Despite the low interest rates allowed by the accommodative monetary policy, widespread uncertainty about prospective demand growth and the deleveraging by overindebted firms have held back private investment. In stressed euro-area countries, these difficulties have been compounded by limited access to credit, because of balance sheet repair in the banking sector, and the increased cost of capital, owing to financial fragmentation.
Nevertheless, the ratio of nonperforming assets to total assets rose to its highest level since 1992 as residential mortgage and construction loans continued to deteriorate. And given the near-term economic outlook, loan quality at many community banks may decline further.