just over 25 percent, well above the statutory minimum requirement of 8 percent and among the highest in the latin american and caribbean region. credit quality improved in 2012, as banks took aggressive steps to restructure and write - off non - performing credit facilities, especially in the luxury real estate sector. one commercial bank also sold a significant portion of a large non - performing facility to its merchant bank subsidiary. some banks also allocated larger provisions to absorb potential losses, particularly on identified impaired loans. as a result, banks ’ non - performing loans declined to around 5. 5 percent of gross loans in september 2012, from around 7. 5 percent in september 2011. bis central bankers ’ speeches the low interest rate environment eroded commercial banks ’ interest income, resulting in the banks continuing to lower deposit rates to counteract the impact on profitability. in addition, banks benefited from a significant increase in dividend income, which assisted in bolstering profitability. in 2012, commercial banks ’ profitability ratios were, on average, slightly higher than in previous years. at the end of september 2012, the return on assets increased to 2. 5 percent from 2. 3 percent in september 2011. the return on equity ratio rose to just over 17. 5 percent from around 17 percent over the same period. while the direct exposure of local banks to foreign markets is low in relation to their asset base, continuing economic stress in a few countries calls for on - going monitoring and vigilance. total foreign country exposure increased to nearly one - third of foreign currency assets at the end of september 2012, from just over 26 percent in september 2011. the largest foreign exposure of local banks was to the united states, most of which is in the form of us treasury bills. the second largest exposure was to caricom, especially barbados. local banks, however, have very little direct foreign exposure to the distressed euro area. the most recent stress tests conducted by the central bank confirm that the banking system remains resilient to significant shocks, supported by ample capital buffers, conservative provisioning, and high profitability. system vulnerability to large shocks to interest rates, exchange rates and even a deposit run appears limited. nonetheless, some banks exhibited greater vulnerability than others to specific shocks, warranting the need to pay greater attention to their specific risk profiles. non - bank financial institutions the non - bank sector, which comprises finance houses, trust and mortgage finance companies and merchant banks, has been affected more severely than commercial banks by the

, so far, the turmoil has been largely in the investment banks : bear stearns, lehman bros, and merrill lynch ; with some ripples in goldman sachs and morgan stanley. our us bond holdings have benefitted from the increase in prices consequent on the flight to quality, which has been the main reaction to the market meltdown. our limited exposure to fannie mae and freddie mac bonds ( some 6 per cent of our total reserves ) could have resulted in some losses. however, the us government take - over of these institutions has reduced, if not eliminated, the risk of this exposure. lehman bros, as one of our external managers managed about 6 per cent of the total portfolio. the bulk of these resources was invested in treasury securities of g7 countries, and as such faced very low risk. a very small amount ( us $ 85 million ) was invested in a mutual fund sponsored directly by lehman bros. we were able to liquidate this asset at no loss. the bulk of our asset - backed securities were issued by merrill lynch. the take - over of this institution by the bank of america eliminates or reduces the risk attached to this asset. but ladies and gentlemen, if we had any doubts, the current turmoil in international financial markets should remind us that no institution is totally immune from possible contagion, regardless of what the rating agencies may say. as you may know, not too long before bear stearns was declared insolvent it was rated bbb ; lehman bros was rated ( a + ) and merrill lynch ( a + ) : they were all considered investment grade. before selecting lehman bros as an external manager, we went through a rigorous selection process that not only included examination of past performance of funds managed and lehman ’ s ability to deliver superior returns, we also conducted a thorough examination of lehman ’ s financials. but as happened many years ago, with the dot - com crash, investor sentiment can change very quickly and sharp declines in stock prices can quickly erode the capital of even the strongest banks, producing the dire consequences that have attended three of the world ’ s five largest investment banks. since lehman ’ s and merrill lynch ’ s difficulties, the bank has carefully reexamined the financial status of all our counterparties as well as our investment managers to ensure that none of these are on any watch - list. we have also taken the decision to introduce two new elements to our investment strategy. first, until financial markets have been stabilized, mat