broadly offset the negative impact of low rates on net interest margins. against the backdrop of continued loan growth, net interest income increased by about 4 % in the first three quarters of 2019, compared with the same period in the previous year. but margins slightly tightened in 2019 as a whole and are expected to remain under pressure. in addition, increasing provisioning needs and persistently high costs will continue to weigh on banks ’ return on equity. structural factors are at the heart of weak bank profitability, however. euro area banks face challenges linked to the sector ’ s overcapacity, with two important implications for profitability. first, banks are not fully benefiting from economies of scale and are relying on overlapping physical distribution networks, leading to persistent cost inefficiencies. indeed, euro area banks ’ cost - to - income ratio – at 66 % in the 12 months to september 2019 – is high when compared 1 / 4 bis central bankers'speeches with their global peers. second, many banks have low market shares and face high competitive pressures which, in turn, have an impact on their pricing behaviour. on the positive side, banks have greatly improved the quality of their balance sheets and their resilience over the past few years. there has been a steady improvement in their asset quality : the ratio of non - performing loans more than halved over four years, reaching 3. 4 % in the third quarter of 2019. banks now hold significantly more and higher - quality regulatory capital than before the crisis, largely reflecting the impact of the new regulatory framework. significant banks ’ aggregate common equity tier 1 ratio, a key measure of capital strength, stood at 14. 4 % in the third quarter of 2019, up from 12. 7 % in mid - 2015. regulatory liquidity ratios are also at solid levels, with an aggregate liquidity coverage ratio of 145 %. furthermore, banks also made progress in building loss - absorbency capacity by issuing more debt instruments that can be bailed in. some market analysts think this has been facilitated by reduced risk aversion among fixed income investors who, unlike equity investors, are less concerned about the overall bank profitability outlook. but although banks have improved their capital positions in recent years, they hold only a small fraction of their capital requirements in the form of the countercyclical capital buffer, which authorities can release in the event of systemic stress to help avoid costly economic deleveraging. this suggests that the current composition of capital requirements may need to

be rebalanced to give the countercyclical capital buffer a more prominent role, without affecting the overall level of capital requirements. resilience is a key reason why bank profitability matters for financial stability. bank profits serve as a first line of defence against losses and are the main source of bank capital growth. but how can euro area banks return to sustainable profitability? i see room for banks to further diversify income sources and improve cost inefficiency. this would include investing in digital technologies, even if this would initially push up their costs. the prudential treatment of software assets in the capital framework should be consistent with fostering digital investment, and an alignment on both sides of the atlantic would be welcome to ensure a level playing field. in the light of the overcapacity in the banking system, efficiency gains can also be reaped through both domestic and cross - border mergers and acquisitions ( m & a ). in practice, incipient m & a activity has mainly taken the form of domestic mergers as cross - border consolidation poses more challenges. policymakers should remove obstacles to cross - border m & a and to pursue the completion of the banking union. opportunities and challenges for euro area non - bank financial institutions turning to the non - bank financial sector, its rapid growth since the global financial crisis is impressive : total assets doubled from €24 to €48 trillion between september 2009 and september 2019. euro area non - banks have also increased their share of credit to the real economy, especially through sizeable investments in bonds issued by euro area non - financial corporations. euro area investment funds, insurers and pension funds jointly hold half of these bonds, whereas euro area banks hold less than 10 %. from a financial stability point of view, the greater role played by non - banks can be perceived as clearly positive as it helps diversify the sources of financing provided to the real economy. moreover, life insurers and pension funds typically provide one of the most stable sources of long - term financing. they are well - placed to invest in infrastructure which can help in reducing asset - liability duration mismatches, for example. but, similar to banks, non - banks also face several challenges in the current environment, with profitability being one of the major concerns, especially for life insurers and pension funds. as 2 / 4 bis central bankers'speeches bond yields have fallen, they are holding a growing share of low - yielding bonds, which decreases