measures to lessen capital requirements that do not actually diminish risk. the limited diversification of the risk weights applicable to assets makes it possible for banks to select higher risk - return combinations. 3. the evolution of prudential rules on credit risk the basel committee has focused on the need to strengthen the set of legal rules safeguarding bank stability by defining capital adequacy requirements in greater detail, improving the structures and methods for the management of credit risk, reinforcing the discipline exerted on banking enterprises by the financial markets. in june the committee released a set of proposed revisions of the capital adequacy rules, asking for the comments of the banking industry with a view to their definitive formulation in the second half of next year. during the summer it distributed documents setting out best practices in credit risk management, disclosure requirements and supervisory activity. for the time the idea of determining the capital needed to face credit risk by means of internal models devised by banks themselves has been shelved, pending resolution of the problems with existing methods and in view of the costs associated with producing such models. for the future, such models represent an opportunity to be pursued, in view of the possibility they offer of measuring credit risk more exactly and more analytically and of factoring in the correlation between different risks. they generate estimates that gauge the capital needed to cover the largest loss that could occur in any given period of time and with any given probability. for lending to firms, the committee ’ s proposed changes provide for two distinct methods of determining risk weights : the ratings of specialized agencies, which are only available for a limited number of borrowers, and internal ratings, which the banks can assign to all their customers. for the standard method, the committee has established the requirements that agencies must meet for their ratings to be used in determining capital ratios for banks. the requirements refer to agencies ’ credibility and independence as well as to the objectivity and transparency of their judgments. the criteria for supervisory authorities ’ validation of internal rating systems have not yet been fixed. they will certainly include the completeness of the data, the methodological rigour of the procedures and provision for verification of the results. there remains the complicated problem of defining a common yardstick to which to relate the results of the various banks ’ internal rating systems, in order to make sure that capital requirements are uniform. another problem to be faced concerns the comparability of the criteria for weighting the risk on loans to companies with agency ratings and those

000 companies. the research under way is expected to produce results that will be of help in the analyses and tests that will have to be carried out for the validation of the internal rating systems banks adopt. increasing the competitiveness of the italian banking system, and of the economy as a whole, requires continuous improvements in the methods used for granting and managing credit, and the development of the corporate finance services needed to foster small and medium - sized enterprises ’ access to the capital market. it is necessary to capitalize on italian banks ’ greatest strength : the wealth of information and relationships accumulated over the years in doing business with their customers and turn it to account in creating effective internal rating systems. i am sure that italian banks, faced with this new challenge in the most typical of all banking activities, the management of credit, will succeed in developing the instruments and mind - set needed by companies operating in markets that have been opened up to competition by the efforts over the last ten years of parliament, the regulatory authorities and intermediaries themselves.