Since the report on the collapse of the Cooperative Credit System was released recently, everyone seemed to have an opinion on the matter about who was to blame for the whole debacle. The report was fairly conclusive, giving a general overview of what the public enquiry discovered.
The Co-op Bank have now split their loan portfolio into a good pile of active re-payers with Hellenic Bank, while it’s non-performing loans will be transferred to an entity specialising in debt management and repayment.
The political parties of the opposition are crying out for blood and blame the government, the finance minister, the EU, the Single Supervisory Mechanism (SSM), the Central Bank of Cyprus and want a public inquiry to find those to blame.
What Did the Report Bring to Light?
According to the findings of the public enquiry, the following reasons are to blame for the banks demise:
- Previous & current governments ignoring IMF warnings for several years.
The banking landscape in the EU in terms of non-performing loan management was only going to get worse and several warnings were given over a number of years, by experts.
- Questionable Operational Techniques.
The ECB/SSM is mostly responsible since they had better knowledge, experience and should have known better. They did not act earlier to protect the Cyprus taxpayer and the AQR should have been a cause for real concern if they carefully took the points from the PIMCO report on board. Banks also require proper corporate governance with no political nominees on the board.
- Inadequate Legislation.
The attorney-general will most like rule that there was a lack of criminal liability. No Cyprus shareholders or management unlawfully benefited themselves and so cannot be held criminally responsible. Shareholders and Board members most likely acted in good faith at the time based on their knowledge and expertise to any actions such as foreclosure.
- The Regulators (both in Cyprus & abroad).
The issues with the co-op movement go back years in that no time was spent on prudent lending, with no proper supervision of the co-op which was under the wing of the commerce and industry ministry.
- The Borrowers who were in a Position to Repay their Debts and Omitted.
The repercussions of inaction in reducing the NPLs mean that the Cyprus taxpayer was not spared the cost of the split and so consequently had less disposable income with which to repay the loans in a suitable manner.
The report named some more confounding factors that were a result of external or historic influences:
- Large Increases in Operational Costs & Reporting Requirements
While this can’t be the sole cause for the collapse of the Co-op, all the banks had to increase their operational costs during this period to bring in expertise to handle a very problematic situation after 2013. This is especially true with existing personnel that were working in the bank, issuing loans with no prior knowledge of loans or even banking experience.
As the report truthfully states, the conversion of the numerous loans into one unit and bank was a huge task that required urgent expertise from other countries; which in itself implies a growth in operational expenditure.
- Poor Governance
The problem of bad governance is not only a “Cypriot” spectacle, other EU members have demonstrated how easy it looks to have incorrect expertise and culture. Furthermore, governance is not only about the Board of Directors and the Senior Management but extends to the entire company as a whole and includes all the entities and economic factors within the system, not only the government.
- The Large Number of Non-Performing Loans & Island Lenders Inability to Handle Them
To begin with, the structure of the NPL portfolio of the Coop was much worse than the rest of the commercial banks. It consisted of mainly property or start-up loans with the primary residency or commercial property as collateral. Given the decisions taken by the MPs regarding the protection of the primary residency or commercial property, not a lot could be done for such loans and thus they did not have much value.
The Enquiry & Report Criticisms
The it exaggerates the timeframe after 2013 with almost 600 pages of research as opposed to merely 150 for the period pre-2013, which arguably set up the entire situation.
This is in contradiction to the commonly-accepted argument that the issues did not originate from the conduct during the after 2013 period, but rather during the many years of abuse of the system pre-2013 by all the entities in the Co-op sector (Management of the Cooperative Credit Institutions, regulators, governments, Boards in the company and the political system at that time in general).
The report fails to encompass the bigger picture. If we look at the key entities of the bank, in 2019, all of them are in a better situation after the deal with the Hellenic Bank loan portfolio.