On Wednesday, the Commission met with President Nikos Anastasiades and presented its Final Report and Recommendations Report which was published yesterday.
The 118-page report, compiled by the Commission’s four international banking experts, says that Cyprus’ banking crisis was due to: external and internal factors, risky strategies, weak bank governance, ineffective supervision, and other factors.
According to the report, one of the business practices that contributed to the bad loan problem at the heart of the crisis was “advancing loans against collateral (usually real estate) and personal guarantee, with insufficient attention paid to cash flow and ability to repay.”
“When Cyprus property bubble burst, the banks often found that the collateral could not be seized, or had fallen sharply in value, and that the guarantees could not in practice be called. However, rather than recognise these loans as bad, the banks used various practices to treat them as good, for example by extending the repayment terms or accruing the interest on them at penalty rates, which had the effect of boosting both the balance sheet and revenue. Rules governing the recognition of nonperforming loans were also lax.”
The Commission believes that Cyprus’ prospects would be greatly improved if capital controls were lifted soon, and a state guarantee of all deposits in Cyprus banks was issued to reduce the risk of deposit flight and that “confidence in Bank of Cyprus will best be created by taking out the non-performing loans (NPLs) and placing them in a separately incorporated entity owned by the bank’s shareholders, funded by the BoC and managed by private sector individuals with strong incentives to recover value. This will free it from its NPL burden and give greater transparency to its true operating performance, which should improve. BoC urgently needs strong executive leadership to manage its transformation and extract the full benefit from the merger with Cyprus Popular Bank.”
Further reading
Independent Commission on the future of the Cyprus banking sector Final Report and Recommendations