antonio fazio : the banking industry and the prospects for the economy speech by mr antonio fazio, governor of the bank of italy, at the annual meeting of the italian bankers ’ association, rome, 8 july 2004. * * * the european banking market over the past three years the european banking and financial system has managed to withstand, without repercussions for the cost of credit, the difficulties caused by the slowing of economic growth, fluctuations in share prices and the crises and collapse of major industrial groups. monetary policy in the three main areas of the world has been markedly expansionary, while prices have remained largely stable. there has been a substantial increase in the monetary base ; interest rates on loans have fallen to historical low levels. in the case of real - estate investment the abundance of credit has fostered price rises in excess of the increase in prices of current output ; in some countries, property values have been inflated by speculation. the federal reserve ’ s recent increase in interest rates by 25 basis points marks the start of a move to bring the cost of money in the united states back to long - term equilibrium levels, against a background of robust economic growth. even after the rate increase the yield curve has a sharp upward slope everywhere, in the united states, in europe and in japan, pointing to market expectations that interest rates will rise substantially in coming years. the rise in interest rates will affect public finances, particularly in the most heavily indebted countries. it re - emphasizes the need for firms to ensure that costs and combinations of factors of production can guarantee the development of their activity and the growth of the economy, even with real and nominal interest rates closer to normal levels. the return on savings invested in financial assets will increase. the resilience of the banking and financial systems in the face of destabilizing forces can partly be ascribed in europe to the close collaboration between national supervisory authorities and the increasingly widespread adoption of harmonized rules. substantial progress has been made in the past ten years in improving the regulatory framework and strengthening the operational infrastructure and by integrating payment systems at national and international level. the integration of the share and bond markets can benefit firms in terms of the range, quality and cost of the services provided to them, as well as households. wholesale financial activities, interbank transactions, syndicated loans and business services are concentrated and tend to develop on international markets. according to a survey conducted within the ambit of the european system of central banks, the 41 largest european banking groups

the anglo - saxon countries there is clear evidence of a structural shift in banks ’ business stemming from the greater development of these countries ’ financial markets ; the relationships between banks and firms are changing. as international competition grows more intense, these trends will also affect the italian financial system. the new aspects of credit business and the new operational instruments will need to be assimilated by italian bankers and adapted to the specific features of the italian economic and institutional context ; the supervisory authority is following developments closely. mergers and acquisitions have narrowed the gap between italian and foreign banks in terms of volumes of business. the gap reflects the less developed state of the italian banking market. the ratio of credit to gdp is 85 per cent, a value comparable to that of france, less than those of spain and germany and the euro - area average, all well above 100 per cent. lending to households is less developed in italy, among other things because of the higher propensity to save. most of households ’ borrowing consists of home mortgages ; credit for the purchase of consumer durables is nonetheless expanding, thanks in part to a more diversified and efficient supply. by contrast, lending to firms is comparable to the euro - area average in relation to gdp. interest rates are in line with, and sometimes lower than, those in the other eu countries. another factor tending to reduce banking intermediation is the high level of public debt and the substantial investment of households ’ savings in public - sector securities. although growing, the presence of italian banks in foreign markets is still limited. according to the bis, at the end of last year the italian banking system ’ s assets abroad vis - avis non - bank counterparties equaled 13 per cent of gdp. the levels reached by the french, spanish and german banking systems are much higher, respectively 49, 36 and 72 per cent. the leading international banks are interested in the italian market. german banks have $ 137 billion of claims on italian residents, compared with italian banks ’ exposure of $ 33 billion to german residents ; french banks have $ 114 billion of assets in respect of italy, compared with italian banks ’ $ 28 billion in france. these figures are mainly a reflection of the important production and above all marketing presence of german and french firms in italy. the expansion of credit must serve the needs and in fact follows that of production. we have called on the banking system to increase the support it provides for the internationalization of the italian economy. the growth in italian banks ’ operations in