Keynote speech by Mrs Chrystalla Georghadji, Governor of Central Bank of Cyprus, at the 10th Economist Cyprus Summit
Nicosia, 4 November 2014
Introduction
Honourable President, Ladies and Gentlemen, good morning.
It is my pleasure to address before such a distinguished audience the summit organised by The Economist here in Cyprus. I would like to thank the organisers for their kind invitation and for giving me the opportunity to share our experiences of what has been a challenging and unprecedented period for our banking system, but also to reaffirm our determination to fully restore confidence and financial stability.
Today’s conference happily coincides with the launching of the Single Supervisory Mechanism (SSM): A European organ aiming (i) to ensure the safety and soundness of the European banking system and (ii) to increase financial integration and stability in Europe.
The SSM is undoubtedly one of the most important steps in strengthening the Economic and Monetary Union. Indeed, it is the first established part of the EU banking union and it is to function in conjunction to the Single Resolution Mechanism. In the SSM the ultimate responsibility for specific supervisory tasks related to the financial stability of all euro area banks will henceforth lie with the European Central Bank, but national supervisors will continue to play an important role in day-to-day supervision and in preparing and implementing ECB decisions. The Central Bank of Cyprus as the national supervisor in Cyprus is well‑prepared to take on this role.
Developments in 2013 and 2014
It is known, during 2013 our banking sector faced its most challenging period to date. As a result of a sequence of events, including a sustained period in previous years of overexpansion in the real estate market and a very risky strategy of investing in high-yielding Greek government bonds, several Cypriot banks were left with significant imbalances.
In the past 20 months, a series of corrective measures have been put into place to ensure that after the severe shocks and restructuring of the banking sector in March 2013, the foundations have been laid for the sector to be rebuilt on sound principles.
In the spring of 2013, Cyprus embarked on an economic adjustment programme aimed at: (i) restoring the health of the financial sector; (ii) continuing the on-going process of fiscal consolidation; and (iii) implementing appropriate structural reforms in order to support competitiveness and return the island to a path of sustainable and balanced growth.
In the banking sector, an assessment was made of the immediate priorities and shortcomings, and as a result a number of goals and milestones were set. Significant progress has been made. This includes recapitalising and restructuring the systemic credit institutions as well as strengthening the banking regulatory and supervisory regime. The largest credit institutions are proceeding with the implementation of their restructuring plans, while corporate governance practices have improved and will continue doing so.
A significant milestone was achieved recently when Cyprus’s four major banks participated in the EU-wide comprehensive assessment conducted jointly by the European Banking Authority and the European Central Bank in the context of the preparation for today’s launch of the SSM. One hundred and thirty banks across Europe were subjected to stress tests which were conducted at the end of an asset quality review (AQR). The AQR thoroughly reviewed and assessed the banks’ balance sheets to establish weaknesses and existing capital deficiencies. The stress tests that followed the AQR were intended to establish whether, using a baseline and an adverse scenario, additional capital needs would arise over a three year horizon.
The methodology of the stress tests applied to the four banks incorporated in Cyprus was the same as that used for all the other 126 banks throughout the Eurozone, including large banks in Italy, France and Germany. Our banks, together with staff at the Central Bank of Cyprus, worked relentlessly from the start of this year on the stress tests and the results were released last week.
The starting reference date to which the series of stress scenarios were applied was 31 December 2013. This was at the end of the most turbulent period in Cyprus’s banking history. Thus the stress tests were an additional challenge for our banks, at a very difficult time.
The Bank of Cyprus, which recently underwent a €1 billion capital increase, successfully passed the tests and will not require any additional capital. With new strategic and respectable investors the bank will soon have a new Board of Directors and is proceeding with the implementation of its restructuring plans.
Hellenic Bank, which did not receive any programme money and was recapitalised privately, enjoys the support of its three major shareholders. The results of the comprehensive assessment exercise have shown that the bank, under the adverse scenario, will require additional capital of €105 million. Prior to the comprehensive assessment, Hellenic’s new shareholders had already announced that they would inject further capital to cover any expected shortfalls, to ensure that the bank can proceed smoothly with the implementation of its business plans.
