pierluigi ciocca : “ basel 2 ” and “ ias ” - more competition, less risk speech by mr pierluigi ciocca, deputy director general of the bank of italy, at the 8th abi convention “ implementing basel 2 and ias : tendencies, problems, solutions ”, rome, 29 november 2004. * * * my intention in these remarks is to set the issues raised by basel 2 and iaswithin a common framework. i shall therefore not consider the technical details but three general aspects : a ) the macroeconomic context in which the new methods will be inserted ; b ) the hoped - for effects on the financial system ; c ) their transposition by banks and the italian legal system. a ) the macroeconomic context the entry into force of the new international accounting standards and the “ basel 2 ” capital adequacy accord will be gradual, phased in between 2005 and 2007. intermediaries and supervisors are making their preparations. the “ context ” thus consists in a set of present - day realities, plans, expectations and forecasts. the information now available suggests that the moment is propitious for the non - traumatic introduction of the new methods. the international economy is subject to the threat of military conflicts, oil shortages, high real - estate prices, the large foreign debt of the united states and a declining dollar. yet overall the economic picture is the rosiest seen for a quarter of a century. the forecasting scenario for 2005 - 2006 remains one of inflation - free growth : annual gdp growth of 3 per cent in real terms and price inflation under 2 per cent in the oecd countries, and annual world trade growth of no less than 9 per cent. this essentially benign macroeconomic situation is accompanied by systemic financial stability. the financial stability forum, in which i have had the honour of participating since its foundation in 1999, is the world ’ s leading financial supervisory body. the forum sees the debt of firms and households as moderate or sustainable, intermediaries as profitable and well - capitalized, share prices as basically in line with fundamentals, and prudential standards as stronger virtually everywhere. by comparison with the past the indicators of stability are on average higher and have lower although not negligible dispersion. italy is no exception as regards low inflation and the stability of the financial system as a whole. unfortunately, however, it is an exception in its rate of economic growth. from 1992 to 2006 ( forecast

greater advantage will be taken of the connection between antitrust action and prudential supervision. credit remains the heart of banking. competition in the credit market is increasingly vital. as the supervisory authority, the bank of italy will have a delicate dual task. it must validate the various internal models of risk control that the banks can use under basel 2. it will also have to check how these models are used in decision - making and, together with consob, how the international accounting standards are applied. as stochastic methods come into more widespread use, until the ways in which they are employed converge under the pressure of competition the credit “ product ” and its price will vary −from bank to bank and over time, and perhaps even for the same customer. in the product price / quality / quantity analysis performed for antitrust purposes, the benefits of assigning the antitrust powers to banking supervisors will increase. the supervisory authority is better informed because it has primary responsibility for the validation and checking of the banks ’ risk models and accounting methods. lastly, the urgent need for radical revision of bankruptcy procedures has become even more glaring. in a world in which corporate planning and decisionmaking are no longer deterministic but probabilistic, the old bankruptcy law, all black - and - white, without shades of grey ( liquid - illiquid, solventinsolvent, revocable loans, impaired loans and bad debts ) has become simply impracticable. even the vested interests that have stymied all attempts at reform for years now will have to recognize the need to rewrite the bankruptcy procedures from top to bottom. basel 2 and ias encourage customized standards where abstract and general principles are hard to apply to concrete cases. this is consistent with the principle that the courts must weigh not so much the outcome of companies ’ decisions as the process by which they are made. both extremes must be avoided : having directors ’ actions governed exclusively by established parameters on the one hand and placing excessive emphasis on the outcome, ex post facto, in judging their choices on the other. ultimately, in any event, jurisprudence will be crucial. long - term trends in the italian banking industry demographics banks existing at 31. 12. 1990 1, 064 banks existing at 30. 06. 2004 banks, that went out of business between 1. 1. 1991 and 30. 6. 2004 profitability and productivity 1980 - 1990 1991 - 2003 ( averages of annual data ; percentages ) return on equity