before international liquidity standards were first discussed in basel. it has helped to shelter the italian banking system from the financial storm ; it continues to be necessary in the face of persistent market instability. convergence towards the basel liquidity standards, the details of which are not yet fully defined, will take place gradually, according to plan. in the first quarter of 2011, the profitability of the five largest banking groups improved somewhat with respect to a year earlier. the annualized rate of return on equity rose from 3. 0 to 3. 4 per cent. losses on loans decreased by 12 per cent, but they still absorb almost half of the banks ’ operating profit. the improvement is encouraging ; it should continue in the coming months when the recovery in lending reflects positively on banks ’ earnings. however, for the banks to return to satisfactory profitability it is essential that they persist with their efforts to reduce costs. some groups are taking steps to rationalize their networks ; these must be pursued with determination. a difficult round of labour negotiations awaits the banks, during which they must reconcile the need to reward the professionalism and productivity of employees with the impelling need to ensure that the evolution of costs is in line with the sector ’ s economic prospects. * * * there are favourable factors we can rely on to carry forward the consolidation of the public finances, overcome the emergency now overshadowing the economic outlook, and set italy on a path towards stable growth. we have the advantage that private sector debt and the country ’ s overall net foreign debt are both limited. our banks are sound ; they have emerged unscathed from the financial crisis that shook large foreign institutions. we possess fundamental resources that have always characterized the italians : individual initiative, ability to innovate, willingness to work. we must believe in our economy ’ s capacity for growth. we must find a common goal, above and beyond individual and factional interests. we must rediscover how to act for the good of all. bis central bankers ’ speeches

functions. sound and prudent management demands that the presence of current and former employees in the shareholding structure should not influence management policies and decisions. second, there should be no hesitation to change the bank ’ s legal form. international authorities and investors concur that the limited share company is the model most consistent with the characteristics of large banks, encouraging contributions of capital and fostering transparency of ownership structures and governance. the larger cooperative banks must open up to this transformation, easing the way by setting realistically achievable quorums for their general meetings. the revision of governance is essential to ensuring informed risk management, a correct allocation of credit to the economy and an efficacious management of conflicts of interest. by bis central bankers ’ speeches removing the obstacles to capital strengthening, it will reassure investors as to the banks ’ ability to cope with the difficult macroeconomic context and growing competition. the banking union the work to create a single supervisor in the euro - area, consisting of the ecb and the national authorities is proceeding expeditiously. starting out from the national authorities ’ store of technical knowledge, the new institution will have to ensure a supranational vision based on best practices in supervisory methodologies, modelling and assessment of banking risks. the transition to the single supervisory mechanism will give stability to the euro area, helping to counter the trend towards the segmentation of the financial markets along national lines, which we have seen during the crisis. it will facilitate comparisons between the banks and systems of the different countries. on 20 june the eurogroup reached an agreement on the possibility of using the resources of the european stability mechanism ( esm ) to recapitalize banks directly under certain stringent conditions for a maximum of up to €60 billion. this will be conditional on the launch of the single supervisory mechanism, which in turn will have to be preceded by a balance sheet assessment of the banks subject to centralized supervision at european level and, in particular, by an asset quality review. in the following days the ecofin council reached a general agreement on the rules for the recovery and resolution of banks in crisis. the procedures whereby creditors are to share the costs of a banking crisis were decided, with entry into force scheduled for 2018. these so - called bail - in mechanisms are consistent with the recommendations of the financial stability board aimed at curbing opportunistic behaviour and limiting the costs of bank crises for taxpayers. the agreement specified the bank liabilities covered by a credit