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13 December 2013

The future of the Cyprus Banking Sector

The Independent Commission on the Future of the Cyprus Banking Sector was set up in by the Central Bank of Cyprus (CBC) to make recommendations on the long term recovery of the Cypriot banking industry from its present crisis. Commission presented its final report in late October 2013.

Banking is of crucial importance to Cyprus being a leading contributor to the economy and accounting for a sizeable percentage of the workforce and the GDP.

There is a brief summary of the 110-pages report on the Future of the Cyprus Banking Sector.

Causes of the Cyprus banking crisis:  

The Cyprus banks’ downfall was caused by the interplay of a number of factors and failures, some of them outside Cyprus’ control, but many within it.

1. External. The main external causes were two. One was Cyprus’ accession to the EU (2004) and the euro (2008) which rapidly liberalised a previously tightly controlled banking system.

2. Internal. The most significant internal cause was a failure at the national policy level to appreciate that running a big banking industry involves risk as well as reward.

There are some other factors those had played an important role in the banking crisis: risky strategies, weak bank governance, wrong business methods, ineffective supervision, culture and mentality.

Recommendations:

The number of steps, both at the national policy and administrative levels should be taken in order to restore health to the Cyprus banking system. The most urgent task is to rebuild confidence in the banking system. Cyprus’ prospects would be greatly improved if capital controls are lifted soon, and a state guarantee of all deposits in Cyprus banks was issued to reduce the risk of deposit flight. This would require a credible commitment from the relevant European institutions.

1. Financial stability – there is a problem of poor communication between public

authorities responsible for financial stability.

2. Reform of the labour market – the banking labour market needs to

be substantially reformed in order to introduce greater efficiency and flexibility.

3. Confidence building – more explicit measures should be taken to restore confidence in the Cyprus banking system.

4. The political process and the Central Bank – Greater attention should be paid to the need to achieve a balance between the need for accountability at the Central Bank of Cyprus and independence of the supervisory process.

5. Integrate the regulators – Cyprus should combine its four separate financial regulators (the Central Bank of Cyprus (CBC), which is responsible for the supervision of commercial banks; the Cooperative Societies Supervision and Development Authority (CSSDA), supervising the cooperative credit institutions; the Superintendent for Insurance Control (SI); and the Cyprus Securities and Exchange Commission (CySEC)) into a single entity to make them more efficient.

6. Merging co-ops – restructuring of the co-ops has reduced their number drastically from 90 to 18; reform of the co-ops should go a stage further to create a single commercial entity with a joint stock structure.

7. Cultural changes – changes in the culture of politics and business, specifically to bring more openness and objectivity to decision-making.

Other measures to be implemented:

  • Reduction the size of the banking system
  • Recapitalization of banks
  • Strengthening corporate governance in banks
  • Strengthening the capital and liquidity position of banks
  • Improvement the banks’ loan origination and management practices
  • Strengthening anti-money laundering actions
  • Improvement of the banking supervision
  • Macro-prudential supervision
  • Consumer protection
  • External audit
  • New entrants
  • Alternative sources of finance

Resolving the banking crisis is crucial to Cyprus’ economic recovery. Much work is already underway to correct the previous failings. This will help restore confidence in the banks and reduce systemic risk. However further work needs to be done for recovery and future growth of Cyprus economy.

Full report: http://www.icfcbs.org/wp-content/uploads/2013/10/ICFCBS-Final-Report.pdf

 

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