mario draghi : fact - finding on issues affecting the banking and financial system testimony of mr mario draghi, governor of the bank of italy and chairman of the financial stability forum, before the finance committee of the chamber of deputies, chamber of deputies, rome, 17 march 2009. * * * all the main advanced economies recorded a sharp contraction of output in the fourth quarter of 2008. consumption and investment demand is falling owing to the rapid, generalized deterioration in household and business confidence, the increase in unemployment, the drop in share prices and house values, and tighter access to credit. the recession has passed to the emerging economies, hit by the drop in exports to advanced countries, the decline in raw material prices, and the sudden reversal of capital flows. the countries that depend most heavily on financing from abroad, such as those of central and eastern europe, are especially vulnerable. the international monetary fund and other official and professional forecasters have progressively revised their estimates of world economic growth downwards. in january, the imf projected that world trade would contract by almost 3 per cent in 2009 and that gdp would fall by 1. 6 per cent in the united states, 2 per cent in the euro area and 2. 6 per cent in japan. it has already announced that the estimates are being newly revised in the light of more recent data. world gdp growth will probably be negative on average for the year. economic policymakers have acted promptly to contain the spread of the financial crisis and counter its effects on the real economy. central banks supplied ample liquidity to the financial system, with interventions of unprecedented size and degree of international coordination. governments have introduced or strengthened guarantees for bank deposits and securities and have prepared or taken measures to recapitalize financial institutions. these actions have prevented the collapse of the system but they have not yet shed full light on the financial situation of those banks that invested most heavily in “ toxic ” assets : there is still uncertainty as to the size and distribution of the losses on the balance sheets of what were once the world ’ s largest banks. moreover, it is likely that the recession will cause a further deterioration in banks ’ assets. the restoration of confidence in financial institutions and properly functioning credit markets is essential, along with support for demand offered by monetary and fiscal policies, in order to restart growth. official interest rates now stand at minimal levels in the leading economies. there is limited scope for the monetary policy lever to work, although there remains the option of unconventional measures, which are being implemented

relatively short time. the terms of the italian instruments are in line with those offered by other european countries. i expect banks to make use of them in suitable amounts. the recapitalization law also provides for monitoring the transactions and their effects on the economy and institutes special observatories at prefectures, with the participation of the interested parties. the bank of italy will supply the ministry for the economy and finance with data and analyses on the evolution of credit and borrowing costs on a regional basis, as an additional supplement to the ample geographically disaggregated data already released in its publications. the statistical information will allow any specific situations of tension to be identified. it is essential that analysis of credit conditions at local level not stray into a role of pressuring banks, prompting them to relax the standards of sound and prudent management in the selection of borrowers. in my opinion, political and administrative interference in assessments of individual cases of creditworthiness must be avoided. lending is and must remain an entrepreneurial activity, based on a prudent, professional evaluation of the validity of companies ’ plans. sooner or later, imprudent banks end up in distress and also cease lending. but the test posed by the crisis is severe and requires the ability to be good bankers even when the economy is doing badly. the inevitable deterioration in loan quality due to the recession calls for far - sighted choices : just keeping the accounts straight is not enough. firm support for creditworthy customers prevents an excessive credit squeeze, which would aggravate the recession, thereby worsening the position of banks ’ customers. as i have already said, every opportunity must be taken to strengthen the capital of banks, choosing the most appropriate form in each case : recourse to the market, retained earnings, or the instruments offered by the state. the restoration of confidence in the banking system is a global, not a national question. in my view, four conditions are essential. first, the uncertainty still surrounding the value of the most troubled assets on banks ’ balance sheets must be dispelled ; this must become an integral part of public interventions in support of the financial system. it is indispensable, especially in europe, that similar measures be based on common principles, in order to avert competitive disparities between intermediaries of different countries and between banks exposed in differing degrees to the problem of impaired assets. second, in determining recapitalization objectives, it is vital that the definitions of bank