Cyprus Central Bank sets 8% as core tier 1 requirement

 * Replaces capital adequacy as benchmark * Two largest banks must exceed 10% by 2014 * 

The Central Bank of Cyprus has set a new core tier 1 minimum capital requirement of 8% for the island's banks with immediate effect.
The central bank directive was published in the Official Gazette of the Republic on Friday. Core tier 1 essentially replaces the capital adequacy ratio as the new benchmark for capital adequacy in Cypriot banks.
Under previous regulations, the minimum core tier 1 requirement could have been as low as 2.0%.
Cypriot banks have sizeable exposure to Greek debt, and the island's ratings have been downgraded by all three agencies on concern of a spillover effect from a possible Greek default.
Fitch, the last ratings agency to downgrade Cyprus to A- on May 31, said Cypriot banks could absorb the impact of an assumed 50% haircut on Greek bonds, but that worse-case scenarios could have a knock-on effect on Cyprus's own debt profile.
Industry sources said that the new directive would seek to incrementally increase core tier 1 based on assets of the bank and the country's GDP. Under that assumption, Cyprus's two largest banks Bank of Cyprus and Marfin Popular would have to have a minimum core tier 1 capital ratio of 10% from 2014 onwards.
Both banks have recently conducted issues to raise capital. Bank of Cyprus's core tier 1 ratio at the end of March stood at 8.2%, excluding a 890 mln euro issue of convertible capital securities (CoCos) in the meantime. Marfin Popular Bank's core tier 1 ratio is now at 9.4%.