Reuters reports that according to fresh data from European Central Bank, bad loans at euro zone banks fell to a new low in the last quarter of 2020.

The ratio of non-performing loans at banks supervised by the ECB fell to 2.63%, the lowest level since the start of supervision in 2015, despite a deep and scarring recession that will likely weigh on the economy for years to come.

Banks have managed to improve their loan books thanks to abundant government guarantee and credit schemes that are keeping the corporate sector afloat, even as large swathes of the services has been kept mothballed for the past year due to lockdown measures.

But reality is bound to catch up with banks, the ECB has warned, arguing that some lenders are unprepared and have insufficient warning systems in place.

Still, banks have ample capacity to absorb a rise in soured credit as their combined common equity tier 1 (CET1) ratio rose to 15.62%, also the highest since the start of supervision.