enough to trigger credit restructuring events. 2 in particular, the paper found that several countries in the region had debt levels above the limits of what could be deemed “ tolerable ”. the authors also provided evidence of how countries – in latin america and elsewhere – have historically used deleveraging to regain a sustainable path for their external debt. their conclusion is clear : “ for debt - intolerant countries, sustaining access to capital markets can be problematic unless debt ratios are quickly brought down to safer levels. to assess how such ‘ deleveraging ’ might be accomplished, we examine how, historically, emerging market economies with substantial external debts have managed to work them down. to our knowledge, this is a phenomenon that has previously received very little, if any, attention. we analyze episodes of large debt reversals, where countries ’ external debt fell by more than 25 percentage points of gnp over a three - year period. of the twenty - two such reversals that we identify for a broad group of middle - income countries since 1970, two - thirds involved some form of default or restructuring. only in one case – swaziland in 1985 – was a country sources : world bank, moody ’ s and imf ( weo, april 2012 ). reinhart, c., m. savastano and k. rogoff, ( 2003 ), “ debt intolerance ”, brookings papers on economic activity 1. bis central bankers ’ speeches able to bring down a high ratio of external debt to gnp solely as a result of rapid output growth. ” thus, in the early 2000s, there were widespread expectations that a default would occur. overall, the history of latin america in the 2000s did not go as expected. during the first decade of the twenty - first century, latin american countries succeeded in lowering their levels of external debt by nearly 20 percent of gdp. the current - account balance, which had exhibited a secular deficit during the 1980s and 1990s, posted a surplus of nearly 2 % of gdp during the 2000s. a review of the fiscal ledgers yields similar numbers. what happened? what was the miracle? in a word : china. china ’ s strong growth began to permeate international commodity markets early in the decade, leading to an enormous increase in the region ’ s terms of trade beginning around 2004. this major increase in income enabled the economies to deleverage without having to make large adjustments to expenditure or output. also, the real exchange rate appreciated

cyprus amongst the most liquid banking sectors in the union, where the average lcr amounts to 175 %. at the european level, including cyprus of course, the banking sector faces a number of challenges. the profitability prospects of banking both in cyprus as well as across the eu remain challenging. but why is profitability an area of interest for regulators? a sustainably profitable banking sector is necessary to build buffers to absorb unexpected losses, like the ones we have seen recently due to the pandemic. it also enhances further the ability to provide viable lending to businesses and households alike, contributing to the efficient functioning of the real economy. 1 / 5 bis - central bankers'speeches under this light, banks'profitability is high on the agenda from a regulatory perspective. the level of return on equity of european banks is shy on their cost of capital and below the respective level of other jurisdictions, like banks in the united states. a low return on equity compared to the cost of capital is a european structural issue and raises the need for formulating appropriate action plans, both by regulators and banks alike. if we want these actions to have an impact, we must first understand the factors that drive this weak performance. overcapacity of the banking sector is a dominant factor. according to most indicators there are too many banks in europe relative to the size of the market. this implies that there is significant scope to benefit from consolidation without exacerbating the problem of " too big to fail " through the creation of mega banks. moreover, the banking union which has ended a prolonged supervisory divergence enhances the capability of reaping these benefits in a more efficient manner. credit risk is inherent in banking and is considered a major challenge for the european banking sector. for countries that have a high level of legacy non - performing loans like cyprus, this risk requires particular attention, despite the tangible improvement achieved in the last years. a weaker than expected economic environment may result in deterioration of asset quality. it is therefore important for our banks to continue the enhancement of the quality of the asset side of their balance sheets, bridging the gap with our european peers. european banks are also facing emerging risks beyond the traditional business model risks i just mentioned. i will focus on the three i consider as the most prominent ones. the first one is the exposure to climate - related and environmental risks, which will be one of the main concerns for both supervisors and banks in the years to come. the transition to