ECB cautions over changing foreclosure framework

3 mins read

ECB supervisory board member Elizabeth McCaul advises caution over possible amendments to the Cyprus foreclosure law as they could “backfire and destabilise the banking sector”.

In an interview with CNA, McCaul said last year’s amendments to the framework, enabling recourse to the Financial Ombudsman for breaching the Code of Conduct and extending various timelines, “risk a negative impact on banks and may cause further delays.”

“Such policies can also backfire and destabilise the banking sector if designed in a haphazard manner.”

“So, the right mix has to be found.”

She said while banks have reduced NPLs on their balance sheets, it does not mean that debts have “magically disappeared”: they are still present elsewhere in the Cypriot economy.

Amendments to the insolvency and foreclosure framework have helped to remove some of the impediments to the procedure.

But McCaul argued several more impediments need to be addressed, such as the low uptake of the insolvency and pre-insolvency tools and existing backlogs in the judicial system.

She acknowledged the progress in the island’s banking sector in reducing its non-performing loans (NPLs) since the 2013 financial crisis and amid the Covid pandemic but advised caution.

“There is great uncertainty about the overall impact of the pandemic on borrowers and thus on bank balance sheets.

On plans to convert KEDIPES into a ‘bad bank’, a state-owned asset mandated to wind down NPLs of the former Cyprus Cooperative Bank, McCaul said that such solutions could complement banks’ efforts by offering additional options to tackle NPLs more swiftly.

“By all accounts, the NPL ratio in Cyprus remains high, and the effects of the pandemic are still a source of uncertainty.

“We welcome broader possibilities for banks to reduce NPLs: from securitisations to establishing well-designed asset management companies.

“If appropriately designed, state-supported solutions for promoting NPL disposal can complement banks’ own efforts by offering additional options to tackle NPLs more swiftly.”

McCaul said the success of asset management schemes as an effective solution to reduce NPLs depends on many factors: a well-functioning foreclosure framework, the feasibility of the scheme’s time horizon and the type of assets transferred to the scheme, such as retail versus corporate exposures.

Covid pandemic

Compared with the 2013 crisis, McCaul said Cypriot banks are now better prepared to deal with an increase in distressed debt.

“Their capital positions today are stronger than they were in the immediate post-crisis period, and there has been significant progress in making their balance sheets more resilient.”

NPLs in Cyprus declined by €23.2 bln between December 2014 and December 2020.

“Even though the first moratorium expired at the end of 2020, we need to keep in mind that we are still in a period of great uncertainty about the overall impact of the pandemic on borrowers and thus on bank balance sheets.

“We haven’t yet seen the potential effects of the full withdrawal of fiscal support measures materialise on bank balance sheets, and we don’t yet know whether certain sectors will struggle more than others once the support is no longer available.

“What we do know from experience is that credit impairments typically emerge only after some delay, and we know that we do not yet have data on potential future bankruptcies that may be latent on balance sheets now.”

Mergers and acquisitions

McCaul said that decisions on mergers and acquisitions must be made solely by market participants, while the supervisor’s role is neither to push for or hinder consolidation.

“There is indeed a problem of overcapacity in some countries, which can be dealt with in different ways.

“However, consolidation is not the only option available to improve structural profitability and cost efficiency in the Cypriot banking sector.”

McCaul pointed out that digitalisation could produce significant cost savings for institutions with extensive branch networks if supported by efficient internal governance and reorganisation.

“One of our supervisory priorities is the assessment of banks’ business models and profitability, also in the light of increasing digitalisation, which has received a boost from the pandemic situation and physical distancing rules.”

She said about 40% of EU banks are “falling short of what we expect regarding their provisioning practices, the classification of their loans, flagging forbearance measures, and the strength of their operational capability to prepare for the expected increase in NPLs.

“Rather surprisingly for a crisis situation, in some portfolios we discovered improvement in credit risk parameters (ratings), especially for probability of default.

“Banks need to be forming a clear picture of potential underlying credit deterioration and providing the required transparency. In this regard, we are monitoring banks’ provisioning practices closely.” (source CNA)