The banking system, unquestionably strained by the uncertainty created by the pandemic, is going through a prolonged period of low-interest rates.
At the same time, it has excessive liquidity, which, combined with the quantitative easing measures applied by the European Central Bank (ECB), creates an additional cost for institutions.
Cypriot banks have to manage a very difficult conjuncture, which affects their efforts for sustainable profitability.
In an economy like Cyprus, where private debt is very high, and the number of individuals and entities who meet the justifiably strict criteria for new lending is limited, channelling new funds is particularly difficult.
The effort is also hampered by the fact that Cyprus facilitates a large number of banking institutions in relation to the size of its real economy.
In this environment, most banks have imposed negative interest rates or liquidity fees on certain categories of large customers to reduce the cost of safekeeping large deposit amounts (liquidity).
As bank efforts are observed on utilizing their available major liquidity surpluses to assist, the ECB has recently improved its lending conditions for liquidity and reduced collateral requirements depending on the purpose and scope of the loan.
This development can be helpful for the Cypriot banks to some extent, provided always, the relevant financing criteria are met, mainly to grant new loans of a certain amount and on terms aimed at achieving Sustainable Development Goals under the UN 2030 Agenda (17 Sustainable Development Goals-SDGs) and EU Sustainable Finance Action Plan (SFAP).
However, no matter how helpful the above actions are, they certainly do not solve the problem on their own.
In addition to the challenges, the Cypriot banks and the economy are provided with a great opportunity from the Cyprus Recovery And Resilience Plan 2021-2026 “Cyprus – Tomorrow”.
The Plan provides for significant direct investments, up to €1.2 billion, of European funds and additional investments of billions from the private sector.
It is easily understood that Cypriot banks have a major opportunity to grant new lending and get involved in projects addressing compliance with SDGs and ESG criteria (Environmental, Social, Governance).
Sustainable Finance is a key pillar of the EU effort on channelling funds to make sustainability considerations an integral part of its financial policy, to create an optimal business environment for sustainable growth, job creation and innovation.
SDGs have been set across all industries.
Since 2018, the EU has adopted a targeted Action Plan with specific legal-economic technical parameters for Sustainable Financing leading to Sustainable Growth.
The EU wants Member States to implement their commitment to channel private capital into investments in support of the Paris Agreement (2016), with the initial aim of achieving a neutral carbon balance by 2050 and the UN 2030 Agenda.
Implementing the rules concerning Sustainable Financing and Development is anything but a firework.
The Cypriot banks and large corporations are significantly affected by these developments.
If they do not react in time, they risk losing the growth train and likely face supervisory consequences in due time.
The European Commission, for example, recently approved a review of banking rules in the EU to complete Basel III.
One of the changes promoted is the obligation of banks to systematically identify, disclose and manage risks related to the ESG criteria of the broader risk management process they apply (Risk Management Assessment).
Indicative is the obligation on conducting regular simulation exercises of extreme climatic conditions (stress tests), both by the supervisory authorities and the credit financing institutions.
It’s clear that Sustainable Financing is already here.
The faster the regulated entities adapt to the new reality and guide their customers towards this direction, the greater the benefits for themselves and the economy in general.
By Nicole K. Phinopoulou Lawyer, LLB. LLM. LPC. Banking & Financial Services, Alumni Member of the Institute for Sustainability Leadership, University of Cambridge