Blog Post

The calm after the storm: developments in Cyprus’ banking sector

At present there is calm after the storm; despite having less stringent restrictive measures than almost a year ago, the banking system remains stable. Though dealing with mounting non-performing loans remains the biggest financial challenge.

By: and Date: March 28, 2014 Topic: European Macroeconomics & Governance

On March 24th, the Central Bank of Cyprus (CBC) released new data on key aggregate financial stability indicators, including provisional data for the fourth quarter of 2013. Our preliminary figures show some improvement in the profitability and capital adequacy ratios of the Cypriot banking system, reflecting the progress made on restructuring last year.

The facts

Although the banking system as a whole is still not generating profits, losses were much more moderate during 2013 than the year before; the total losses before tax from continuing operations (not taking into account the parts of the business that have been disincorporated due to restructuring or other reasons) stood at less than 1% of total assets for the last quarter of 2013, while the ratio for return on assets (after tax profit/losses on a discontinued operations basis as a share of total assets) was shrinking continuously since the bail-in of depositors in March 2013.

Cyprus banking sector profitability

 

Note: The difference between the two lines reflects the one off costs of the ongoing restructuring process.

Source: Central Bank of Cyprus

Thanks to the recapitalization of the two largest banks, the Tier 1 capital ratio stood at its highest level of the last five years at 12.9% and the overall solvency ratio at 14%. Both of them close the euro area average at 13% and 15.4 (during the first half of 2013).

Cyprus banking sector capitalization

Source: Central Bank of Cyprus

The most worrisome financial concern in Cyprus is the high and increasing level of non-performing loans. According the CBC’s new definition (see legal framework), the percentage non-performing credit facilities soared to 44.9% at the end of January, showing a slow but continuous increase since September 2013 when it stood at 40.3%. For the cooperative credit sector the number was almost equally high at the end of January at 40.4% and also increasing.

There is an undergoing discussion about the creation of a bad bank that would buy troubled assets, including NPLs, to clean the banking system like in the cases of Spain and Ireland, which was also mentioned in a Reuters interview with Bank of Cyprus Chief  Executive John Hourican. 

The restructuring process of the cooperative banking sector was somewhat slower than expected last year, but its recapitalization is expected to be completed shortly according to the latest Troika Statement on the Third Review Mission. The restructuring plan of the cooperative sector includes the merging of 93 cooperative credit institutions into 18 monetary institutions under the supervision of the recently created Central Cooperative Bank.

The total amount of deposits in the Cypriot banking system has basically stabilized since October around a total of 46-47 billion euros, decreasing at a monthly rate just 0.3% in the last quarter of 2013. Despite the imposition of capital controls, the cumulative shrinkage of total deposits since December 2012 still amounts to all of 33.9% (17.3 billion euro), of which 27.2% were withdrawn since the end of March when the capital controls were imposed. Discounting the effect of the 5.8 billion bailed in deposits (of which 2.8 billion were accounted for in April statistics and 3 billion distributed between the months of June and August, see chronology in the Monetary and Financial Statistics of the Central Bank of Cyprus), the reduction on total deposits still amounts to 18.1% or 11.5 billion euro since the end of March 2013.

Cyprus total deposits by residence

Source: Central Bank of Cyprus

From the 17.3 billion reduction in the total outstanding amount of deposits in Cyprus after the establishment of the capital controls: 9 billion euro (or 52% of the total decline) came from domestic deposits, 1.2 billion euro (7%) from other euro area residents and 7.1 billion euro (41%) from residents of the rest of the world. Presumably, the bail-in of depositors hit depositors from the rest of the world harder, but lacking sufficient evidence, the amount of deposit flight by residence discounting the effect of the bail in cannot be estimated.

What can we conclude?

In absence of counterfactual, assessing how effective the restrictive measurements on capital movements in Cyprus have been at containing the deposit flight from the island is a very difficult task.  And more so as Cypriot authorities have been progressively relaxing the controls as the banking sector becomes more financially stable. All we can say is that at present there is calm after the storm; despite having less stringent restrictive measures than almost a year ago, the banking system remains stable. Though dealing with mounting non-performing loans remains the biggest financial challenge.

