non - performing loans across the board. the irish experience in some ways, npl resolution is similar to endurance running. both require defining clear goals, ensuring the correct strategy and processes are in place, and effective preparation. however, plans and processes alone are not sufficient for success. achieving the required distance requires continued resolve over an extended period of time and developing endurance on the ‘ hard road ’. in ireland, our first step was to diagnose the scale of the problem, and ensure the deployment of appropriate resources commensurate with the challenge. an important milestone was the work conducted by the central bank of ireland during the financial measures programme ( fmp ), in particular the loan loss forecasting exercises and the stress tests conducted as part of prudential capital assessment review ( pcar ) in 2010 / 2011. more recently, similar exercises have been undertaken by the central bank of ireland, or jointly with the ecb, including the balance sheet assessment in 2013, the comprehensive assessment in 2014, and the imf fsap and eba stress tests in 2016. these types of exercises will continue to be a key component in our supervisory toolkit going forward. banks must have credible portfolio - specific resolution strategies and appropriate governance structures. these must be married with operational capabilities ( including distressed debt workout skills ), appropriate it infrastructure and decision analytics, and well - developed restructure types appropriate to the portfolios being restructured. in the following years, the central bank of ireland therefore changed emphasis to ensure these elements were adequate to deal with the rising level of npls. a major milestone in this regard in 2 / 6 bis central bankers'speeches 2012 was undertaking distressed credit operations reviews ( dcor ). the output of this was a benchmarking of actual operational capacity to execute npl strategies. supervisory follow - up in 2012 / 2013 monitored the effectiveness of banks ’ operations through regular on - site inspections. loan file reviews and interviews with bank staff were an important supervisory tool in understanding if a bank ’ s strategy was actually being implemented on the ground. deficiencies in both strategies and operations were required to be remediated. all of these steps were important preconditions for success. however, the willingness of institutions to resolve npls in a sustainable fashion can be lacking, on occasion. in my view, successful debt restructuring means sustainable debt restructuring. over - reliance on short - term forbearance such as interest - only arrangements and rising levels of mortgage arrears

while the stresses have abated, household and non - financial sector deleveraging strengthens the headwinds faced by some member states ’ banking sectors. 5 in this context, high levels of npls can constrain both credit growth and economic activity. 6 npls tie up bank capital and can restrict banks ’ ability to undertake new lending to the economy. banks also need to hold additional provisions against npls, which lower net income and can reduce profitability. in addition high levels of npls also cause uncertainty as to banks ’ actual financial position given the inherent judgemental nature of provisioning. this may create profit and loss volatility and vulnerability, as provisions are typically connected to the value of the underlying collateral which 1 / 6 bis central bankers'speeches can fluctuate. these factors can also contribute to higher cost of funding and negative or volatile investor sentiment. the capitalisation of banks across the euro area has increased considerably over recent years. however the structure of profit and loss accounts across banks is quite heterogeneous. for some banks, impairment charges continue to be a drag on profitability. coupled with continued pressure from the low interest rate environment, and squeezed lending margins, these dynamics can threaten long - term viability. therefore banks potentially need to adapt their business models to the changing environment and risks. 7 a fully functioning euro area banking sector is needed to support investment, growth, and employment. removing impediments to this critical economic function underpins the rationale for reducing npls and supervisory actions to accomplish this. moreover addressing this issue should also support the expansion of credit, in line with the objectives of monetary policy. given these challenges, high levels of npls require deliberate and sustained action. aggregate figures mask considerable heterogeneity across member states and across banks. in ireland, for example, in the corporate sector the overall npl rate has fallen to 13 per cent, the lowest rate since end - 2010. for some of the banks which hold these non - performing loans, there is substantial variation in npl rates within this category. the construction sector has by far the highest rate of npls with almost one half of all loans classified as non - performing. the hotel and restaurant sector also has a relatively high rate of npls at about 20 per cent. loans to the manufacturing sector have a relatively lower npl rate at 7 per cent. 8 therefore, a bank by bank, portfolio by portfolio strategy is needed to see a sustained reduction in