mario draghi : restoring confidence with more transparency interview by mr mario draghi, governor of the bank of italy, with the wall street journal, at the world economic forum, davos, 2 february 2009. * * * wsj : are there any signs markets are stabilizing or improving and if so, how much should we read into it? mr. draghi : there are markets that have started to function again, though at a reduced level. spreads on the interbank market have narrowed considerably, and the corporate - bond market has shown signs of being alive. there has been a flurry of new issuances in the first few weeks of january. we will get little bits of good news and we can enjoy them. but we shouldn't make too much out of it. wsj : what is the priority for regulators at the moment? mr. draghi : credit circuits have been clogged now for more than a year. the very first thing to do is restore confidence in the banking sector, because it's clear that until that is done there will be no significant flow of private capital to the banking sector. wsj : how do you restore that confidence when the market has become so skeptical and skittish? mr. draghi : the only thing we can do to help restart the market is to tell the world that there are certain kinds of real products that are simple to understand, easy to price and satisfy certain legal conditions. wsj : how do you do that beyond emergency measures and into the medium and long term? mr. draghi : there needs to be significant progress in developing greater transparency so we can understand what's on banks'balance sheets and what valuations are. wsj : more specifically? mr. draghi : in the future, there is going to be an unavoidable move toward standardization. with standardization, regardless of whether you have regulation, you will have a powerful push toward transparency, because people would understand and price products with full knowledge of them. it is also of primary importance that we create a centralized clearing and settlement process. wsj : aren't you afraid that the push for more regulation will put a brake on financial innovation? mr. draghi : we want to create a system which doesn't destroy the prospectives of the banking industry. standardization may well hamper growth of financial innovation, but this growth will be more sustainable through time. wsj :

the entrepreneurial nature of banks has been axiomatic for many years now, and capital cannot be raised in the absence of expectations of sustainable rates of return ; the drive for profit is legitimate, it serves growth. however, earnings must derive not only from operating efficiency but also from offering products that correspond to customers ’ real needs, not costly, needlessly complicated and risky services. in the first nine months of 2012 banks ’ staff costs diminished by about 2. 5 per cent compared with the year - earlier period. the containment of operating expenses must proceed resolutely. the banks must enhance the quality of human capital, which is essential to the assessment of creditworthiness and risk management. the variable portion of the compensation of risk takers must be reduced in line with banks ’ earnings. specifically, loss - making banks must not pay bonuses. bonuses must reward the achievement of stable earnings, not simply the fruit of extraordinary operations. only the bis central bankers ’ speeches structural components of income can serve as the standard for the determination of bonuses and, in the arrangements that so provide, for their restitution. executives ’ severance packages too must be clearly and effectively bound to the results attained. they must reflect proper evaluation of the manager ’ s performance. and compensation must be deferred long enough to validate the true quality of management. if banks do not conform spontaneously to these principles, rules and controls will have to be made more stringent. the spread of information and communication technology has affected the behaviour of customers, heightened competition and opened up new opportunities to streamline and digitize business processes. these trends require a revision of distribution channels that will be all the more important going forward. maintaining a local presence is essential, but it has to be combined with the rationalization and upgrading of the branch network. the simplification of company and group structures remains a priority. in the problematic context in which these actions must be undertaken, the materialization of the savings expected requires significant improvement in the ability to actually carry them out. concretely feasible solutions have to be designed long enough in advance, just as the investments necessary for their implementation need to be programmed. * * * these are still difficult times for the italian economy. the long financial crisis has taken a heavy toll on the markets and the institutions. it has put monetary union itself to a severe test. the banks are suffering the heavy consequences of the double - dip recession and the sovereign debt crisis. they have met with serious funding