Cypriot banks need to apply "additional and persistent" efforts to wrestle down a stockpile of non-performing loans (NPLs), ECB's Daniele Nouy said in an interview published on Monday.
Nouy, who heads banking supervision at the European Central Bank, said there had been uneven progress across banks on handling the problem.
"Notwithstanding some progress in NPL resolution, the very high level of NPLs remains a key vulnerability of the Cypriot economy and banking system, and weighs on the ability of banks to carry out their credit intermediation function.
"It is, therefore, essential that NPL resolution be accelerated," Nouy said in an interview with the semi-official Cyprus News Agency.
Toxic loans account for more than 40 percent of the total loan book in the Cypriot banking sector, among the highest in the European Union. The country required an international bailout in 2013.
Recent proposals by the ECB on how to tackle future soured loans has triggered disagreement in the bloc, particularly from countries whose banks are already sitting on mountains of toxic debt.
The ECB, she said, had put into place a "rigorous framework" for all banks it supervised.
"With the addendum on quantitative expectations for newly classified NPLs, which is currently under public consultation, we are reinforcing this framework even further," she said.
"Work is still in progress regarding the best way to deal with the stock of NPLs," Nouy said.
In Cyprus, an effective foreclosure framework was needed to deter strategic defaulters and encourage other lenders to engage in voluntary debt restructuring agreements with the banks.
An important measure to step up the use of the foreclosure framework would be a reform of the justice system to cut down on the time required in dealing with legal claims, she said.
Asked whether a system of electronic auctions could be introduced as in the case of Greece, Nouy said because it was not operational yet, it was early to draw conclusions from it.
"Experience shows that the longer it takes to deal with high NPL levels, the higher the cost is in terms of losses for financial institutions," Nouy said.