Statement by Chrystalla Georghadji, Governor of the Central Bank of Cyprus, made to journalists at the Central Bank of Cyprus
26 October 2014
Dear journalists and colleagues,
Welcome to the press briefing on the results of the stress tests performed on the four systemic Cypriot banks from among 130 banks in the euro area. The four banks in question are Bank of Cyprus, Cooperative Central Bank, Hellenic Bank and RCB.
First of all, I wish to thank everyone who worked on this long, arduous and very successful mission for their dedication, professionalism, diligence and great sense of responsibility.
Today is a very important day for our country and, in particular, for our banking system. It is a new beginning with great expectations for the future.
On 4 November 2014, an ambitious European project will be implemented: the Single Supervisory Mechanism (SSM) which, initially, will have the 130 most significant banks of the euro area under its direct control and will also be indirectly controlling another 6,000 banks. Prior to launching the SSM, the ECB had decided to carry out a comprehensive assessment, in collaboration with the national supervisory authorities, of the balance sheets and solvency of banks to ensure that the banks to be placed under direct ECB supervision are healthy, with adequate capital and able to withstand extremely adverse macroeconomic developments.
The comprehensive assessment consisted of two main phases:
1) an asset quality review (AQR); and
2) the stress test exercise.
The comprehensive assessment, which was part of the preparation by significant banks for their direct supervision by the ECB from 4 November 2014 onwards, had the following objectives:
- enhance transparency by improving the quality of information available on the financial condition of each bank;
- strengthen the banks’ balance sheets by applying corrective measures to any problems identified by the comprehensive assessment;
- boost confidence by assuring that, after taking the necessary corrective measures, the banks will be healthy and reliable.
Phase 1: Asset Quality Review (AQR)
Bank of Cyprus, Cooperative Central Bank and Hellenic Bank were included in this phase.
The primary goal of the first phase was to assess the value of loan portfolios and their guarantees as well as the corresponding provisions, i.e. the losses resulting from the sum of the loan portfolio as at 31 December 2013, while also setting the starting point for the stress test. The exercise was carried out on the basis of a common methodology and common definitions. Its extent was unprecedented, leading to an extensive check of the financial health of the banks to be directly supervised by the ECB. Upon completion of the asset quality review, the banks had to maintain a Common Equity Tier 1 ratio of at least 8%.
Out of 130 banks, 25 banks showed a deficit in the adverse scenario. Twelve of those have already covered their deficits by increasing their capital by €15 billion between January and September 2014.
The results show that the capital reserves of Cyprus banks, including their capitalisations already made or announced in 2014, are more than enough to cover the capital shortfalls identified by the stress test exercise.
Phase 2: Stress test exercise
In addition to the three aforementioned banks, RCB also participated in this exercise.
The main objective of the stress test phase was designed to simulate the capital of banks based on two three-year macroeconomic scenarios: the baseline scenario and the adverse scenario. Under the baseline scenario, the banks should maintain, over the three-year period, a minimum capital ratio (Common Equity Tier 1) equal to 8%, while in the adverse scenario it is 5.5%. This exercise was conducted in close co-operation with the European Banking Authority (EBA).
The aim of the baseline scenario was to assess whether the existing capital reserves of banks are sufficient over a three-year horizon consistent with current macroeconomic forecasts.
The results of the baseline scenario, calculated after taking into account the recapitalisations already made or announced in 2014, show that no Cyprus bank needs additional capital.
Finally, the adverse scenario was designed to examine the strength of the Cyprus banking sector when subject to extreme macroeconomic conditions for three years.
Even under these adverse macroeconomic conditions, and after taking into account the capitalisations already made or announced in 2014, the banking sector of Cyprus appears largely adequately capitalised. Measures designed to cover the small capital shortfalls indentified for Hellenic Bank have already been taken or are planned.
It should be noted that the stress tests were not conducted to accurately predict future economic indicators, but rather to establish the strength of banks based on very conservative projections.
Summarised results:
In summary, the results of the comprehensive assessment, after taking into account recapitalisations already made in 2014, are as follows:
Bank of Cyprus, Cooperative Central Bank and RCB showed capital adequacy ratios in excess of the minimum requirements in all three scenarios, i.e. the asset quality review (8%), the baseline scenario of the stress test (8%) and the adverse scenario of the stress test (5.5%). Specifically, Bank of Cyprus has a capital adequacy ratio of 11.5%, 11.6% and 5.8% respectively; Cooperative Central Bank has 13.6%, 14.1% and 9.3% respectively; and RCB has 16.7%, 15.7% and 11.6% respectively. Under the adverse scenario, Hellenic Bank’s capital adequacy stands at 1.7% with a small capital requirement of €176 million, following the 2014 capital raising measures.
It should be noted that part of this requirement (approximately €71 million) has been covered by the actions already taken. This amount consists of the following mitigating factors: conversion of further convertible capital securities (CCS1) into shares following today’s announcement of the bank’s nine-month results (€23 million); acceptable allowance from the remaining convertible capital securities in issue (€46 million); and approximately €2 million revenue from the sale of its subsidiary bank in Russia. The remaining balance of €105 million is expected to be more than covered by the conversion of convertible capital securities and rights issue.
Any banks showing net capital shortfalls following the comprehensive assessment have two weeks within which to submit plans on how such shortfalls will be covered. As announced previously, the Board of Directors of Hellenic Bank will carry out an increase of share capital, after taking the results of the comprehensive assessment into account. There are no additional needs for the other credit institutions after taking into account the capitalisations made in 2014.
The results are particularly encouraging for the Cyprus economy because they demonstrate that the actions taken in 2014, as well as all the efforts and actions aimed at boosting the banking sector, have been more than satisfactory. The Central Bank had previously encouraged banks to strengthen their capital base and has now been vindicated for this foresight. There had been certain negative reactions and disputes at the time, but we persisted. Optimism about the future has now been restored. The results of this exercise should help boost the confidence of depositors in Cyprus banks which will in turn contribute to the efforts for economic growth. This increased confidence should also set the right conditions for lifting the remaining restrictive measures on the movement of capital overseas.
It is highly important that the €1 billion available in the support programme of the Cyprus economy from international lenders, which was intended to cover the capital shortfalls of the Cyprus banking system, will not be used and will remain available as a buffer. Therefore, the national debt will be €1 billion lower than anticipated in the Memorandum of Understanding.
Extensive details on the results of the exercise for each bank and additional information on the banks’ balance sheets, have been published on the ECB website.
Please note that this exercise has been carried out based on the ECB methodology for the AQR and on the EBA methodology for the stress tests. Thorough checks were performed by ECB representatives at every stage of the exercise to ensure the validity of the calculations. The complete report, with the results for all banks participating in the exercise and detailed results for each bank, are available on the ECB and EBA websites.
Thank you for being here today and thank you, once again, to my colleagues who will now answer any technical questions.