Recapitalisation of the banking sector
The Central Bank of Cyprus announces that significant progress has been made with the Financial Sector Reform Programme at the conclusion of the three week mission of the international lenders today. The programme was designed to restore the solvency and viability of the banking sector, to ensure it is resilient, restore depositor and market confidence and ultimately enhance the sector’s capacity to contribute to economic growth
The Cypriot authorities have already started to implement a comprehensive action plan to ensure that banks are well capitalised and viable. The regulation and supervision of the banking sector is being strengthened, thus restoring depositor confidence and enhancing the sector’s capacity to contribute to economic growth.
Serious losses have been suffered in the recent past by domestic financial institutions, due to overexpansion domestically and abroad, without adequate risk management oversight, overexposure to Greek government bonds and excessive lending practices. Imbalances in the Cypriot financial system were also allowed to build up and are now being corrected.
The broad policy actions designed by the authorities, which are described below, should dispel any doubts about the resilience and credibility of the Cypriot financial sector.
Recapitalisation of the banking sector
All banks, including cooperative credit institutions, have to maintain a capital ratio of 9% by end of 2013, as a condition of the reform programme.
The entire financial sector will meet its required capitalisation level by the end of 2013, either from private sources or from state aid with programme money already reserved as part of the Troika programme. Out of the €10 billion financial assistance to Cyprus, €2.5 billion has been allocated for the recapitalisation of the cooperative credit institutions (€1.5 billion), the other commercial banks and for unexpected setbacks which may emerge in the financial sector.
There will be no depositor bail-in beyond the one already completed at Bank of Cyprus and Laiki Bank. All other recapitalisations will be achieved through private means or through money reserved from the programme.
Bank of Cyprus (“BoC”) and Laiki Bank (“Laiki”)
BoC and Laiki were in need of sizeable capital injections to reach the minimum capital adequacy due to large losses incurred on their Greek operations as well as on their domestic loan books. Since the capital needs of the two banks were very large, their recapitalisation through taxpayers’ money was not feasible because it would have made Cypriot debt unsustainable. As such, the two banks were put into resolution. The resolution measures have been designed to protect insured deposits in line with the EU framework.
BoC was adequately capitalised through the full contribution of the shareholders and bondholders of the bank and through the partial conversion of uninsured deposits into equity.
Insured depositors of Laiki Bank, together with certain assets and liabilities, were transferred to BoC. The uninsured depositors of Laiki will participate in the liquidation proceeds of Laiki assets which include remaining overseas operations and the BoC shares received by Laiki as compensation for the transfer of certain assets and liabilities to BoC.
The bail-in of both banks has now been fully completed and the new emerged entity is well capitalised to a level which can sustain possible future losses on its loan portfolio.
Hellenic Bank
Hellenic Bank, as already announced by the bank itself, aims to raise private capital in order to meet the capital requirements set under the programme by the end of September 2013. If the private sector funding does not cover in full the required capital increase, state aid will be injected in the bank through programme money. The state aid rules will apply which, inter alia, entail the mandatory conversion or writing down of subordinated debt. State aid, which is available from available programme money, will not be granted before equity, hybrid capital and subordinated debt have fully contributed to offset any capital shortfall.
Cooperative credit sector
Recapitalisation of the cooperative credit sector will occur through the programme. To this end, €1.5 billion of programme money has been reserved. The strategy for the cooperative credit sector has been agreed and in order to restore the sector to viability and profitability, several CCIs will be merged with the current number of CCIs thus the total will be reduced to 18.
Regulation and supervision
Regulation and supervision will be strengthened to ensure a more credible, robust and resilient financial sector. The main steps undertaken in this area are:
Supervision of the cooperative credit sector
Cooperative credit institutions, which up to now were not subject to the supervision by the CBC, will be as from the end July of 2013 supervised by the CBC to ensure that common rules, regulations and supervision are applied throughout all credit institutions.
To ensure that the cooperative credit sector is viable with proper governance structures, the CBC in cooperation with the Cooperative Central Bank devised a strategy for the reform of the sector involving mergers and restructurings, which is expected to result in 18 financially sound Cooperative Credit Institutions (“CCIs”). Thus, viable institutions with proper governance structures are created.
Indebtedness and loan restructurings
To better assess the credit worthiness of borrowers and therefore to enable better pricing of loans in accordance with the entire indebtedness of borrowers, the authorities will set-up a central credit register by end of September 2014.
To strengthen the credit institutions’ ability to withstand shocks, the CBC will review the current regulatory framework with respect to the entire loan process, including approval and provisioning to identify any gaps and address them accordingly.
Given the criticism about the governance structures that existed until very recently, the CBC will introduce tighter rules on the composition of the boards of credit institutions and on lending to board members, to ensure a more transparent and effective corporate governance.
The authorities will also introduce a framework to be adopted by credit institutions when dealing with troubled borrowers.
Financial transparency
The economic importance of Cyprus’ financial centre should not allow for the development of any credibility concerns. Therefore, to further enhance credibility, Cyprus has undergone an independent audit by Moneyval and Deloitte’s which was finalised in early May 2013. The recommendations of the independent audit will be implemented as part of a comprehensive action plan.
Furthermore, trust registers will be established and a third-party assessment of the functioning of the Registrar of Companies will be launched. Cooperation with foreign intelligence units will be further strengthened.
Restrictive measures
The imposition of restrictive measures on transactions was a necessity, given that the banking system underwent a deposit bail-in and a severe blow to depositor confidence. Although the restrictive measures initially hampered economic activity, they have been notably relaxed since they were initially imposed. Efforts have been and continue to be made in order to limit their duration and scope to the minimum extent necessary. A further gradual relaxation of the restrictive measures until they are lifted remains a top priority for the authorities. The authorities are looking for ways to end them as soon as conditions allow and have agreed with the Troika a roadmap of milestones to relax the measures with the Troika.