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Many people are searching for an answer on whether the reason why banks are involved in scandals around the globe is because of the greed factor of earning a huge bonus on top of already high salaries or if the failure is due to inadequate monitoring, testing and oversight of their operations or due to over-leveraging.
While most analysts, columnists and media commentators have had an easy ride blaming the Christofias government for doing nothing during the past four years when the EU debt crisis was knocking on our doors and it was obvious that the problems from Greece and other EU countries would eventually reach Cyprus, the real problem currently facing Cyprus is the problem with our banks.
After all, fixing the government imbalances would require EUR 2 bln at most and is manageable, but the same cannot be said of the bank bailout price tag.
The revelation by the Troika that Cyprus banks have opted to consider non-performing loans with property pledged as performing, in sharp contrast to the practice abroad is a serious scandal by itself which raises questions about the way Cyprus banks have been operating and why Cyprus banks were allowed to follow a different policy than those of other eurozone member banks?
While everybody has blamed the crisis in Greece for the Cyprus banking woes, especially the decision to purchase Greek government bonds, the real scandal is the way banks treated non-performing loans over the years and “kicked the problem down the road” for others to solve.
Rating agencies have been blaming non-performing loans as part of the reason why they have knocked the rating of Cyprus banks to junk status, but it’s unfortunate that they did not explain the problem in simple language, the way the Troika representatives did.
I wish one could say the problem was related to Cyprus, but it is not. The problems and scandals involving banks is global and is affecting many countries. Bankers were to blame for forcing Iceland into bankruptcy and default. Bankers were also to blame for forcing Ireland into a very expensive bailout and banks are to blame for the woes now facing Spain.
In fact, it was the banking crisis in 2008 in the US and the collapse of Lehman Bros which started the whole global financial crisis that spread to the eurozone.
Almost on a daily occurrence, we hear of more scandals involving the banks. During the past weeks, we heard how JP Morgan Chase recorded losses on disastrous credit bets, how HSBC is cooperating on anti-money laundering charges which would cost it $1 bln and how Barclays agreed to pay $453 mln to settle charges by US and UK authorities that its employees manipulated LIBOR, a key benchmark rate used to fix the interest rate on most global loans.
Talking of scandals, one should not forget the Capital Securities that the banks dumped on the unsuspecting public here as they wanted to raise capital at all costs. While a CySEC investigation cleared the banks of any regulatory wrong-doing, the way the banks sold those products has shattered the trust they enjoyed with the public.
Is this the last we shall hear of a scandal involving a bank, either in Cyprus or another country? Probably not. Is there a quick fix? Yes and no. For a start, it’s obvious that greed plays a significant role and probably the first thing regulators need to do is ban bonuses for bank employees.
Regulators should also order a complete and total revamp of how banks monitor, test and control their operations at all levels, starting from the CEO and making sure that the non-executive independent directors are in fact independent and not the ‘koumparos’ of the CEO or the Chairman. And no director should be allowed to receive a loan from the bank, end of the line. If they have their businesses, then they have no place on a bank board seat. And finally, banks should not be allowed to become “too big to fail”. Overleveraging and over-expansion should be prohibited or allowed only under strict rules and subject to high capital adequacy ratios.
Eventually the problems involving the banks will be fixed, but I doubt if the banks ever regain the confidence of the public.
(Eurivex Ltd. is a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nomad for listings on the Emerging Companies Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
