the assessment, the corrective measures required will also be specified. any capital shortfalls will have to be made good primarily by drawing on banks ’ own resources, not distributing dividends, selling non - strategic assets, and curbing costs. where necessary, fresh capital will have to be raised on the market. the success of the exercise depends crucially on having adequate national financial backstops, to be utilized in conformity with european rules and the legal framework defined by national constitutions for the ultimate purpose of ensuring financial stability. once the system is fully phased in, the rules for the operation of a european backstop will be defined, to avoid a situation in which measures taken at national level could reaggravate the vicious circle between sovereign risk and national credit market conditions. at present the european stability mechanism cannot directly recapitalize banks ; its funds can be used indirectly for loans to member states. these loans, however, would increase their public debt. direct intervention is envisaged only once the single supervisory mechanism is fully operational. the implementing details are now being finalized. * * * the problems of the italian economy stem from long - neglected structural weaknesses. they have been exacerbated by the global financial crisis and the european sovereign debt crisis. the reform action undertaken in the last two years must be continued resolutely and set within a comprehensive framework, giving italian citizens and domestic and foreign investors alike the prospect of a country that can change and return to growth. the efficient allocation of savings is a necessary condition for our economy to regain the path of sustained, balanced growth. it requires a vital financial system that can support entrepreneurial initiative and innovation and fuel a virtuous circle between economic growth and saving. the banks have a decisive role to play. the bank of italy ’ s supervisory action – which we perform in full observance of our powers and duties under the law – is directed to protecting the savings of depositors and investors, to ensuring that their use is not distorted by inappropriate corporate structures or misplaced local allegiance. but rules and controls are no substitute for conduct guided by the principles of correctness and transparency, which banks must also ensure through a suitable internal organization. the exceptional monetary policy measures taken by the ecb governing council during the crisis, and even before that the supervisory action of the bank of italy, have protected the banks and the real economy against potentially catastrophic consequences. they have helped to preserve the confidence of savers and investors. banking union, in

the additional capital required by some intermediaries in order to meet the minimum regulatory requirements would be limited ; depending on the definitions used, it would amount to between €6 billion and €14 billion. these are – it is worth emphasizing – hypothetical capital needs that would arise only in an improbable scenario. bis central bankers ’ speeches the financial sector assessment program ’ s findings dovetail with the analyses that the imf itself has conducted at aggregate level in its recent global financial stability report, which estimates the losses on loans to firms that the italian banking system could face in an adverse economic scenario at €125 billion for the two years 2014 – 15. considering the writedowns already taken, this amount is reduced to €53 billion, less than the gross profits banks are expected to make in the same two years. the losses, therefore, should not affect the system ’ s total capital. italian banks have been protected first and foremost by business models that remain rooted in traditional retail banking business. in part thanks to the attentive supervision of the bank of italy, the system avoided the kind of massive investments in “ toxic ” securities seen elsewhere, often with recourse to off - balance - sheet vehicles. the depth of the crisis faced by our country nonetheless weighs on the outlook for banks. compared with the third quarter of 2007 gross domestic product has fallen by almost 9 per cent and industrial production by roughly one fourth. it should surprise no one that banks are encountering difficulties and struggling to support the economy fully. they suffered as a result of the sovereign debt crisis and the ensuing deterioration of funding conditions in international markets. the protracted recession continues to have repercussions on the quality of loans, above all to firms. in some instances difficulties have arisen from transactions that are incompatible with sound and prudent management, at times even fraudulent. the supervisory action of the bank of italy has been intense ; when necessary, special administrative measures have been imposed. in the second quarter of this year the annualized ratio of new bad debts to total bank loans reached 2. 9 per cent. supervision – both off - and on - site – is closely monitoring the evolution of credit and its quality. the objective is to make sure that the coverage ratios for nonperforming loans remain adequate and are raised when necessary. far from harming the banks, our action will strengthen them, reassuring markets about the soundness of their balance sheets. bad debts amount to about €75 billion net of