Cyprus Banking: The Current Situation
Firstly it is important to have an understanding of the recent Cyprus Banking Crisis and thereafter focus on the current situation.
Cyprus Banking Crisis Explained – Cyprus Banking Institutions early Year 2013
During 2013 the Cyprus Banking sector faced its most challenging period to date.
As a result of a sequence of events, see below information, several Cypriot banks were left with significant imbalances.
- Overexposure to Greek Government bonds.
- Overleveraged local property developers.
- Inability of Cyprus Government to borrow on international money market.
- Two local banks, Bank of Cyprus and Laiki Marfin Banks, with the highest exposure to Greek bonds had suffered substantial losses.
- Laiki Marfin Bank was dissolved. Uninsured deposits over €100k written off.
- Shares in Bank of Cyprus withdrawn from Cyprus Stock Exchange.
- Uninsured deposits over €100k were converted into a second class of shares.
- Restrictions imposed on all Cyprus bank accounts.
- €10bn secured from Troika (IMF, ECB and EC) in exchange to conduct structural reforms in Cyprus economy.
A series of corrective measures had 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 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.
On 4 November 2014, an ambitious European project commences: 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 European Central Bank 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) Asset quality review (AQR); and
2) 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.
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.
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. The adverse scenario was designed to examine the strength of the Cyprus banking sector when subject to extreme macroeconomic conditions for three years.
In conclusion the challenges and events of 2013 are being addressed and Cyprus Banking Institutions have made significant progress.
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