The quality of banks’ assets has improved markedly, with the overall non-performing loan ratio steadily decreasing from 6.49 per cent in the third quarter of 2016 to 5.15 per cent in the third quarter of 2017, the European Central Bank said in its 2017 report on bank supervision.

Non-performing loans (NPLs) on systemically-important banks’ balance sheets stood at almost €760 billion in the third quarter of 2017, down from €1 trillion in early 2015.

However, much work needs to be done, and it stressed that there were parts of the banking sector where NPL levels remain far too high.

“Clearly, NPLs are a sizeable problem for the European banking sector. This is because NPLs weigh on the balance sheets of banks, drag down profits, divert resources from more productive uses, and keep banks from lending to the economy. It is therefore necessary for banks to address NPLs,” the report said, noting that this was one of ECB Banking Supervision’s most important supervisory priorities in 2017.

Looking across the euro area, the ratio differd significantly from country to country. In the second quarter of 2017, Greek and Cypriot SIs had the highest NPL ratios (with country-weighted averages standing at 46.6% and 34.0% respectively).

With 18.1%, Portuguese SIs had the third highest ratio. Looking at the trend, the NPL ratio decreased significantly year-on-year for SIs in Cyprus (-6.3 pp), Ireland (-5.6 pp), Italy (-4.4 pp) and Slovenia (-3.2 pp).

In the third quarter of 2017, the stock of NPLs for Italian SIs was €196 billion, followed by French SIs (€138 billion), Spanish SIs (€112 billion), and Greek SIs (€106 billion).

The ratio in Malta was 3.6 per cent.

This report called for a comprehensive European strategy in three key areas: (i) supervisory actions, (ii) legal and judicial reforms, and (iii) the need to develop secondary markets for distressed assets.