bank of italy ’ s supervisory action and the banking union thanks in part to the action of the bank of italy and in spite of the sharp deterioration in loan quality, between september 2012 and september 2013 the non - performing loan coverage ratio rose from 38. 3 to 39. 9 per cent on average for italian banking groups. the ratio of core bis central bankers ’ speeches tier 1 capital to risk - weighted assets rose from 10. 0 to 10. 6 per cent. coverage and capital ratios must continue to increase ; this preserves investors ’ confidence in the banks and lowers the cost of funding, thus helping to ensure an adequate flow of credit to economic activity. during the crisis, lending has been more buoyant at the better - capitalized banks. the bank of italy is scrutinizing the weaknesses in the structure and working of banks ’ boards of directors ; the aim is to remove factors that can hinder banks ’ capital strengthening and to foster better business management. the proposals put forward in last december ’ s public consultation document are designed to improve banks ’ governance by limiting the number of directors and increasing the possibility for shareholders to make their views known. the bank will take account of the comments that emerged during the public consultation when it issues the final provisions. correct organizational arrangements are essential for efficiency and stability. the growth in the number of banks in difficulty was mainly due to the recession, but weak governance systems also played a role, as did episodes of outright malfeasance. during the crisis the vicious spiral between the state of the banks and that of their respective sovereign issuers had a perverse effect on intermediaries ’ creditworthiness and their ability to raise funds in the market. banking union can make a decisive contribution to breaking this link. the first step is the launch of the single supervisory mechanism. the comprehensive assessment of the leading euro - area banks ’ balance sheets to be carried out by the ecb and the national authorities will contribute to the single supervisory mechanism ’ s launch, at the end of this year, on a solid and credible basis. this will make clear and comparable information available on the state of european banks ’ health. the exercise will be carried out transparently and rigorously, with uncertainty about the way it is performed reduced to the minimum. the assessment will cover all the asset items and the related risk profiles. in examining the quality of exposures, uniform criteria will be used, in line with italian practices, which are acknowledged to be among the most scrupulous

. the first phase of the examination of the quality of banks ’ assets, devoted to the selection of riskier portfolios, is drawing to a close. in the second phase, which will get under way in the coming weeks, a large number of credit files will be analyzed and the adequacy of the value adjustments in banks ’ accounts will be assessed. in the last few days the european banking authority and the ecb have announced the main features of the stress test. the exercise will refer to the three years 2014 – 16. the threshold value of the capital ratio that banks must comply with at the end of the period is 8 per cent in the baseline scenario and 5. 5 per cent in the adverse one. the definition of capital, which will take due account of the choices made by national authorities, in line with the provisions of the transitional regime, will be that in force at the end of 2016. the corrective measures that intermediaries will be asked to take will be related to the nature of the capital weaknesses revealed by the stress test. if they emerge in the baseline scenario, banks will be asked to implement the necessary measures rapidly ; if, instead, they only appear in the adverse scenario, the time frame will be determined appropriately as part of a recapitalization plan agreed with the supervisory authorities. in recent months i have already drawn attention to the need for a rapid definition of public backstop mechanisms, capable of reassuring the markets about the authorities ’ determination to tackle and overcome any weaknesses that should emerge from the assessment exercise. the design of the banking union must be completed with the introduction of the single resolution mechanism for failed banks. the negotiations under way between the council, the commission and the european parliament on the agreement reached by the council at the end of last year must move forward and be concluded rapidly, so as to allow the responsibilities of supervision to be aligned with those of the management and resolution of crises as soon as possible. the decision - making process must be speeded up and made more effective. the long transitional period envisaged before the resolution bis central bankers ’ speeches fund becomes fully effective must be shortened, so as to make the overall mechanism entirely credible. in order to return to rapid, sustained economic growth it is not enough to eliminate the factors of risk that i have recalled – to counter excessive disinflation, ensure the credibility of fiscal consolidation and stimulate renewed lending. italy has still not risen properly to the challenges of technological innovation and the globalization of