estimates on a sample of the largest banks suggest that once fully implemented, the cet1 ratio will be lower by around 70 basis points, as against the eba ’ s estimate of 140 points for the leading european banks. the impact would mostly derive from the treatment of operational risk ; the rule on the minimum requirement for banks that use internal models ( known as the ‘ output floor ’ ) is expected to have a very limited impact in italy. this could be reduced further by the steps that the banks will certainly take to adapt to the new rules during the long transitional period prior to full implementation. banks must make good use of the time available before the introduction of the new rules. measures to strengthen their balance sheets and improve profitability are fundamental, continuing the action undertaken in recent years. in the first three months of this year, the profitability of italy ’ s largest banks improved, continuing the trend observed in 2017. for the significant institutions, annualized roe rose to 8. 4 per cent, from the 5. 1 per cent recorded in the first quarter of last year ; the cost - to - income ratio fell by around 5 percentage points, to 65 per cent. the average profitability of the less significant institutions is lower : in 2017, the last period for which complete data are available, their roe amounted to 1. 3 per cent, against 4. 7 per cent for the significant institutions. for all the banks, and especially for small banks, successfully meeting the challenges posed by stronger competition, regulatory pressures and new technologies, requires incisive action to increase operational efficiency. the reform of the mutual banking sector, which i mentioned earlier, is one of the responses to these challenges. but undoubtedly more must be done, especially in relation to technological change. with the advent of fintech, marking the marriage of high tech and high finance, the framework of reference is changing rapidly. new players are creating alternative and more efficient business models, often superseding functions traditionally carried out by banks, such as the provision of payment, asset management and securities investment services. based on market analyses, traditional banks believe that, over a five - year horizon, a number of their activities, corresponding to around a quarter of profits, are at risk. compared with the new entrants, incumbent banks enjoy advantages stemming from stable relationships with customers and the wealth of data collected over the years. by exploiting these advantages better through the use of new technologies, they can expand the range of services offered, improve

creditworthiness of firms, impairing the quality of bank loans. it would be illusory to think that the link between sovereign risk and banking risk can be broken with measures that push banks to drastically reduce their direct exposures. moreover, in the most difficult years of the crisis, italian banks, like those of other countries, swam against the tide, and made a profit, buying government bonds when tensions rose and yields increased. when the conditions changed, they began to sell them. last may, italian banks held slightly more than €300 billion worth of domestic government bonds in their portfolios, compared with the €400 billion reached at the beginning of 2015. loan quality the continued economic growth has led to a gradual improvement in the quality of bank credit. the ratio of non - performing loans, net of loan - loss provisions, to total loans system - wide, which had fallen by about 4 percentage points between the peak of 2015 and the end of last year, decreased by almost 1 percentage point more in the first quarter of this year, to stand at 5. 3 per cent. the total amount of net npls fell to just over €110 billion, down from €200 billion at the end of 2015. about half of the amount comprises exposures classified as unlikely - to - pay, some of which could become performing again. for the less significant banks the share of all npls ( 7. 1 per cent ) remains higher than that recorded by the significant banking groups ( 5. 1 per cent ). the development of the secondary market is making an important contribution to reducing the number of npls. this market in turn benefits from the state guarantee on senior debt issues deriving from the securitization of bad loans ( gacs ). the gross value of the bad loans securitized under the gacs system was approximately €32 billion and it is expected to increase considerably in the months to come. in the last few days, the government has asked the european commission to extend the possibility of using gacs beyond the current deadline of september. the improvements made thus far should be consolidated and strengthened. more active npl management on the part of banks remains fundamental, including in the light of the regulatory changes proposed by the european commission and the new supervisory expectations of the single supervisory mechanism supplementing the guidelines on npl management published in march 2017. the strategies proposed by the banks will be assessed on a case - by - case basis as part of ordinary supervisory activity and