firm ’ s economic prospects are good. the banks benefited from strong local roots, which ensured stable sources of funds and underpinned the qualitative assessment of their creditworthiness, and from a fundamentally unadventurous corporate culture. the test was, and still is, a hard one, though. we insisted that the banks strengthen their capital without delay. this was not only because they need to move progressively into line with the new international standards, but also because the present situation demands it. they responded without hesitation, giving the lie to the sceptics. their shareholders, including leading institutional investors, understood the need for this step. since the beginning of this year the italian banks have made or approved huge capital increases. bis central bankers ’ speeches the core tier 1 ratio of the five largest banking groups averaged 7. 4 per cent at the end of 2010 ; in march it had increased to 7. 8 per cent and it is estimated to have risen further still, to 8. 6 per cent, as a result of subsequent recapitalizations. the banks have readied themselves in time for the european stress tests, as we asked them to do, and the results will be published in a few days ’ time. we are confident they will be well above the threshold of 5 per cent for the core tier 1 ratio. the capital strengthening that the italian banking system needs to implement in order to meet the new basel iii requirements by 2019, which was estimated at €40 billion in relation to june 2010, is now about €20 billion. we are making good progress. for the future, the progressive increase in banks ’ capital will be essential to ensure the growth of lending while guaranteeing the sound and prudent management of the banking system. it is very important that the tax treatment of intermediaries should not discourage them from strengthening their capital. it was a wise decision to bring bank bond issues scheduled for 2011 forward to the beginning of the year. the volume of securities already issued by the leading banks is equal to the entire stock of bonds due for redemption during the year. despite the sacrifice in terms of cost, both gross and net bond funding has increased significantly, the former totalling €31 billion from july 2010 to june 2011 whereas it was negative twelve months earlier. overall, deposits and bonds rose by 1. 8 per cent in may compared with a year earlier. the bank of italy continues to call on the banks to maintain balanced liquidity positions. this policy was introduced well

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