to counter excessive risk - taking, the pursuit of short - term gain and opacity in compensation. they emphasize disclosure and the control function of the board of directors and the shareholders. above all, they extend regulatory jurisdiction to the sphere of executive compensation. a first check on their application is scheduled for march 2010. in march 2008 the bank of italy introduced principles and implementation guidelines on this matter that apply to all banks, thus in part anticipating international developments. yesterday additional criteria for application were notified to all intermediaries. the most important banking groups have been asked to adapt promptly to the latest standards issued by the fsb and to plan any corrective measures by the end of the year. we are now in a decisive phase. the determination shown by international cooperative efforts in conceiving and drafting new rules for the international financial system must be harmonized at international level and implemented rigorously at national level. protectionism – above all financial protectionism – is no way out of the crisis. 2. the italian banks the italian banking system has weathered the crisis better than many others, but we must not lower our guard because fragility still remains. italian banks ’ capital is above the minimum regulatory requirements. data for june show that the five largest groups had improved their capital positions compared with the end of 2008. their total capital ratio, the ratio of total capital to risk - weighted assets, rose by 0. 6 percentage points to 11 per cent ; their tier 1 ratio rose by 0. 7 points to 7. 4 per cent. their core tier 1 ratio – excluding hybrid capital instruments and considering only the highest quality components of capital – rose by 0. 8 points to 6. 6 per cent. their financial leverage remained low by international standards. the rigour the bank of italy has applied in its prudential supervision of banks ’ capital has protected them in this critical phase. a more general revision of the entire supervisory process has been under way for some time : stress tests are an instrument that we now use continuously ; specialist inspection teams are constantly present at the largest and most complex banking groups, to analyze specific questions and risk profiles. we must not overlook the dangers inherent in a still delicate economic situation. credit quality is deteriorating rapidly. in the second quarter of this year the seasonally adjusted ratio of new bad debts to total loans rose to just under 2 per cent, from 1. 6 per cent in the first quarter. the increase was especially large for loans to firms ( from 2. 1 to

had met, albeit with the inefficiencies that were the inevitable corollary, the demand for credit and money of the italian economy in that buoyant phase. the subsequent resistance to change cannot be entirely attributed to the reluctance of any industry to face the forces of competition or to the natural tendency to continue to do things in the same way. to give way to counterfactual criticism based on hindsight — such as, the injection of competitive enzymes should have been much larger and more intense — would be not only sterile but also debatable in theory and risky in practice. it is analytically doubtful whether it would have been possible, given the context. it is sufficient to mention just one aspect referred to earlier : the uniform treatment of banks and enterprises and of banks in the public and private sectors became a part of italian law — as a result of the judgement of 1989 — ten years after the supervisory authority had clearly stated the principle. the risk at the practical level is that at this point banking competition will be seen as a missed opportunity, and that this will lead to the idea of renouncing it in the future. the position of the bank of italy is to proceed, if possible with greater determination, on the road taken twenty years ago — not only because the single market, the euro and their rules leave no option, and not only because the law in force in italy today mandates this course, but in the belief that the progress that has already been made is in the right direction, even though competition on its own, it is worth repeating, does not guarantee an optimal financial system. the bank of italy will devote more resources, a revised internal administrative structure focused on banking competition, and additional analyses serving to underpin new interventions to the task of fostering competition in the markets in which banks operate and the mergers they autonomously plan. two changes that are already under way will also produce their effects. mutually reinforcing, they should, together with competition in the markets for banking products, stimulate efforts to achieve the cost reductions and quality improvements that are necessary. the first change is the privatization of the banks that are still under public control, the second concerns the exit procedures aimed at preventing moral hazard and the neglect of costs. the transfer of the ownership of banks to the private sector is the precondition for control to be contested in the market. in the last few years the process of privatizing public banks has gathered pace, in parallel with the growth in