The Cyprus banking sector, that has been growing aimlessly over decades and reached nine times the island’s GDP before crashing this year, needs to adopt a new strategy for the future, as the economy relies heavily on funding from banks.
But in order to do that, experts believe that a single “banking czar” would be the best way forward by keeping a balance between supervision, financial stability and a national strategy on banking.
The Independent Commission on the Future of the Cyprus Banking Sector published its final report on Thursday laying out recommendations for the recovery of the banking industry, saying that a sound financial services strategy is vital for a recovery.
The report, commissioned by the Central Bank of Cyprus, and the result of a year-long inquiry, contains more than 35 recommendations, which President Nicos Anastasiades pledged he would “personally oversee through a process of implementation”.
However, although the Central Bank has announced it, too, would set up a national steering committee to implement the ICFCBS recommendations, the ongoing conflict between Anastasiades and Governor Panicos Demetriades suggests that the president wants to replace the centralbanker prior to giving more powers to the new “banking czar”.
David Lascelles, the Commission’s chairman, said that while the list of recommendations looked daunting “it is in Cyprus’ power to address all of them”. He added that Cyprus was not alone in facing these issues, and that its banking crisis contains lessons that can help strengthen international best practice in areas such as the management of large banking systems and crisis recovery.
Lascelles said that Switzerland adopted a national strategy to overcome its recent troubles, while Britain also has “a strategy of some sort.”
George Charalambous, a former senior executive at the Bank of Cyprus and later chairman of the Cyprus Securities and Exchange Commission, said that Luxembourg probably has the best strategy, while rival jurisdiction Malta has a single regulator responsible for both banking supervision and a national strategy.
One of the conclusions of the 120-page report is that the absence of a national financial services strategy was one of the reasons why Cyprus’ banking problems got out of control.
The current lack of depositor confidence in banks due to the bail-in is the major issue facing the banking industry, with all four Commission members unanimous in that the bail-in that was “uniquely imposed on Cyprus” and that the measures proposed by the Troika of international lenders, such as capital controls “is not the right way to proceed”.
However, the best way forward, Lascelles said, is a combination of “lifting capital controls to allow normal banking to resume, accompanied by a state guarantee backed by European authorities to provide capital and liquidity.”
He added, however, that with the bail-in, whereby unsecured deposits in Bank of Cyprus were used to recapitalise the bank to the tune of 4.8 bln euros, deposit guarantees were no longer necessary, while even the Cooperatives have been rescued with a 1.5 bln euro bailout.
On that issue, the Commission chairman suggested that the Cooperative credit societies, that are being merged into 18 local entities under Troika rules, should go further and “become a single joint stock company”.
“The present solution is not satisfactory and is perpetuating weaknesses, as the Cooperative sector has been bailed out for the third time in 30 years, with 2 bln euros pumped into the sector so far.”
The Commission’s report also found that apart from an ineffective system of supervision, both of the commercial banks and the Central Bank itself, with weak corporate governance and a lack of transparency and accountability, leading to the phenomenon of unsecured non-performing loans getting out of hand, there is a need for tough measures when it comes to screening by the Central Bank and a major culture change as regards unhealthy labour relations and trade unions that effectively determine banking decisions.
Other recommendations in the Commissions report include the need for the Bank of Cyprus to return to normality as soon as possible and its NPLs be spun off into a separate entity owned by BoC shareholders with a strong incentive to recover value.
Costs will have to be cut, branch networks reduced and high staffing levels brought down with a major shift towards more remote and electronic banking, while consumer protection should have a high priority through a Financial Ombudsman and better financial education, the report said.
The Commission believes that the international financial services business “should continue, but in an upgraded form which relies more on quality and breadth of service than on tax breaks.”
Fuelling the arguments raised by President Anstasiades, the Commission added that “poor governance arrangements at the Central Bank of Cyprus contributed to the 2012 crisis by concentrating too much power in the hands of the Governor. The solution lies in having a stronger non-executive board membership with clearly defined board responsibilities, and a more formalised executive structure.”
“Relations between the Central Bank of Cyprus and other areas of government have not worked as well as they should.”
In line with this, the Commission concluded that supervision of Cyprus’ largest banks will pass to the Single Supervisory Mechanism at the European Central Bank in Frankfurt next year, and that preparations are being made for this through enhancing the audit of banks and improving the oversight of the accounting profession.
The report is available at www.icfcbs.org
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