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By Dr. Jim Leontiades
It is no secret that Cyprus has a high level of non-performing loans. But why are they so high relative to other nations? The Eurozone average NPL ratio is 4.6%. Ours are ten times that.
Cypriot NPLs are 40+%, on a level with those of Greece, together the highest in the EU. This, despite the fact that the Greek economy has suffered a crisis incomparably worse and much longer than ours. Our NPLs are at least double those of any of the other four countries bailed out by the Eurogroup. Even Italy, with its chaotic political situation, stagnant economy and massive debt is doing better than Cyprus with NPLs at half our level.
Surely, we have learned something from the recent financial crisis. Healthy banks are necessary for a healthy economy. Bank failures are deadly poison. The high levels of Cypriot NPLs are clearly the single greatest threat to a continued economic recovery. Yet, the government and parliament seem determined to either limit themselves to “gesture politics” or pass legislation which actually makes reducing NPLs more difficult.
The slow progress in dealing with NPLs is not evenly distributed. Some banks are doing better than others. According to Moody’s, the Bank of Cyprus has reduced its NPLs by 40% since December 2015, Hellenic Bank by 21%. The government owned Co-op Bank by only 6%. The Co-op Bank also has the highest NPLs at 60% +.
The Co-op Bank begins with two inherited disadvantages. Firstly, history tells us that where government owned enterprises are in direct competition with privately owned firms, they will lose. Cyprus Airways comes to mind. The government plans to keep its equity in the Co-op Bank, while seeking private investors and a greater role for private management. Hopefully, something will come of it, but after five years of state ownership it is likely that government bureaucracy and interference have already influenced the bank’s management culture.
Co-op Enterprises
Secondly, there is the co-operative form of enterprise itself. The early co-ops were small agricultural associations owned and operated for the benefit of those who used them, its members rather than shareholders. In this context, the co-op “people friendly” model offered a useful alternative to the shareholder model. It had its early successes, particularly in more primitive economic situations where the market was either lacking or monopolistic, as in those cases where farmers had difficulty finding buyers who would give them a fair price. In such situations, the joining together of suppliers (the members) provided positive advantages.
Things have changed. Many markets have become larger, more developed and more competitive. Agriculture has declined as a proportion of national income. Co-ops themselves have become larger – losing their small scale and closeness to members. This raises the question as to whether the co-op model for banks can operate effectively in today’s much more competitive financial environment.
A people-friendly approach is not necessarily an advantage for a bank when it comes to collecting delinquent loans. None of the world’s major banks follow the co-op model. The earliest and largest co-op bank (the UK Co-op Bank) has been declining for many years. It has recently had to be bailed out by a collection of hedge funds, investors specialising in high risk situations.
The Cypriot Co-op Bank
The Cyprus Co-op Bank was organised after the 2013 crisis out of 200 smaller co-op banks. These were more nearly like the classic model of small, people friendly co-operatives. Reorganising them into a single, coherent company represented an enormous challenge. There were clearly many opportunities for laxness and a failure of the necessary oversight.
Apparently much remains to be done. There have been charges of fraud involving millions of euros against a number of former employees. Seventeen of the co-op’s employees have been found guilty of not repaying their loans. If the Co-op Bank’s own employees do not repay their loans, what can be expected of other borrowers? Let’s hope the government succeeds in placing the management of the bank into private hands. It was a government-owned bank, Laiki, that was at the epicenter of the last financial crisis.
