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
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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.
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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.
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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).
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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.
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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
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markets.
Thank you for your attention
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