at one and the same time ), so that management ’ s incentives are less closely aligned with the interests of the community where the bank was originally established. the support for the economy provided by banche popolari, especially the smaller ones, is a major strength of italy ’ s banking system. however, there are risks that cannot be ignored. an examination of the banking relationships of a sample of nearly 50, 000 firms surveyed by the company accounts data service shows that the banks that stepped up their lending most sharply in the last year did so in part by significantly increasing their exposure to financially fragile firms. the necessary provision of support to businesses must be accompanied by an objective assessment of the potential of the projects undertaken and the medium - term prospects. careful and stringent risk management is a sine qua non for credit to continue to flow to where it can safeguard valid business initiatives and contribute to the recovery of productive activity. 4. technical indicators the banche popolari ’ s technical indicators – like the main balance - sheet aggregates analyzed above – point to quite considerable diversification in terms of size and market. capital adequacy ratios show no evidence of any particular difficulty overall. the solvency ratio is in line with that of the banking system as a whole ; it is higher for the smaller banche popolari than for the larger, listed ones. profitability reflects these institutions ’ retail specialization, involving broad territorial coverage through a dense branch network. the ratio of operating costs to gross income, which can serve as a proxy for operating efficiency, was 63. 8 per cent in june 2008, about one percentage point higher than for banks incorporated as public limited companies. this indicator improves with the size of the bank : it is better for the listed than for the minor banks ( 63. 1 as against 67. 9 per cent ). roe is lower for banche popolari than for public limited banks ( 8 and 10 per cent respectively ), and again differs within the cooperative group ( 8. 1 per cent for listed and 7. 5 per cent for unlisted institutions ). many cooperative banks, like the others, recorded significantly reduced profits in the first three quarters of 2008, as a result of the financial turmoil. loan quality is now showing serious effects of the recession, as in the banking system as a whole. the non - performing portion of the cooperative banks ’ business loans rose by nearly half in 2008 to 1. 9 per cent, compared with 1. 3

per cent at the end of 2007. the default rate is rising mostly among the smaller and medium - sized banche popolari and those located in the south. it is hard to compare the technical situation of cooperative banks in italy and in the other european countries where they play a significant role, as the data are scanty and lacking in uniformity. table 6 gives some figures ; all in all, there does not appear to be any great difference between the state of italian and other european cooperative banks. some liquidity problems emerged in conjunction with the tensions in the interbank market. the easing of the strains, the issue of new securities that can be posted as collateral ( mainly through self - securitizations ), and the bank of italy ’ s emphatic call for the adoption of more sophisticated risk management and liquidity management systems all contributed to a broad improvement in the liquidity profile. steps still need to be taken to develop sound cash management strategies and to reinforce the organizational machinery, so as to achieve integrated risk management. there are some weak points in organization, according to the bank of italy ’ s periodic examinations. most of the shortcomings involve the functioning of corporate bodies – compromised, in some instances, by an uneven distribution of tasks and by unsatisfactory internal debate, with repercussions on strategy and coordination – as well as the efficacy of management instruments, the detection and management of risks, and the scope and depth of audits. risk management – including operational, legal and reputational risks – has not always been adequate to the cooperative banks ’ size and complex business. this applies above all to the listed banks, which have been subjected in recent years to growing attention and pressure from the market, particularly as regards the effectiveness of their risk control process. these anomalies are not generalized, however. the need for improvement is found above all where governance systems are not entirely efficient, with rigid, crystallized arrangements and insufficient control over management. even where they have not yet affected the other profiles, organizational inadequacies always indicate a latent, potential risk. as such, these failings are an important signal that should not be neglected, because they impinge sharply upon growth and competitiveness. like capital adequacy, organizational adequacy is a safeguard, the precondition for sound and prudent management. 5. governance the governance of the cooperative banks has been the subject of lively debate in recent years, with strongly