The non-performing loan ratio has continued its downward trend and stands at 11.2  3/4  BIS - Central bankers' speeches  percent as at June 2022, with total non-performing loans amounting to € billion, which is the lowest level observed since 2014 when the definition was harmonised across the European Union. So far the first round effects from the geopolitical crisis have been manageable and of limited direct extend. Nevertheless, the second round effects are yet to be materialised. Adverse macroeconomic developments may weaken banks' profitability and deteriorate asset quality, causing delinquencies and an upward pressure on impairments and provisions. It is therefore important for banks to adapt their business models to the new realities as shaped by the consecutive crises. Challenges emerge through various channels. Intense competition, from entities not falling in the traditional banking spectrum, threat of additional provisions due to increased credit risk, the need to invest in digitalisation to streamline operations, and the costs of managing climate change and the transition towards a sustainable greener economy are among the challenges that the Cyprus banking sector faces. It is important to say that these challenges are not country specific to the banking system of Cyprus. They are challenges that are commonly faced by European banks. Especially the issues of digital transformation together with the management of climate risks and the transition to a green economy are key issues that should be on top of the agendas' of European economies and banks. They surely are on the top of the supervisory agenda.

Monetary policy easing and substantial liquidity provision to the banking sector have so far not been sufficient. Moreover, the impetus from emerging economies has waned. Sluggish investment is the main drag on growth in Europe. Elevated uncertainty surrounding economic developments, high corporate debt and tight bank credit standards are holding back the willingness and ability to invest. The result is a self-reinforcing mechanism that is difficult to unravel. BIS central bankers’ speeches  5  With policy rates near zero, the central banks of major advanced countries have employed unconventional measures to stimulate activity and combat the risk of deflation. Large-scale securities purchases, including government bonds, have been made. The bonds are recorded in central banks’ balance sheets. The US and the UK were among the first countries to launch asset purchasing programmes in the wake of the financial crisis. Until recently, the European Central Bank (ECB) had largely used a different channel, namely supplying large loans to the banking system on favourable terms. Three weeks ago, the ECB decided to take it a step further and will soon start purchasing government bonds on a large scale. Government bond buying drives up prices and pushes down yields. The purchases may also push up equity prices and prices of riskier assets. The aim of these central bank operations is to stimulate lending and investment via lower long-term interest rates. There is evidence to suggest that the measures have contributed to softening the downturn and boosting production in the UK and the US.