total lending and 4. 0 per cent for loans to firms. the new monetary policy measures, which reduce macroeconomic risk, should also have beneficial effects on credit risk. at the end of september bad debts accounted for 10. 6 per cent of the total customer loans of the leading banking groups while total non - performing loans amounted to 18. 3 per cent. the still high proportion of the latter is partly due to the absence of a secondary market for these assets in italy, as well as to the slow process of credit recovery. to date, transfers of these assets have been possible in just a few cases and at very low prices, incorporating not only normal management costs and the risks of the underlying assets, but also the uncertain economic outlook for the country. banks must liquidate their non - performing loans in order to raise funds to finance the real economy. direct state intervention – within a framework whereby, in accordance with european rules on competition, banks participate fully in the costs of the operation and public support is suitably remunerated – could be used not to remedy excessive risk taking by single banks, but to respond to the deterioration in loan quality caused by the severity and length of the recession and to the need to ensure an adequate flow of financing to the economy. appropriate tax relief or state guarantees on assets backed by bad debts would smooth the way for the creation of a private market in non - performing loans. with the conclusion of the comprehensive assessment of the balance sheets of the largest euro - area banks, regular supervisory activity under the single supervisory mechanism has commenced. all the significant banks supervised directly by the ecb, with the assistance of the national authorities, have been notified of capital adequacy targets based on an analysis of their respective risk profiles. this practice, which is specifically envisaged under the rules of the second pillar of the basel capital accord, is similar to the one that the bank of italy followed before the single supervisory mechanism and that it continues to use for the institutions it supervises directly. the banks for which the assessment identified capital shortfalls have been assigned targets that are largely in line with the plans they presented following the exercise. in recent years the need to observe more stringent capital adequacy requirements has affected the banks ’ propensity to lend during a cyclical downturn. additional requirements for capital increases must be carefully calibrated so as not to undermine the signs of economic recovery. more generally, in the new context of banking union, a clear and

ignazio visco : economic developments in the euro area and italy, monetary policy, credit and banks speech by mr ignazio visco, governor of the bank of italy, at the 21st assiom ( the financial markets association of italy ) forex congress, milan, 7 february 2015. * * * the positive signs emerging from the global economy are still accompanied by marked uncertainty. while growth has accelerated in the united states, it remains weak in japan and is slowing in china and in other emerging economies ; in russia it is contracting rapidly. the slump in oil prices may bolster economic activity in the advanced countries but it is also the result of weak demand ; it must be prevented from entrenching expectations of deflation. financial conditions are favourable, but market volatility is on the rise. economic developments in the euro area and italy the euro area is struggling to re - establish satisfactory rates of growth and unemployment is still very high. while consumption has picked up somewhat, domestic demand has been held down by investment, which contracted in the second and third quarters of 2014. the difficulties are widespread : average area - wide gdp growth is no higher than the modest rate recorded for the group of countries directly hit by the sovereign debt crisis. after a long series of unexpected drops in consumer price inflation, in december the twelvemonth variation was negative in eleven countries and, for the first time since october 2009, in the euro area as a whole. nowhere did inflation top 1 per cent. preliminary estimates indicate that in january consumer prices fell by 0. 6 per cent, and by 0. 4 per cent in italy ; this does not just reflect the drop in energy prices, as even without this component inflation has reached an unprecedented low of under 0. 5 per cent in the euro area. medium - and longterm inflation expectations have been affected and this downward shift must be countered with firmness. in the first week of february the expectations implied by five - year inflation swaps were still 0. 7 per cent and those for the five to ten year horizon were 1. 6 per cent. italy is among the countries that are struggling hardest to make a start on the road to recovery. gdp has been declining almost without a break for three years and is expected to show no increase in the last quarter of 2014, mainly owing to the further contraction in investment, which is more than a quarter below the level of 2007. the latest data point to some encouraging developments for both the euro area and