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

current level of inflation or of output that figure into our policy decisions directly – rather, it is the expected level some quarters out, after the lags in the effects of policy actions have worked themselves out. in that regard, the projection of only a gradual strengthening of demand and subdued inflation imply that that these gaps – of inflation and output below our objectives – are likely to persist for quite some time. in these circumstances, at its last meeting, the fomc was of the view that economic conditions were likely to warrant unusually low levels of interest rates for an extended period. this assessment and my outlook do not mean that my colleagues and i will not also be looking carefully at any evidence that portends a potential pick up of inflation. uncertainty about the course of the economy is a lot lower than it was just a few short months ago. but we cannot lose sight that this uncertainty remains quite high ; we are still in largely uncharted waters when it comes to fully understanding how our economy will recover from the severe recession and financial disruptions of the past several years and how that recovery and inflation will be affected by the extraordinary actions we took. we need to base policy on our best estimate of the evolution of inflation and output relative to our objectives, but we also need to be ready to adjust our plans if events don't turn out as predicted in either direction. we have the tools to exit our unusual policies when the time comes. and we must act well before demand pressures or inflation expectations threaten price stability. in circumstances like these, we will be carefully watching the forecasts and economic evaluations of people like yourselves – indeed, perhaps as carefully as you will be watching the evolution of our thinking. in that regard, i'm glad to have had the opportunity to share some thoughts on these issues with you today.