equity market since 2011, the average core tier 1 capital ratio has risen from 5. 7 to 10. 8 per cent ; the ratio stands at 8. 8 per cent for the other banking groups and at 13. 8 per cent for the smaller banks, mostly mutual banks. the capital of the smaller banks is generally adequate. some large and medium - sized groups must make further progress in strengthening their own funds. capital strengthening will permit compliance with the basel 3 rules and achievement of the objectives that will be set for the assessment of banks ’ overall risk profiles. it makes it possible to limit the degree of leverage without reducing credit support to the real economy. capital strengthening is in the interest of shareholders : the resulting decrease in risk lays the foundation for reducing the cost of capital and, looking ahead, raises the return on the resources invested. a low exposure to financial risks also helps to curb the cost of funding. in 2012 the capital gains on government securities purchased at prices far below those consistent with the fundamentals of the italian economy cushioned the impact of the macroeconomic deterioration on banks ’ income statements. any dividends paid must not draw on banks ’ capital reserves ; they must be compatible with capital targets communicated to banks at the end of the annual supervisory and review process. banks ’ profitability given the persistently unfavourable economic and financial situation, it has been contended that banks ’ profits are high, especially compared with those of firms. so the banks, the argument runs, should be called on to expand the supply and lower the cost of credit, to reduce their fees, and to offer an array of services free of charge. actually, two recessions in the span of three years, undermining the quality of banks ’ assets, have generated loan losses that seriously erode profitability. the sovereign debt crisis has made funding in the wholesale markets harder and more costly, further reducing the profitability of traditional credit activity. the profitability of the major banking groups is low. in the first nine months of 2012 their return on equity, annualized and net of extraordinary goodwill impairments, was just above 3 per cent. the modest growth in the volume of business and the incidence of loan losses will continue to compress banks ’ earnings until the economic recovery takes hold. the uncertainty over economic and financial market developments will continue to weigh on the speed and the extent of the rebuilding of profit margins, which are in any event bound to remain below their unsustainable pre - crisis levels.

stock of them is kept large by the slowness of recovery procedures. it should also be noted that in the last few years the proportion of impaired loans backed by guarantees has risen for italian banks. in the meetings with the international monetary fund, which is currently performing its periodic assessment of the stability of the italian financial system, we stressed the need to bear these aspects in mind when attempting to draw policy implications from international comparisons. another question that is sometimes raised is whether the loan assessments that we require banks to make are not excessively cautious and therefore likely to slow the financing of the economy. here again it is necessary to be clear. the prudence we require in the assessment of loans helps to safeguard the integrity of banks ’ capital and contributes to increasing the market ’ s confidence in them. analysts and investors want the amounts stated in balance sheets to reflect the actual quality of banks ’ assets and provide reliable indications of the risks involved. prudent provisioning policies encourage the disposal of impaired items. it also needs to be recognized that such policies are likely to be hindered by a harsh tax treatment, which should be gradually removed. in periods of market tension, the intensity of supervision cannot be relaxed until the economic recovery produces its effects on banks ’ accounts. tolerance towards situations of persistent support to borrowers with a precarious financial condition and no prospect of growth would not only risk undermining the soundness of the banks but also hinder the efficient allocation of resources to the economy. the inspections we perform make it possible to assess the situation of each intermediary on a case - by - case basis. we pay due attention to the risk of generating procyclical effects. to this end, above all we ask banks that need to strengthen their capital bases to free resources by reducing their costs, selling non - strategic assets and retaining earnings in the business. beyond the short term the prudent assessment of assets is beneficial to the financing of customers, especially if coupled with action by the banks to increase their ability to resist and bis central bankers ’ speeches react to external shocks. efficient production processes and attention to strategic sectors contribute to the growth of credit business and in this way to the support of the economy. in recent years italian banks have increased their capital resources considerably, especially core tier 1 capital. since 2007 the core tier 1 ratio of the banking system has risen from 7. 1 to 10. 4 per cent. for the five largest banking groups, which have raised €17 billion on the