The future of the Cyprus Banking Sector

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Cyprus BanksThe current situation of banks in Cyprus
Cypriot Minister of Finance Harris Georgiades was discussing the current situation of the Cyprus banking sector, more precisely how the badly hit Bank of Cyprus is fairing and he believes the creation of a bad bank should remain an option and was quoted as saying ‘This is not a decision to be taken on a political level neither one should expect political decisions on the issue. This is primarily a decision based on operational plans of the banks executives themselves and not an issue to be settled with political decisions, political interventions or even worse by stakeholders.’ Back in March 2013 Cyprus signed a deal with the EU and IMF to receive a €10 billion ‘assistance package’ as part of the deal depositors with more than €100,000 in Cyprus banks were forced to ‘bail in’ giving their deposits a so called haircut in order to save the largest lender on the island, Bank of Cyprus which absorbed the Laiki bank. Deposits up to €100,000 are protected by the deposit protection scheme which you can read more about by following this link Amongst the casualties were local companies, life time savings, and off shore companies, this all added up to hurt an already struggling economy and the severely restricted movement of monies and an almost non-existent lending situation bought the IMF to the bleak predicted outlook of an 8.7% contraction, however this was not the case as the Cypriot economy showed signs of resistance.
The connection between the Cyprus economy and bank lending
Over the last 8 years the Cyprus banking sector was giving credit at an unsustainable rate. Cyprus was the highest in the EU for privet lending and due to its slack lending criteria many of the loans were focussed to non-productive investments such as consumption and a large amount on the over inflated housing bubble, which even without the global economic crisis was only a matter of time before it popped. This previous uncontrolled lending alongside the ever increasing unemployment has now left the Cyprus banking sector in a somewhat precarious position. NPL’s are non-performing loans, these are loans that are in arrears by more than 90 days, and are on a step ward rise with conflicting reports estimating that 50% of all loans on the island are NPL’s which equates to somewhere in the region of €26 billion, this has the obvious effect of the banks being unable to lend. The politicians are debating the next steps, if the banks start a massive crack down on asset seizing, mainly in the form of repossession of property this could course the economy to crash again, though the alternative of not recovering their losses means that not only are they unable to lend but they themselves facing the possibilities of crashing and are once again going to need some kind of financial backing. Cyprus lenders are calling for the authorities to reform legal framework to facilitate debt restructuring that would enable the banks to restore debt servicing, pointing out that the foreclosure process in Cyprus takes up to 20 years. One option being discussed as a last resort is the rent against mortgage scheme; this will be financed from the state budget, and would allow selected cases to keep their residence by paying a rent that is lower than their loan instalments whilst maintaining the right to repurchase their property if and when economic conditions permit. The Government has set a target date to return to the international capital market for the second half of 2015, which although is seen as cautious does show us that there is light at the end of the tunnel.
Corporate accounts in the Cyprus banking sector
With the new CEO of the Bank of Cyprus Irish man John Patrick Hourican things should start to move in a forward direction, with a great amount of experience behind him including the Royal Bank of Scotland and PricewaterhouseCoopers to mention but a few, he is sure to lead the bank of Cyprus through these stormy waters. Amongst his list of things to do is help make it easier for corporate accounts to be processed. After the initial shock wave of the haircut back in 2013 investors and corporations are returning to Cyprus and the banking sector in their droves. The most prominent are the Russians which were possibly the worst hit by the cuts, and as their confidence grows so to do the requests for new accounts. One great advantage that is helping the Bank of Cyprus in its popularity is remote opening making it not only easier but quicker to open a new bank account. Opening a bank account – Procedure, documents, etc.