to establish the new groups. the participating banks must begin to operate in harmony, under the guidance of the parent company, well before the groups have been formally established. the asset quality review will need to be thoroughly updated to take account of the necessary value adjustments and write - downs already entered in this year ’ s balance sheets. the bank of italy is committed to strengthening the other banks under its direct supervision in order to increase their efficiency and productivity, promote the supply of innovative services for households and firms, and diversify their sources of income. for their part, banks are being called on to undertake wide - ranging action, including mergers to facilitate investment, economies of scale and, where necessary, access to capital markets. a first step towards greater integration could be recourse to consortiums to provide services and the pooling of data for internal models to compute capital requirements. in line with other countries, a more decisive step would be to introduce institutional protection schemes ( ips ), which do not remove the autonomy of individual banks but give rise to mutual support agreements that can be activated in the event of capital or liquidity needs. expenses, income and structural changes in the banking industry the significant progress made in overcoming the grave difficulties of some banks and the gradual improvement in balance sheet conditions throughout the banking industry are undoubtedly positive developments. several factors, however, are altering the context in which banks operate : changes in demand for financial services, technological progress and the digital revolution, and the regulatory reforms introduced in the wake of the financial crisis. the profitability of european banks has diminished considerably over the last ten years. the global financial crisis first hit the large merchant banks, who earn much of their income on the capital market. the recession and sovereign debt crises then took their toll on the balance sheets of banks whose core business is lending. italy ’ s banking sector suffered a particularly sharp fall in profits ; the return on capital, which was about 10 per cent in the middle of the previous decade, has been virtually nil for the last five years, exceptional factors aside. at the same time, the profits of italian banks have been eroded by heavier losses on loans and a drop in income. because of corporate crises in particular, from 2008 to 2016 write - downs on loans absorbed 80 per cent of operating profit. interest income is now one third lower in relation to total assets than in the middle of the last decade ; other income has also diminished. as the economic recovery gains strength, the outlook for the banking industry

on examination standards and discuss and agree on reporting requirements that apply to smaller banks. with a growing divergence in the approach of state and federal regulators to the examination process, we need to ask how the ffiec can better accomplish its goals. we also need to ask whether the other important work of the ffiec, like establishing reporting requirements, is being conducted in an appropriate way. the opportunities for input, review, and oversight of this important work are very limited, with only the board representative on the ffiec participating. notwithstanding these structural impediments, i have prioritized rationalizing the call report, an effort that i revived when i joined the board. these types of overly broad requirements pose their own risks to community banks, and we should remember to focus on the unglamorous work of making sure we are not collecting more data than is necessary and appropriate for supervisory purposes, and that we are efficient in the collection of that data, for example, by leveraging data previously collected instead of requiring further collection of the same data. - 16 regulators also tend to be very proprietary about the development of regulatory and supervisory proposals. often, policies are far along in the development process before they are published for public comment in the rulemaking process, and state banking regulators rarely provide feedback on proposals before or after they are put out for comment. while regulators tasked with implementing regulations, supervision, and guidance bear the ultimate responsibility for those policy choices, this process can greatly benefit from more interaction among federal regulators and our state bank regulatory counterparts. more extensive dialogue with state regulators can improve proposals in the formulation stage by sharing practical, real - world perspectives, including observations on the impacts of intended and unintended consequences. while it is challenging to anticipate the unintended consequences of reforms, casting a wide net for views can lead to better, less disruptive, and better - informed policy choices. the importance of enhancing coordination between state regulators and the federal reserve cannot be overstated. at a recent meeting of the board ’ s subcommittee on smaller regional and community banking, my colleagues and i were delighted to welcome representatives of the conference of state bank supervisors and four of their state bank commissioner members. we learned firsthand about the successes, frustrations, concerns, and areas for improvement in the coordination between state and federal regulators. there is simply no substitute for these direct conversations and building upon and improving these important intergovernmental relationships. collaborative approach to reform historically, one of the many virtues of