new adverse shocks. credit the contraction of lending to firms intensified in the first half of this year, to an annual pace of over 5 per cent in the three months ending in may. the decline in lending to households was less severe, amounting to 1. 6 per cent. the average interest rate on new business and house purchase loans remained the same as at the start of the year, at just over 3. 5 per cent. the spread over the euro - area average did not change significantly, hovering around three quarters of a percentage point. the cyclical downswing is squeezing credit demand. it is aggravating debtors ’ repayment difficulties : in the first quarter the new bad debt ratio for business loans was around 4. 5 per cent, which was high in historical terms ; other impaired loans are also increasing sharply. heightened risk is weighing on banks ’ credit supply policies, discouraging lending and driving up interest rates. this can be seen in the surveys conducted with banks and firms alike. the bis central bankers ’ speeches strains will continue over the next few months ; past experience indicates that the deterioration in loan quality tends to continue beyond the start of a cyclical upturn. above all, the difficulties affect small firms, which have less opportunity to access the capital markets. the government ’ s recent changes to the workings of the guarantee fund for small and medium - sized enterprises are a step in the right direction. the implementing provisions should allow firms with good growth prospects to apply to the fund, even in the face of a temporary recession - induced deterioration in their accounts. the guarantees should be made conditional on the effective granting of loans, with more favourable terms provided for banks showing better overall credit growth. the availability of guarantees must translate into an actual improvement in credit terms, enabling firms themselves to apply directly to the fund. on 1 july the italian banking association and the country ’ s trade associations signed a new agreement allowing firms in difficulty to obtain a temporary suspension of repayments of medium - and long - term loans and an extension of loan maturities, and to be granted new loans if they increase their capital. the bank of italy will make sure that the moratorium provides support for deserving firms without concealing the actual riskiness of the loans. past experience in this regard has been positive. italian banks must guard themselves against the risk of a worsening of their funding conditions. the supply of assets eligible for use in eurosystem refinancing operations is now very substantial thanks in

prices can fluctuate wildly at any time for no or little reason, then over time investors could require higher haircuts and regulators could see a need for even more hqla. how can we protect and strengthen the structure of these markets? in tomorrow ’ s session, several panels will discuss market structure, including potential risks to clearing and settlement infrastructure, and ask how current structures might be adapted to provide greater liquidity and better guard against liquidity risk. i would point to four important trends that have been driving the changing structure of these markets : first, advances in computerized trading and high - speed communications and the entry of new players using these technologies ; second, the intensified prudential regulation and supervision of the systemically important banks that are the largest dealers ; third, the banks ’ own re - evaluation of risk in the wake of the financial crisis ; and fourth, the increasing importance of mutual funds and other asset managers. while markets will always continue to evolve, there is no reason to think these trends will suddenly reverse. in all likelihood, they are here to stay. although post - crisis regulatory changes have likely increased the costs of market making, markets were already undergoing dramatic changes well before the crisis. high - frequency and algorithmic trading firms already accounted for a large and growing share of transactions in the interdealer market, altering the speed and nature of market making. as traditional dealers have lost market share, they have sought to remain competitive by internalizing a greater share of their customer trades, finding matches between their own customers and keeping those trades off the public interdealer markets. but internalization does not eliminate the need for a public market, which is where price discovery mainly occurs. dealers need to place the orders that they cannot internalize onto that market, and at times of market stress such as on october 15, they will likely need to put most of their orders onto the public market. the current structure of the trading platforms in both the cash and futures markets is based on a central limit order book, which provides for continuous trading but also provides strong incentives to be the fastest. there may be adaptations of this market structure that could give greater emphasis to liquidity provision rather than a never - ending competition for more speed. some of the panelists we ’ ll hear from tomorrow argue that it may be possible to do so, for example by considering frequent batch auctions as an alternative to the central limit order book, or by placing minimum time limits on orders. ideas