ambitious regulatory reforms is thus paying off. it has resulted in a european financial sector that is now stronger in terms of capital, leverage, funding and risk - taking. for example, common equity tier 1 ratios in the euro area have improved substantially, rising from less than 7 % for significant banking groups in 2008 to more than 14 % today. the welcome improvements in bank solvency – and the related improvement in asset quality – are a tangible result of our common work to create the banking union. the comprehensive assessment we conducted in 2014 – together with a deep asset quality review – encouraged banks to strengthen their balance sheets without delay. as a result, while the level of non - performing loans ( npls ) remains high in some countries, today this problem is not primarily related to the robustness of balance sheets. coverage ratios are close to 50 % and much of the remainder is collateralised. a more resilient euro area banking system has been able to respond to the impetus originated by our monetary policy and facilitate the recovery in credit we have witnessed so far. 2 / 4 bis central bankers'speeches however, a number of structural factors are still weighing on the ability of the financial sector to fully support the euro area recovery. notably, the profitability of euro area banks remains a challenge to be addressed. while bank profitability and the level of bank equity prices is not per se a matter for policymakers, insofar as it raises financing costs for banks, it could ultimately curtail lending to the real economy and hold back the recovery. we should therefore consider what factors are behind this and what we can do to address them. one factor is certainly the low growth and low inflation environment, which translates into low interest rates. by supporting the recovery, our monetary policy measures are supporting a return towards higher rates of return. in other words, low interest rates today are necessary for a return to higher interest rates in the future. but legacy and structural challenges are also important factors behind banks ’ low profitability. where profitability is being affected by structural issues, such as overcapacity and inefficient cost structures, rationalisation and consolidation must form part of the answer. where npls are at a high level, creating the conditions for a faster resolution of bad loans is an essential part of the solution. ecb banking supervision has presented its draft guidance on npls for public consultation. we have also conducted a stocktake of national supervisory practices and legal frameworks related to npls.

measuring borrower services produced by a bank. therefore, the appropriate reference rates should be chosen to more closely match the risk characteristics of a bank ’ s loan portfolio. failure to allow for risk will lead to an overstatement of bank output that will distort productivity measures. it is therefore important to consider banks ’ risk when studying their efficiency or productivity and i am pleased to see that several papers on the conference programme address these issues. closely related to banks risk profile is their degree of output diversification, which is likely to increase as specialised financial institutions seek safety in larger and more diversified groups. in principle, diversification lowers risk, but it may also lead to cost savings when jointly producing several outputs. greater output diversification is a likely concomitant of the increase in average bank size that will accompany consolidation in the banking sector. by now, academic research generally recognises that banks must be modelled as multi - output firms, but more work is needed on the measurement of the costs and benefits of joint production. finally, on the priorities for research emerging from the financial turmoil, i would like to leave you with an open question : the bursting of asset price bubbles is likely to lead to a decline in balance sheet values and a fall in productivity. is this a problem of measuring prices or measuring productivity? i realise that this is a very difficult question as even central bankers have a hard time distinguishing bubbles from the fundamental level of prices. however, recent events have focussed our attention on the real consequences of assuming that asset prices are always at equilibrium. if we are going to discuss productivity in financial services, we need some indication of how far our measures will be distorted by asset price bubbles. in conclusion, i am pleased to see you here in luxembourg, where the financial services industry is such an important part of our national economy. it only remains to me to wish you a fruitful discussion and an enjoyable visit to our country.