to be considerable. greater investment in equities would increase the return on retirement savings. over the long run the rate of return on equities has been substantially higher than that on bonds and well above the nominal rate of growth in gdp ; it has been far higher on average than that on accumulated severance pay. hitherto, the accumulation of severance pay has represented a form of precautionary saving for workers, offering a modest but certain return, which in the event of loss of employment supplemented the often scant protection provided by the welfare system. ways must be found to guarantee workers adequate flexibility in the use of the accumulated resources and an appropriate limitation of risk. as for firms, contributions relief such as that which has been announced would amply compensate for the loss of a source of finance at less than market rates. the development of supplementary pension schemes requires that full competition be promoted between all financial institutions and that workers be guaranteed full freedom of choice. suitable fund size and greater transparency of terms and conditions must contribute to containing costs. at the same time, it is necessary to give workers clear information about the public pension that they will receive in the future. according to the bank of italy ’ s survey of household income and wealth, one third of the persons in employment are unable to judge whether their pension will be adequate. the experience of other countries suggests that the expansion of pension funds is also crucial for the development of intermediaries specialized in fostering the growth of small, innovative firms. between 2000 and 2003 pension funds in the united states accounted for 42 per cent of the financial flows of venture capital firms, compared with 20 per cent in the euro area and 3 per cent in italy. a deep and efficient stock market enables private - equity investors to dispose of their shareholdings by means of stock exchange listings, a method of disinvestment that makes the valuation process transparent while also offering entrepreneurs greater protection against the risk of losing control. the growth of specialized intermediaries, the greater involvement of institutional investors and the strengthening of the stock market are mutually reinforcing. more widespread use of investment funds would permit greater diversification of the risks in households ’ portfolios and improve the functioning of the financial markets. the competitiveness of italian funds is affected by tax disadvantages by comparison with foreign operators ; it is in the interest of the development of the italian financial industry that they be eliminated. the bank of italy will simplify the supervisory rules. the timetable for the launch

of funds will be shortened by broadening the range of cases in which the approval of fund rules is rapid or automatic. hedge funds and funds reserved to qualified investors, which have high minimum investment requirements, will be allowed the greatest possible operational autonomy. the growth of investment funds could also benefit from changes in the sector ’ s structure. the current governance arrangements for asset management companies are based on the integration of the production and distribution of financial products and on the central role of banking and insurance groups. initially this model enabled the sector to grow rapidly, but today it threatens to segment the market, reduces its efficiency and restrains its further growth in quality and size, preventing full exploitation of the large economies of scale in asset management. in the past few years the italian financial marketplace has achieved great progress in terms of trading volumes and transaction costs. the market ’ s liquidity and depth can increase further if implementation of the plans for federation with other european exchanges is accelerated, while safeguarding the informational advantages of the national market. the european directive on financial markets has created the conditions in which integration can strengthen competition between regulated markets and systems operated by intermediaries. however, the benefits may not materialize if barriers to access to clearing and settlement services persist and legislative and technical disparities remain. further common rules could be formulated with the aim of preventing discrimination in access and creating a harmonized regulatory and supervisory framework that will ensure competition on an equal footing, investor protection and systemic stability. the banks the italian banking system is sound. in the last few years loan quality has remained high, despite the weakness of the real economy ; it has benefited not only from improvements in borrower selection techniques but also from the transfer of part of the credit risk away from banks ’ balance sheets. the profitability of banking groups has improved : the return on equity has reached 12 per cent, two points higher than in 2004 ; for the leading groups it has risen by five points to 16. 2 per cent. further development of the banking sector, including in terms of banks ’ size, can improve the financial system ’ s competitiveness and strengthen the economy. small banks continue to play an indispensable role in financing local economies ; the presence of sufficiently large intermediaries is necessary to ensure that more advanced services are widely available at low cost. the growth and internationalization of firms are facilitated by the growth and internationalization of banks. as well as engaging in traditional activities, banks now increasingly distribute a wide range of financial products