low in the 1970s, reached very high levels. by the end of 2003 for example, the domestic banks ’ assets amounted to over 277 % of gdp, compared with a euro area average of 273 %, while the ratio of domestic bank credit to gdp stood at 155 %, as against 143 % in the euro area. more significantly, spreads between short - term lending and deposit rates in malta, at 2. 41 percentage points in 2003, were even narrower than the euro area average of 3. 48 points. this suggests that the local banks compare favourably in terms of efficiency with banks elsewhere in the european union. furthermore, despite the global economic slowdown and the recent weak performance of the maltese economy, the profitability of banks in malta, as evidenced by the return on assets, has been fairly stable at around 0. 8 %. this compares with an average return of 0. 6 % recorded by european banks in 2001. at the same time, bank liquidity remains very high, with the domestic banks ’ holdings of liquid assets as a share of short - term liabilities, just under 50 % at the end of 2003, consistently exceeding the 30 % prudential requirement. maltese banks are also strongly capitalized. their aggregate capital adequacy ratio, defined as the ratio of own funds to risk - weighted assets, stood at 16. 7 %. on the other hand, the banks ’ loan portfolio still tends to be concentrated on a few sectors, reflecting the structure and small size of the maltese economy. furthermore, they still rely too heavily on property as collateral. in addition, the level of non - performing loans has been on the high side, and certainly higher than the eu average, even though it has recently started to decline. here i should perhaps point out that in malta we adopt a relatively conservative definition of non - performing loans. the expanded economic role of the banks has been accompanied by significant progress in creating an independent and effective regulatory framework in line with international standards. in 2002 the malta financial services centre was renamed the malta financial services authority, and took over from the central bank the responsibility for supervising the banks and the malta stock exchange to become the single supervisory and regulatory body. the division of responsibilities between the authority and the bank requires effective cooperation, and for this purpose a memorandum of understanding has been signed. at the same time, the central bank was given formal independence in the conduct of monetary policy, in overseeing payment systems and in safeguarding the overall stability of the financial

system. the bank uses a number of approaches to identify possible threats to the system. it analyses data from prudential returns submitted by the banks and other financial institutions. this, coupled with further analysis of the corporate sector in terms of leverage, profitability and liquidity, complements the monitoring of credit risk within the banking system. stress testing is also carried out in order to identify potential losses resulting from abnormal market conditions. this is applied both to the banks ’ loan portfolio and to market risks arising from their foreign currency, interest rate, liquidity, equity and commodity risk exposures. finally, a financial intelligence analysis unit was established, thus completing the institutional framework for strengthening the anti - money laundering regime and for combating the financing of terrorism. it is worth noting here that both the 1994 and the 2002 financial reforms were unanimously approved by malta ’ s parliament - a rare event, and one that should inspire investor confidence. a further important development in malta ’ s efforts to establish itself as a reputable financial centre occurred in late 2002 when malta requested the imf / world bank to conduct a financial sector assessment programme ( fsap ). the assessment, which was published in august 2003, noted that malta ’ s financial system appeared to be healthy and well supervised, and that its domestic banks were profitable, liquid and well capitalised. moreover, it had a comprehensive legal framework and adhered strongly to most international standards and codes. at the same time, the report noted that, mainly because of the predominance of two large banks, the system was highly concentrated and exposed to the country ’ s narrow economic base. among the more recent developments on the banking scene has been the introduction of a number of innovative products and delivery channels, such as equity - linked deposits and mobile and internet banking. on the legislative front, a major development has been the introduction of a depositor compensation scheme. malta has also adopted the european directive of 4th april 2001 on the reorganisation and winding up of credit institutions and their branches in member states, which should facilitate the harmonisation of any eventual measures that may have to be taken in this regard. in compliance with eu legislation on the promotion of international payments, the central bank has meanwhile brought into force the directive on cross - border credit transfers. another directive, on electronic payments services, which seeks to ensure a high level of consumer protection in the field of electronic payment instruments, came into force on may 1st this year. looking forward, we believe that malta ’ s