ROME (Reuters) – Mergers among Italian mid-size lenders should be encouraged to boost profitability in the sector, Bank of Italy Director General Salvatore Rossi said on Tuesday.

Italy’s banking system is fragmented with more than 600 lenders in the country. A government reform approved last year to prompt cooperative banks to restructure and merge has led to just one tie-up to date.

Rossi said that Italian banks will have to cut their staff, adding that welfare mechanisms such as a solidarity fund could be used to reduce the costs deriving from early retirements of banking employees.