is, we would allow our balance sheet to shrink passively by not reinvesting all of the principal payments from our securities. 9 one advantage of the fomc ’ s chosen approach to scaling back accommodation is that both the fomc and the public have decades of experience with adjustments in short - term interest rates in response to changes in economic conditions. nonetheless, the post - crisis environment presented a new test to the fomc ’ s ability to influence short - term interest rates. before the crisis, the fomc could raise the federal funds rate — the rate at which banks with excess reserves lend to banks with a reserve need — by removing a small amount of reserves from the banking system. that would translate into a higher federal funds rate because reserves were relatively scarce to begin with. the intuition was simple : the fomc would signal that it was going to tighten conditions in the reserve market, and the cost of obtaining reserves in the market — the federal funds rate