Bank of Cyprus successfully passes the stress test exercise

Bank of Cyprus Public Company Ltd was subject to the 2010 EU-wide stress testing exercise coordinated by the Committee of European Banking Supervisors (CEBS), in cooperation with the European Central Bank, and the Central Bank of Cyprus.

The Bank of Cyprus has successfully passed the stress test exercise, reaffirming its robust financial position and its strong capital adequacy, even under adverse stress scenarios. Even under the “additional sovereign shock on the adverse scenario”, the Bank is expected to achieve a Tier 1 ratio of 8,0% in 2011, without receiving any capital support from government and without taking into consideration the planned rights issue.

As announced on the 8th of July 2010, despite its strong capital position, the Bank is in the process of further strengthening its capital base through a rights issue of up to €345 mln, which will provide the Bank further strategic flexibility to capitalise on its strong well positioned network and to deploy its increasing liquidity to seize profitable growth opportunities across its various markets.
Bank of Cyprus acknowledges the outcome of the EU-wide stress test which complements the risk management procedures and regular stress testing programmes set up in Bank of Cyprus under the Pillar 2 framework of the Basel II and CRD1 requirements and the Central Bank of Cyprus Directive on the Calculation of Capital Requirement and Large Exposures.

The exercise was conducted using the scenarios, methodology and key assumptions provided by CEBS (see the aggregate report published on the CEBS website2). As a result of the assumed shock under the adverse scenario, the estimated consolidated Tier 1 capital ratio would change to 9,4% in 2011 compared to 10,5% as of end of 2009. An additional sovereign risk scenario would have a further impact of 1,4 percentage points on the estimated Tier 1 capital ratio, bringing it to 8,0% at the end of 2011, compared with the regulatory minimum of 4%. Detailed results on the stress test outputs and the exposures to central and local governments are shown in the tables that follow.

The results of the stress test suggest a buffer of €470 mn of the Tier 1 capital against the threshold of 6% of Tier 1 capital adequacy ratio for Bank of Cyprus agreed exclusively for the purposes of this exercise. This threshold should by no means be interpreted as a regulatory minimum (the regulatory minimum for the Tier 1 capital ratio is set to 4%), nor as a capital target reflecting the risk profile of the institution determined as a result of the supervisory review process in Pillar 2 of the CRD.

Given that the stress test was carried out under a number of key common simplifying assumptions (e.g. constant balance sheet) the information on benchmark scenarios is provided only for comparison purposes and should in no way be construed as a forecast.
In the interpretation of the outcome of the exercise, it is imperative to differentiate between the results obtained under the different scenarios developed for the purposes of the EU-wide exercise. The results of the adverse scenario should not be considered as representative of the current situation or possible present capital needs. A stress testing exercise does not provide forecasts of expected outcomes since the adverse scenarios are designed as "what-if" scenarios including plausible but extreme assumptions, which are therefore not very likely to materialise. Different stresses may produce different outcomes depending on the circumstances of each institution.

Background

The objective of the 2010 EU-wide stress test exercise conducted under the mandate from the EU Council of Ministers of Finance (ECOFIN) and coordinated by CEBS in cooperation with the ECB, national supervisory authorities and the EU Commission, is to assess the overall resilience of the EU banking sector and the banks’ ability to absorb further possible shocks on credit and market risks, including sovereign risks.

The exercise has been conducted on a bank-by-bank basis for a sample of 91 EU banks from 20 EU Member States, covering at least 50% of the banking sector, in terms of total consolidated assets, in each of the 27 EU Member States, using commonly agreed macro-economic scenarios (benchmark and adverse) for 2010 and 2011, developed in close cooperation with the ECB and the European Commission.


Financial Mirror, July 23, 2010

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