##ability of italian banks reflects not only the sluggishness of the italian economic recovery but also their prevalent business model : concentration on lending to retail customers ( households and small businesses ) ; retail fund - raising ; low leverage ; limited securities trading on own account ; and less maturity transformation than banks in other countries, owing in part to the predominance of variable - rate loans. this model means our banks are less exposed to financial market volatility and protected them during the crisis. the other side of the coin is that it makes them heavily dependent on net interest income and macroeconomic conditions. it makes their operating costs more rigid. resolute action is needed to lower the ratio of costs to total income. in recent years the largest italian banks have enhanced their operating efficiency, bringing the cost / income ratio closer to that of their european competitors : 62 per cent, against an average of 58 per cent for all eu banks in the first half of 2010. italian banks must improve further, and decisively, by rationalizing sales networks, extending and refining the use of technology, simplifying the structure of production, selling other non - strategic assets, and adapting compensation policies at all levels. curbing costs will permit the recovery in profits needed for the capital strengthening that the markets and the new capital rules demand. given the difficulty of raising fresh equity capital, it is essential to generate sufficient resources internally. the capital ratios of the top five italian banking groups are rising overall. at the end of september the tier 1 ratio stood at 9. 0 per cent, while core tier 1 capital came to 7. 9 per cent of risk assets, up from just 5. 7 per cent at the end of 2007. on average italy ’ s smaller banks already have levels of capitalization in line with the new regulatory minimums set by basel iii. these banks supply more than half the credit needs of the country ’ s small and medium - sized enterprises. for the major banks, which use internal rating models, the basel ii rules for containing the capital charges for loans to smaller companies stand confirmed. this year we shall again assess the resilience of italian intermediaries in the face of highly adverse conditions, as part of the new series of stress tests of the european banking system. thanks to the experience gained to date, the bank of italy and intermediaries will be able to interact fruitfully for the success of this new exercise. for banks to be prepared when the new capital adequacy

peers in other countries has narrowed but remains wide, and it is particularly large in the south. the school system must reward academic merit and diligence. it must guarantee a satisfactory level of education to all students, irrespective of their social background and geographical origin. our university system, despite some notable exceptions, is still far from the standards of quality prevailing in most of the advanced countries. our research institutions are unable to attract talented scholars, technicians and managers, italian and not, in sufficient numbers. recognition of merit is one of the central principles of the reform of the university system just approved. this is a first step in the right direction. for over a decade the entry wages of young people in the labour market have been stuck below the levels of the 1980s in real terms. the recession has made the situation more difficult. the youth unemployment rate verges on 30 per cent. already high by international standards, young people ’ s dependency on their parent ’ s wealth and income, a factor of conspicuous social inequity, has been accentuated. a major contributory factor is the segmentation of the italian labour market, where the rule is minimum mobility at one extreme and maximum precariousness at the other. this is a waste of resources that mortifies young people and seriously impairs the efficiency of the productive economy. our firms ’ propensity to innovate and their international projection are insufficient to drive growth, ultimately because too many firms remain small, including successful ones. the conduct of entrepreneurs also reflects improper incentives not to grow. a tax system with less evasion and lower rates would be conducive to firms ’ decision to scale up and to accept contributions of new equity capital. as we have seen on several occasions, the north - south gap in italy depends largely on national policies and their application at local level. we can regard the possibility of a reform drive with fair confidence. italy possesses abundant resources, has many companies, entrepreneurial ability and a hardworking and thrifty people. it is a matter of freeing the spirit of entrepreneurs and individuals from many constraints. this has already begun, but bolder reform measures would improve the expectations of firms and households and would give a boost to growth. this year we celebrate the 150th anniversary of the birth of a united italy. more than one third of our history has been characterized by the choice – more and more deeply felt with the passage of time – to be part of europe in every phase of