, 60431 frankfurt am main, germany, tel : + 49 ( 0 ) 69 9566 3511 or 3512, fax : + 49 ( 0 ) 69 9566 3077 presse @ bundesbank. de, www. bundesbank. de reproduction permitted only if source is stated. financial stability is at risk if systemic risks emerge. at the heart of systemic risks are externalities : systemic risk may occur, for instance, when the distress of one or more market participants jeopardises the functioning of the entire system. this may be the case when the distressed market participant is very large or closely interlinked with other market players. interconnectedness can be a channel through which unexpected adverse developments are transmitted to the financial system as a whole, thus impairing its stability. market participants can be connected directly through contractual relationship such as on the interbank market. besides this, indirect channels of contagion may exist. many market participants may conduct similar transactions or hold similar types of assets. in such a situation, investors may interpret negative news as signals that other market participants are adversely affected as well. hence, systemic risks also exist if a large number of small market participants is exposed to similar risks or risks that are closely correlated with each other. in the presence of systemic risk externalities, the optimal level of risk taken by financial institutions from a private perspective is thus higher than the socially efficient level of risk. owners of financial institutions may reap the potential benefits of their decisions in full, but bear the potential risks only partially if they can expect to be bailed out by the government bailout in the event of distress. this excessive risk taking implies costs for society : if risks materialize, governments may be pressured to bail out banks, thus imposing costs on taxpayers. regulatory reforms aimed at internalizing these externalities comprise higher lossabsorbing capacity and provisions to facilitate the orderly resolution of banks. these reforms have the potential to increase social welfare. however, they may come at a net private cost for the affected institutions : they will forgo the net private benefit ( profits ) associated with their excessive risk taking, they may incur costs related to compliance with new regulations, and their funding may be more costly as it must provide greater capacity to absorb losses. through these channels, changes in regulations affect the incentives for banks to take on risks. seite 3 von 13 deutsche bundesbank, directorate general communications wilhelm - epstein - strasse 14,

drop in the volume of net non - performing exposures : in the next twelve months their share of the total could fall below 8 per cent. this process must continue. the reforms of the credit recovery procedures launched in italy in recent years are a step in the right direction ; they must be strengthened to ensure a sharp reduction in recovery times. as i recalled in may, it would be especially useful to increase the level of specialization in the handling of insolvency cases, providing for the centralization of the more complex proceedings, including by reviewing the territorial jurisdiction of italy ’ s courts. for their part, banks must make the best possible use of the instruments already available in the form of out - ofcourt agreements with firms on debt restructuring and the transfer of real estate pledged as collateral. all financial intermediaries must increase the availability of sufficient and timely information on non - performing exposures, essential for making the management of these assets more efficient and less costly, thereby facilitating their sale. the new reporting on bad loans that the bank of italy introduced last year, motivated by the scant availability of computerized data at banks, is providing a significant contribution to improving the management criteria for non - performing loans. the commission has asked the european banking authority to consider launching a similar initiative for banks in all member states. the first results of the new npl reporting confirm that the survey has prompted the banks to speed up actions to improve data organization and digitalization. the quality of the responses was initially poor but has become better, partly thanks to monitoring by the bank. there is still room for improvement : in many cases the data on the status of recovery procedures and on the type of assets pledged as collateral are incomplete, particularly as regards valuations. approaches to the recovery procedures differ considerably : some banks are not taking sufficiently prompt action. efforts should be stepped up to eliminate the backlog and take full advantage of the possibilities offered by the new database. by exploiting the information to the full it will also be possible to conduct a more active management of non - performing exposures other than bad loans, raising the rate of reclassification to performing and adjusting coverage levels where necessary. unlikely - to - pay exposures account for half of total npls ; swift action is required to maximize their value, especially by means of restructuring agreements to set firms back on the path to sustainability. the 2015 reform introduced tools that give financial creditors far greater room for manoeuvre under these agreements ; they should be exploited