Cyprus banks urged to ramp up efforts to reduce NPLs

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Cyprus Central Bank Governor Constantinos Herodotou called on Cypriot banks to bolster their efforts to further reduce non-performing loans (NPLs) while the current economic environment remains favourable.

Addressing a conference on “Indebtedness and NPLs”, Herodotou said Cypriot banks may have reduced their NPLs by €19 bln since their peak in December 2014 but “there is still work to be done”.

He said Cyprus’ NPL ratio stands at 30% compared to the Eurozone average of 3% and the Single Supervisory Mechanism’s 10% threshold.

Herodotou said the banks should improve their efforts to tackle NPLs as the current environment remains helpful due to negative interest rates which push up collateral valuations while the investor’s “search for yield” pushes asset valuations higher, thereby facilitating NPL portfolio sales.

He said that the ECB’s governing council is examining its monetary policy strategy, which could signal a change in the negative interest rates policy, due to possible bubbles in asset valuations and stock market bubbles, believed to be associated with negative interest rates.

“That’s why I urge the banks to mobilise and fix their balance sheets while these favourable conditions last because I can assure that everyone in the (ECB) governing council is concerned about the other side of the effects of negative interest rates,” Herodotou said.

He urged banks to expedite the pace of NPL resolution as implementation phase of minimum requirements for own funds and eligible liabilities (MREL), a new capital buffer in case of bank resolution, is about to begin.

Herodotou said a stable legal environment is “an absolutely necessary element” in dealing with NPLs.

Paolo Fioretti, ESM deputy head for banking and coordinator for Cyprus in the ESM’s early warning system, praised Cyprus’ “enormous effort” since the 2013 financial crisis.

But warned that “the NPL ratio in Cyprus remains the second-highest in the euro area. And the improvement was almost exclusively due to the transfer of NPLs to outside the banking sector.”

“Private sector deleveraging has been more limited and sustainable debt restructuring has proven challenging,” said Fioretti.

Maintaining a stable legal environment, he added, “will lead to less volatile and more favourable and predictable NPL prices.”

“This is crucial for dealing with legacy issues related to unresolvable loans. It will also help to increase the banking system’s resilience going forward,” Fioretti said.

Despite progress since the financial crisis, Cyprus still has the second-highest private debt in the Eurozone after Luxemburg and the second-highest NPL rate after Greece. (source CNA)