health and without the resumption of credit flows, the recession will be more drawn out and the recovery slower, despite the exceptional expansion of budget deficits. after the failure of lehman brothers last september, government interventions to guarantee bank deposits and liabilities and to support recapitalization prevented additional collapses ; they were insufficient to avert a contraction of credit. financial markets are still struggling to become fully functional again. risk aversion remains high. worldwide, in the past two years banks have recorded losses of over $ 1, 000 billion in their balance sheets. just under half of the funds used to rebuild their capital base came from government intervention. looking ahead, banks ’ capital requirements must be met by reactivating the market. this depends on the total transparency of banking assets. the cloud of uncertainty that continues to hang over banks ’ balance sheets limits the inflow of private capital, increases the level of capital ratios demanded by the market and makes the incentives to reduce assets more stringent. action must be taken to re - establish the certainty and credibility of the asset side of bank balance sheets. the measures announced by a number of countries to insure or transfer to separate entities part of their assets can prompt the emergence of the most problematic securities. but to restore confidence in the major international financial institutions, there remains the need for a full, internationally coordinated, consistent, rigorous and transparent stress testing of banks ’ balance sheets, which has already been launched in the united states and is being prepared in europe. promoting financial stability the crisis is rooted in distortions in the markets ’ functioning, regulatory and supervisory shortcomings and the conduct of intermediaries in the world ’ s leading financial centres. the exceptional liquidity that flowed into those centres as a result of the prolonged disequilibria in savings rates and payments balances contributed to keeping interest rates, volatility and the cost of protection against insolvency at abnormally low levels. this led to a general underestimation of risk with a consequent overvaluation of financial assets and real estate. the defects in regulation and the management of risk by the world ’ s largest banks were concealed. an accommodating monetary policy contributed to the artificial dilation of financial volumes and permitted the continuation of a situation rendered fundamentally unstable by the distortions and shortcomings mentioned above. the market rejected economic policy interventions despite their timidity ; blinded, it lost its diagnostic capacity, its self - correction mechanisms were paraly

they are faced with the drying up of cash flows, more rigid bank credit, and considerable problems in accessing capital markets. at least six thousand companies, once again with almost a million workers, are affected in this way. the effects of the crisis are being felt above all by firms with fewer than 20 workers. in manufacturing alone there are nearly 500, 000 such firms, employing just under two million workers. the very survival of those subcontracting for larger firms that are cutting orders and deferring payments is sometimes at stake. the coming months will be decisive ; excessive mortality due to financial strangulation of too many companies that have the potential to prosper after the crisis has passed is a second, serious, risk for the italian economy. financing the economy the deterioration of the economy tends to curb bank lending. in april the quarterly rate of growth of credit to non - financial firms was nil ; it had been 12 per cent a year earlier. lending to households has also continued to slow. a part of the deceleration can be explained by a decline in manufacturing and real estate investment and in the consumption of durable goods. but the supply of bank lending has also been curtailed, mainly owing to difficulties in raising medium and long - term funds and to the increase in credit risk. our survey found that the loan applications of 8 per cent of firms were rejected − the highest figure since the mid - 1990s ; it was less than 3 per cent a year ago. over 10 per cent of firms state that since last october they have been asked for early repayment. this happens more frequently in the south of italy but affects the whole country and even some larger companies. banks cannot be asked to be less prudent in granting credit ; a banking system that risked the integrity of its balance sheets and the confidence of those who entrust their savings to it would not serve the interests of the economy. what can, and must, be asked of our banks is to improve their ability to recognize creditworthiness in the present, exceptional circumstances. special attention must be paid to the longer - term prospects of the firms that apply for financial assistance. when evaluating and making decisions, banks must take account of technology, organization and the dynamics of firms ’ main markets. the government ’ s recent initiatives to increase the guarantee fund for small and mediumsized firms can strengthen banks ’ support to smaller companies. consideration should also be given to the possibility of making a public loan guarantee scheme available to a broader