The Banking Sector in Cyprus Christina Antoniou Pierides Senior Officer Banking and Finance in Small States – Malta, Commonwealth April 2012
1.
Composition of Cyprus Banking Sector
2.
Regulatory Attributes of the Banking Sector of Cyprus
3.
Challenges faced by Banks
4.
Measures taken by the Banking Sector
5.
Actions by Regulatory / Supervisory Authorities / Government
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1. Composition of Cyprus Banking Sector A) Banks that operate in Cyprus Domestic Banks: Foreign Banks: Subsidiaries from EU countries Branches from EU countries Subsidiaries from non EU countries Branches from non EU countries Representative Offices Total
6 35 5 11 3 16 2 43
(April 2012)
Supervised by the Central Bank of Cyprus B) Co-Operative Credit Institutions Around 100 Co-ops. Offer similar products and services as banks. Supervised by the Authority for the Supervision and Development of Cooperative Credit Societies (ASDCCS). The Central Co-operative Bank and affiliated CCIs are also subject to consolidated supervision by the Central 3 Bank of Cyprus.
1. Composition of Cyprus Banking Sector C) Regular Members of the Association of Cyprus Banks Bank of Cyprus Public Company Ltd Cyprus Popular Bank Public Co Ltd Hellenic Bank Public Company Ltd Alpha Bank Cyprus Ltd National Bank of Greece (Cyprus) Ltd Emporiki Bank – Cyprus Ltd USB Bank PLC CDBBANK Societe Generale Bank – Cyprus Limited Piraeus Bank (Cyprus) Ltd Russian Commercial Bank (Cyprus) Ltd Eurobank EFG Cyprus Ltd D) Associate Members JSC “Trasta Komercbanka” Cyprus Branch Association of International Banks
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1. Composition of Cyprus Banking Sector E) Wide distribution of ownership Small investors / employees Enterprises Provident funds / Insurance funds Religious Institutions F) Shareholders of 3 major banks Bank of Cyprus ≈ 85,000 shareholders Laiki Bank Group ≈ 94,000 shareholders Hellenic Bank ≈ 26,000 shareholders Market capitalization of banks is around 60% of total market capitalization
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2. Regulatory Attributes of the Banking Sector of Cyprus A) Banks in Cyprus apply the EU Banking Directives and follow the Recommendations of the Basel Committee B) Highly regulated banks under the strong and robust supervision of the Central Bank of Cyprus – [vigilant supervision according to IMF (Feb 2011)] C) Strict Liquidity Requirements 20% of euro deposits must be held in liquid assets 70% of foreign currency deposits must be held in liquid assets Banks are required to undertake on a regular basis liquidity stress test D) Other characteristics of the banking sector: Close attention to capital buffers Loans/Deposit ratio < 1 Avoided the sub-prime loan crisis E) However, currently the banking sector faces significant challenges
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3. Challenges faced by banks A B C D E F G
Conflicting goals of supervisors / regulators / governments Haircut on Greek sovereign bonds Higher capital adequacy requirements Downgrades by credit rating agencies Worsening economic conditions in Greece and Cyprus Liquidity pressure – high interest rates New regulations: Financial Transactions Tax
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3A. Conflicting goals of supervisors / regulators / governments for banks & economy Strengthe n capital base
Lending
Greek Haircut
to govern ments
More taxes Lending to
Growth
businesses & households 8
3Β. Haircut on Greek Sovereign Bonds Before the haircut: Regulatory framework encouraged investment in sovereign bonds (capital adequacy rules, borrowing from ECB). After the haircut: Strong disincentive for bank lending to governments. Blow to investor confidence – sovereign bonds no longer considered “risk-free investments”. Fiscal deterioration: member states borrow at higher interest rates due to higher perceived risk. 9
3C. Higher capital adequacy requirements Basle 3 and EBA regulations: The banks will have to implement immediately the capital adequacy rules for a Tier 1 capital ratio of 9% (until 3 years ago this ratio was 4%). Capital adequacy ratio =
Tier 1 capital Assets (loans etc)
This requirement conflicts with the aim of increasing bank finance to enterprises / households (deleveraging). The new (higher) capital requirements are hindered by the haircut of Greek sovereign bonds and by the increased bank taxes. 10
3D. Downgrades by credit rating agencies Reasons for downgrade of Cyprus economy: Structural problems of the public sector (COLA, retirement pay, pay scales) Increase in fiscal deficit and public debt Size of banking sector in relation to GDP and risks from Greece Cyprus sovereign and Cypriot banks lost access to international capital markets. Increases in borrowing costs. Risk of deposits leaving country. Problems with counter-parties (guarantees, letters of credit). 11
3E. Worsening economic conditions in Cyprus & Greece Enterprises have lower revenues, increases in unemployment and bankruptcies. Lack of liquidity in the market, delays in payments. Increase in non-performing loans.
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3F. Liquidity pressure – high interest rates Credit rating of Cyprus: lack of access to international capital markets (for sovereign and banks), banks rely on domestic depositors for raising liquidity. Credit rating of Greece, liquidity needs of Greek banking sector. Cost of raising deposits, competitive conditions, strategy of each bank. Inflation rate: Jan – Dec 11 Cyprus: 3.5%, Eurozone: 2.8%. Recession, increased credit risk => higher non performing loans => higher provisions => need for more capital => higher cost of capital. Higher capital requirements: increases costs for banks which must keep higher levels of capital for a given level of operations.
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3G. New regulations: Financial Transactions Tax - FTT Political pressure from France – Germany for a Financial Transactions Tax. Proposed tax of 0.1% on all transactions of shares & bonds and 0.01% on derivatives. Aim: banks to contribute towards the financial crisis as they are considered responsible. Part of the proceeds will cover the European Union budget. Implementation of FTT would hurt especially the countries that are financial centers. In Cyprus, a possible implementation would cause a lot of banking transactions to stop or to leave the country – lower profitability, flight of deposits. Serious implications for investment companies, many of which will close. 14
4. Measures taken by the Banking Sector Traditional mainstream banking model (deposit taking & loan granting) Capital plan to meet EBA requirements: Recapitalization plans; raising fresh capital Sale of assets (ie foreign subsidiaries) Deleveraging / Asset optimisation Retained profits New collective agreement with the Union of Bank Employees Freeze on wages and COLA for 2012-13 Permanent reduction of the cost of retirement benefit (from defined benefit to defined contribution scheme) Restructuring of bank network Renegotiation of procurement and rental contracts
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5. Actions taken by Regulatory /Supervisory Authorities / Government More strict and rigorous supervision – new directive on capital adequacy Law for the management of financial crises enacted on Dec 2011 Law for the establishment of an Independent Financial Stability Fund Dec 2011 Special tax for financial institutions (2011-2012). €50 mn out of € 120 mn to be transferred to Stability Fund by 2013. Macroeconomic stability, fiscal consolidation – actions taken by government: Freeze on wages and freeze on COLA Contributions to pension scheme by public sector employees VAT increase Income tax increase, etc Aim to attain balanced or surplus budgets, and to enhance reliability so as to improve credit rating and regain access to international capital 16 markets.
