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BY STAVROS A. ZENIOS
Cyprus society lost four billion euros as a result of bank investments in Greek government bonds. This is a conservative estimate. Losses are expected to be much higher from defaults of private and corporate loans. Assuming that the 20% default rate estimated by BlackRock apply to Cypriot banks operating in Greece, then we are losing today about a quarter of our gross domestic product. Even Greek banks lost less as a proportion of the country’s GDP.
It is not easy to lose so much money! Many things must have gone wrong simultaneously. The question raised is “What went wrong?” We urgently need a well-documented answer to this question not only for the sake of transparency, but also in order to decide what it is that we can improve to find our way out of the crisis and –most importantly—to avoid similar disasters in the future.
An investigation into the crisis is not for the settling of personal or political accounts. We are already witnessing the pass-the-blame game. The President did not renew the appointment of the Governor of the Central Bank blaming him for the problem, the outgoing Governor talked about interference from the President’s office in the discharge of his duties, and the heat is turned on when the political parties take sides.
Exchanges of unsubstantiated accusations never solve any real problem. On the contrary, they fester a confusing and confrontational environment that keeps us in the dark.
International experiences from similar crises, and available information for our own banking system, point to a series of factors that could have contributed to the making of the crisis:
1. Mistakes from the management of the banks and/or profit maximisation decisions that are –or are border case — criminal.
2. Negligence or inability of the Boards of Directors of the banks in discharging their duties.
3. Negligence of the Central Bank in fulfilling its supervisory role using all available supervisory instruments.
4. Inadequacy of the supervisory framework that restricted the Central Bank from exercising effective supervision.
5. Negligence of the Government when taking political decisions at the European level for handling the Greek debt crisis.
6. Adverse side effects on the banking system from government fiscal policy.
It is said that complex systems fail in complex ways, and this is certainly true in the current crisis. We must look into banking corporate governance and supervisory practices, the methods and systems of risk management by banks, the reflexivity between the banking system and the financial strength of the Government. “Looting for profit” is a phenomenon that described many failures of financial institutions internationally and may apply to some Cypriot banks too. And of course issues are raised about (il)legal practices and on what are considered ex ante reasonable management policies from commercial and central banks. That is, whether under the circumstances those in charge were following well accepted international professional norms in performing their duties.
To fully understand what happened and to avoid similar traps in the future we need careful and scientific investigation. This must by carried out by an independent Special Investigation Commission for the Cyprus Banking Crisis. The Commission members should be well established experts of international expertise and repute.
The Commission must be set up by Parliament to have legitimacy. If there is no legal framework for doing so, Parliament should create it through legislation. The problem we face is so big and its nature so unique, that if special legislation is needed Parliament should not hesitate to legislate. The Parliament of Iceland set high standards in 2008. There are many other experiences from which we can draw lessons. Let us not ignore them
Akerlof, G., & Romer, P. Looting: The Economic Underworld of Bankruptcy for Profit, Brookings Papers on Economic Activity, 2:1-73, 1993.
Report of the Special Investigation Commission (SIC), Althingi, Iceland, 2010, http://sic.althingi.is/
Stavros A. Zenios is professor of finance and management science at the University of Cyprus and Senior Fellow at the Wharton Financial Institutions Center, University of Pennsylania, USA.
