1/5  BIS - Central bankers' speeches  Under this light, banks' profitability is high on the agenda from a regulatory perspective. The level of Return on Equity of European Banks is shy on their cost of capital and below the respective level of other jurisdictions, like banks in the United States. A low Return on Equity compared to the Cost of Capital is a European structural issue and raises the need for formulating appropriate action plans, both by regulators and banks alike. If we want these actions to have an impact, we must first understand the factors that drive this weak performance. Overcapacity of the banking sector is a dominant factor. According to most indicators there are too many banks in Europe relative to the size of the market. This implies that there is significant scope to benefit from consolidation without exacerbating the problem of "too big to fail" through the creation of mega banks. Moreover, the Banking Union which has ended a prolonged supervisory divergence enhances the capability of reaping these benefits in a more efficient manner. Credit risk is inherent in banking and is considered a major challenge for the European banking sector. For countries that have a high level of legacy non-performing loans like Cyprus, this risk requires particular attention, despite the tangible improvement achieved in the last years. A weaker than expected economic environment may result in deterioration of asset quality.
Constantinos Herodotou: Address - Annual General Meeting of the Association of Cyprus International Financial Firms (ACIFF) Address by Mr Constantinos Herodotou, Governor of the Central Bank of Cyprus, at the Annual General Meeting of the Association of Cyprus International Financial Firms (ACIFF), Nicosia, 10 February 2022. *** It is my pleasure to address the open session of the Annual General Meeting of the Association of Cyprus International Financial Firms (ACIFF) today and present the current situation of the Cyprus and European banking sectors as well as the challenges ahead. I will also try to shed some light on the trends and developments in the banking industry. Let me start with an update on the Cyprus banking sector. We are now almost a decade after the peak of the Financial Crisis in Cyprus and looking at our banks' key financials, we observe a significant balance sheet derisking and an improvement in their loss absorption capacity. This is despite the shocks caused by the on-going pandemic. Specifically, the capital position of our banks, measured through the common equity tier 1 ratio rose from 14,2% at the end of 2014 to 17,2% at the end of September 2021. This is well above the EU average of 15,7%. In addition, during the same period a noteworthy clean - up from non-performing loans has taken place, where troubled loans in the banking sector have been reduced from 28,3bln euros in 2014 to 4,3bln euros in October 2021. Nonetheless, the NPL ratio in the Cyprus banking sector is still high, ca.