##ncies. banks are not fully benefiting from economies of scale and are relying on overlapping physical distribution networks. as a result, their cost - toincome ratios – currently at 66 % – are high when compared with those of their peers in the united states and the nordic countries. so, how can euro area banks return to sustainable profitability? and how can they make more decisive progress in tackling structural challenges and cost inefficiencies? let me mention two avenues which would support an increase in bank profitability. first, there is room for banks to adjust their business models. in fact, ecb analysis has found that the best performing banks have diversified their income sources, improved their cost efficiency and invested in digital technologies to a greater extent than their peers. 1 second, consolidation via mergers and acquisitions may allow banks to exploit economies of 1 / 3 bis central bankers'speeches scale and scope, which should bring about improved performance. cross - border mergers, while less likely to produce cost savings or economies of scale, would have an additional benefit of improved risk diversification and would thus result in more resilient profitability. to this end, policy - makers may need to remove obstacles to cross - border mergers and acquisitions, promote further integration and pursue the banking union agenda. it is also worth recalling the good news. banks have noticeably improved their resilience over the past few years. this largely reflects the new regulatory framework. they now need to hold more and higher - quality regulatory capital and they must maintain liquidity buffers. they also need to finance themselves through stable funding sources. and they have to plan for their potential resolution and issue debt instruments that can be bailed in. while these adjustments can be challenging in the short term, in the long term they increase the banking sector ’ s resilience to adverse shocks, reducing the likelihood of costly financial crises. in fact, the euro area banking system already complies with the new requirements for high - quality capital and liquidity buffers. but even though banks have improved their capital positions in recent years, only a small fraction of bank capital requirements are in the form of the countercyclical capital buffer ( ccyb ), 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 ccyb a more prominent role. opportunities and challenges for euro area non - bank financial

institutions i will now turn to the euro area non - bank financial sector, which has grown rapidly since the global financial crisis. its total assets have almost doubled over the last ten years, growing from €23 trillion in 2008 to almost €46 trillion in june 2019. euro area non - banks are playing an increasingly important role in financing the euro area economy, especially through their sizeable investments in bonds issued by euro area nonfinancial corporations. euro area investment funds, insurers and pension funds jointly hold half of these bonds, as opposed to 7 % held by euro area banks. the greater role of non - banks can be positive from a financial stability perspective 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. but, similar to banks, non - banks also face several challenges in the current environment, with profitability being one of the major concerns. as bond yields have fallen, non - bank financial intermediaries are holding a growing share of low - yielding bonds, which decreases their investment income in the medium term. many non - banks tend to compensate this by searching for yield in riskier, more illiquid and higher duration assets. this can be a welcome and intended outcome of monetary policy accommodation as it may help to ease financing conditions for non - financial corporations. but this trend also has a flip side, it contributes to rising risks and vulnerabilities in non - banks ’ balance sheets. liquidity risk is a particular source of concern, as illiquid funds can face severe difficulties in dealing with large - scale outflows. over the past one and a half years there have been several cases of ucits funds under such stress. all these funds had large liquidity mismatches on their balance sheets as they invested in illiquid assets but offered daily redemptions. another source of concern is the elevated exposure of non - banks to highly indebted segments of the corporate sector. excessive risk - taking may adversely affect the ability of non - banks to absorb shocks, especially if economic conditions deteriorate. moreover, downgrades of corporates to sub - investment grade ratings may force non - banks to sell assets to fulfil their investment mandates. this could amplify price movements in credit markets in times of low 2 / 3 bis central bankers'speeches market liquidity. it could also generate spill -