CENTRAL Bank chief Panicos Demetriades had a go at the island’s banks yesterday, suggesting they need to downsize to cope with their capital adequacy shortfall.
In a speech at the Cyprus University of Technology (TEPAK), Demetriades said the value of the consolidated assets of all banks operating in Cyprus comes to 800 per cent of GDP, or an 8 to 1 ratio.
The assets of local banks, including co-operatives, stood at 550 per cent of GDP. The island’s GDP is around €18 billion.
On Wednesday the island’s largest lender Bank of Cyprus (BoC) requested temporary state assistance to the tune of €500 million after it failed to raise the necessary capital to meet a regulatory shortfall by Saturday due to increased provisions and a further impairment of its Greek bond holdings.
BoC’s request now means that the state’s cost to bailout its banks rose to €2.3 billion since it already needs €1.8 billion to help recapitalise Popular Bank, the island’s second-largest lender.
Both lenders recorded massive losses in 2011 due to the Greek debt write-down, which depleted their regulatory capital.
The BoC’s request came as a surprise and seemed to irritate Demetriades, because only a week earlier the bank had told shareholders that its capital requirements ranged from €200 to €300 million.
In comments made to Stockwatch on the same day, the CB chief said he was considering inviting external auditors to sift through the bank’s portfolios like Blackrock had done in Greece.
In his first public comments yesterday since Cyprus applied for a bailout on June 25, Demetriades said that the large size of the banking sector proportionate to the island’s economy should be addressed.
“Action should be taken to limit possible future risk drawn from the presence of Cypriot banks in other countries,” said Demetriades, who is also a member of the European Central Bank Governing Council.
The Cypriot banking sector should disengage from the Greek economy, by turning businesses there into subsidiaries, he told a university audience.
“Our aim is to have this process concluded by the end of 2012,” Demetriades said in a prepared text.
Such a move, however, would require the prior approval of Greek banking authorities.
Cyprus’s two main banks, Bank of Cyprus and Popular suffered heavy losses from a bond writedown agreed by euro zone leaders to ease Greece’s debt burden.
Both require recapitalisation to meet European Banking Authority regulatory requirements.
Officials from the European Central Bank, the European Commission and the International Monetary Fund are due to start assessing Cyprus’s potential funding needs from Monday.
In a statement issued Wednesday, the Eurogroup said it was confident that implementation of the financial assistance programme would address the financial, fiscal and structural challenges of the economy in a decisive manner “and should allow Cyprus to return to a sustainable growth path.”
The Eurogroup said the programme “will be based on ambitious measures to ensure the stability of the financial sector by addressing expected capital shortfalls and preserving the soundness of financial institutions, including restructuring and downsizing where needed.”
The Central Bank chief said that insofar as the banks were concerned, the bailout would be an opportunity to assess and pinpoint weaknesses in bank portfolios.
“I will indicatively mention – without necessarily endorsing this, since our own review is pending – the assessment by Fitch that the banks require an amount which corresponds to 33 percent of the country’s GDP,” Demetriades noted.
In his speech to TEPAK, he seemed to echo the government line, stressing that despite the fiscal slippage, the foundations of the Cypriot economy remain robust.
“Our key objective,” he said, “should be to boost productivity through a series of structural adjustments but also through reining in the rate of increase of salaries, but not necessarily through significant cuts in salaries which will hurt demand and create conditions of uncertainty and recession, but rather mainly through the creation of a more flexible and more fair system of the Cost of Living Allowance.”
Meanwhile last night the House approved by unanimous vote the payment of €27 million covering the first two instalments of Cyprus’ contribution to the European Stability Mechanism (ESM).
The sum is to be paid to the ESM out of the Consolidated Fund of the Republic – the government’s main bank account.
The ESM is planned as an institution to manage a permanent rescue funding programme following the temporary European Financial Stability Facility (EFSF) and European Financial Stabilisation Mechanism (EFSM) in the 17-member Eurozone.
The paid-in capital of the ESM was €80 billion euros. Within five years a total capacity of €700 billion shall be created from which €500 billion may be given as credit.
Cyprus’ share in the ESM amounts to 0.1962 per cent of contributions.
Published on June 29, 2012