RCB Bank, formerly the Russian Commercial Bank of Cyprus, remains and is expected to remain well above the required thresholds. Nevertheless it is also further enhancing its shareholding with the participation of a new strategic investor, which is expected to lead to further opportunities for the bank.
Finally, the Cooperative Central Bank, which was fully recapitalised with €1.5 billion from the Cyprus programme, also successfully passed the stress tests and will not require any of the additional €1 billion buffer available in the programme. The cooperative movement has undergone major reforms in the past 12 months and is expected to continue its key role of serving various communities on the island.
The banking sector has certainly had its challenges, and criticisms and mistakes have been made. It is pleasing, however, to see the sector come out of this difficult juncture in a strong and healthier condition. Through the series of actions that have been taken since March 2013, the banks have been restructured and recapitalised. They are refocusing on their core banking activities with a prudent risk-based approach to lending and investing.
With the successful completion of the comprehensive assessment exercise, a major burden has been lifted off the banking sector's shoulders that will allow it to concentrate on day to day operations as well as strengthen its capital base. The future of the sector looks promising and bright, and is well placed to play a leading role in Cyprus' full economic recovery. Healthy and well capitalised banks will be in a good position to provide lending to SMEs, the backbone of our economy.
A further highlight is the level of foreign investment that has been drawn to our banking sector. Foreign investors helped Hellenic Bank to recapitalise thus allowing the bank to avoid the need for state support. More recently, other foreign reputable investors have recapitalised the Bank of Cyprus to the tune of €1 billion.
These capital injections constitute some of the largest foreign investments seen in the history of our economy. This is a strong indication and a firm confirmation of the confidence the international community is showing in our banking sector, and a recognition that the sacrifices and recent restructuring work are beginning to bear fruit.
What is now required is for domestic stakeholders to also demonstrate the same belief and commitment thus creating a ripple effect throughout the economy. With the above in mind, it is important that a solution to the foreclosure bill can be found as soon as possible so that the considerable work completed under the programme with our international lenders is not derailed.
It is my firm belief that, it is not the intention of Cypriot banks to target vulnerable families, young couples and households whose circumstances have changed due to the crisis. The enactment of the foreclosure bill is, however, a necessary tool so that those who are able but unwilling to repay their debts, face the consequences should they continue to strategically default on their obligations.
Every household and business, small or large, has a role to play in our economy’s recovery. I want to take this opportunity to call on large corporate businesses to use some of the surplus funds generated in the recent boom years, to meet their repayments and cooperate with their lenders in restructuring their debts. This will allow the banks to free up capital for further lending in the economy, something that will undoubtedly be to the benefit of all.
The Central Bank’s focus will now turn to ensuring that the restructuring of loans is achieved in a viable and reasonable manner, and to reducing interest rates for the benefit of households and businesses.
Concluding remarks
While recent developments have demonstrated that our banks are slowly returning to a sound and strong position, important work still lies ahead. It is important that our banks continue to take positive steps and not engage in unnecessary risky activities or return to the old lending practices. The results for the four Cypriot incorporated banks which participated in the EU-wide comprehensive assessmnent, demonstrate that a turning point has been successfully achieved and the outlook for the Cypriot banking system is again very positive.
The evolution of the banking union with the adoption, as of today, of the SSM, the development of the regulatory and reporting frameworks as well as the increasing scrutiny of the banks’ capital ratios, puts the onus on banks to continue improving in all areas.
Following an intensive period of structural reforms, we in Cyprus have embarked on a committed path towards financial stability and economic recovery. With a strong infrastructure, expertise in financial services, a strong legal and regulatory framework as well as a strategic geographical position, EU membership and a wide network of double tax treaties, Cyprus is and will continue to be an attractive financial centre.
The Central Bank remains fully committed to the implementation of the programme agreed with our international partners and in re-establishing a thriving banking sector within a prudent and modernised governance framework.
In closing, I would like to reiterate the Central Bank’s and my personal commitment that we will continue to work to complete the mission of fully stabilising the banking sector and the economy, and to emerge even stronger from the recent crisis.
Thank you.