in line with that of the other leading european banking systems. since then it has fallen, reaching a low of around 1 per cent last year. apart from the level of costs, the large loan losses incurred in the last few years have made a major contribution to the decline in profitability. the risk - asset ratio of the italian banking system is 13 per cent, well above the requirement of 8 per cent established in the basle capital accord. only a very few banks are below this limit and the total shortfall is around 500 billion lire. the decline in profitability has nonetheless reduced the flow of internally - generated resources with which to finance growth and merger operations. the larger banks have suffered especially in this respect : at the end of last year they held less than one third of the free capital of the banking system, as against 80 per cent of its total assets. the lack of free capital, not tied up in tangible and financial fixed assets and available for acquisitions, will curtail the scope for modernizing the system and pursuing efficiency. the intermediate objective pursued over the last twenty years has been largely achieved ; there is more competition, there have been numerous mergers and a start has been made on reorganization projects that promise to improve efficiency. competition has produced its full effects on the prices of banking products and services, holding them down and making them more uniform. but other benefits have been, still are, slow in coming : lower costs, international competitiveness, profits and fresh capital generated by efficiency and the quality of services. the picture is thus chiaroscuro. disappointment should only be felt by those who fail to recognize that competition fosters efficiency but cannot guarantee it where producers lack the ability to respond — a la leibenstein — to the competitive stimulus. it is necessary to appreciate how much inertia has to be overcome in a complex process that is more cultural than juridical or institutional, in short the “ passage ” from oligopoly to competition of an industry that is based on information asymmetries, bilateral customer relationships and the reputation of producers. this journey was bound to be laborious and slow, especially in italy ’ s case. the italian banking system arrived at the world economic crisis of the seventies after two postwar decades in which its oligopolistic nature had become deeply rooted, while the economy had enjoyed an extraordinary boom. the model formulated by donato menichella and raffaele mattioli had “ worked ” in a certain sense ; it

had met, albeit with the inefficiencies that were the inevitable corollary, the demand for credit and money of the italian economy in that buoyant phase. the subsequent resistance to change cannot be entirely attributed to the reluctance of any industry to face the forces of competition or to the natural tendency to continue to do things in the same way. to give way to counterfactual criticism based on hindsight — such as, the injection of competitive enzymes should have been much larger and more intense — would be not only sterile but also debatable in theory and risky in practice. it is analytically doubtful whether it would have been possible, given the context. it is sufficient to mention just one aspect referred to earlier : the uniform treatment of banks and enterprises and of banks in the public and private sectors became a part of italian law — as a result of the judgement of 1989 — ten years after the supervisory authority had clearly stated the principle. the risk at the practical level is that at this point banking competition will be seen as a missed opportunity, and that this will lead to the idea of renouncing it in the future. the position of the bank of italy is to proceed, if possible with greater determination, on the road taken twenty years ago — not only because the single market, the euro and their rules leave no option, and not only because the law in force in italy today mandates this course, but in the belief that the progress that has already been made is in the right direction, even though competition on its own, it is worth repeating, does not guarantee an optimal financial system. the bank of italy will devote more resources, a revised internal administrative structure focused on banking competition, and additional analyses serving to underpin new interventions to the task of fostering competition in the markets in which banks operate and the mergers they autonomously plan. two changes that are already under way will also produce their effects. mutually reinforcing, they should, together with competition in the markets for banking products, stimulate efforts to achieve the cost reductions and quality improvements that are necessary. the first change is the privatization of the banks that are still under public control, the second concerns the exit procedures aimed at preventing moral hazard and the neglect of costs. the transfer of the ownership of banks to the private sector is the precondition for control to be contested in the market. in the last few years the process of privatizing public banks has gathered pace, in parallel with the growth in