As we stated before, so far so good, but it is yet to be seen whether Cyprus will be able to lift the capital controls by the end of the year as expected by the Governor of the Central Bank of Cyprus, Panicos Demetriades

This post was written on request following discussions with @Alexapostolides.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article Download PDF More on this topic

Policy Contribution

The euro as an international currency

Is a more important international role for the euro worth pursuing? What measures would achieve this result, if it is worth pursuing?

By: Konstantinos Efstathiou and Francesco Papadia Topic: European Macroeconomics & Governance Date: December 18, 2018
Read article More on this topic More by this author

Blog Post

Brexit: Now for something completely different?

The life of Brexit. After a week of ECJ rulings, delayed votes, Theresa May’s errands across Europe and the vote of no confidence, we review the latest economists’ opinions to try to make sense of what has changed and what hasn’t.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: December 17, 2018
Read article More on this topic

Opinion

Can virtual currencies challenge the dominant position of sovereign currencies?

Marek Dabrowski and Lukasz Janikowski analyse why private money has historically failed in competition against sovereign currencies and what it means for modern virtual currencies, such as Bitcoin.

By: Marek Dabrowski and Łukasz Janikowski Topic: European Macroeconomics & Governance Date: December 15, 2018
Read article More on this topic

Opinion

How a second referendum could be the best way to overcome Brexit impasse

A new vote based on the revocation (or not) of Article 50 would give the UK government a clear signal to proceed in one direction or another, and thus trim down the number of options being touted – most of which are unworkable as things stand.

By: Maria Demertzis and Nicola Viegi Topic: European Macroeconomics & Governance Date: December 14, 2018
Read about event More on this topic

Past Event

Past Event

Investment and intangible capital

This event featured a presentation of the EIB's 2018 Investment Report.

Speakers: Román Arjona, Maria Demertzis, Debora Revoltella and Mario Nava Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 14, 2018
Read article More on this topic

Blog Post

Does the Eurogroup's reform of the ESM toolkit represent real progress?

The deal reached on euro-zone reform at the December 4th Eurogroup is not ground-breaking. However, it contains a number of incremental but potentially key technical reforms – in particular regarding the ESM toolkit. Some constitute an improvement, but there are also clear flaws that should be corrected at the Euro Summit.

By: Grégory Claeys and Antoine Mathieu Collin Topic: European Macroeconomics & Governance Date: December 13, 2018
Read article Download PDF More on this topic More by this author

Policy Contribution

Forecast errors and monetary policy normalisation in the euro area

What did we learn from the recent monetary policy normalisation experiences of Sweden, the United States and the United Kingdom? Zsolt Darvas consider the lessons and analyse the European Central Bank’s forecasting track record and possible factors that might explain the forecast errors.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 13, 2018
Read article Download PDF More on this topic More by this author

Essay / Lecture

A new statistical system for the European Union

Quality statistics are essential to economic policy. In this essay, Andreas Georgiou demonstrates the existence of fundamental risks inherent in the European Statistical System. He argues that a paradigm shift is necessary and sets out a model that would deliver the quality statistics the European Union needs.

By: Andreas Georgiou Topic: European Macroeconomics & Governance Date: December 12, 2018
Read article More by this author

Blog Post

Les gilets jaunes

For weeks, protesters wearing yellow motorist vests have taken to the streets of Paris to protest against the rising price of fuel. They have since taken on a wider role, and are seen as symbols of the growing popular discontent with President Macron. Silvia Merler reviews scholars’ opinions about this movement.

By: Silvia Merler Topic: Energy & Climate, European Macroeconomics & Governance Date: December 10, 2018
Read article More on this topic

Blog Post

Providing funding in resolution: Unfinished business even after Eurogroup agreement on EMU reform

The recent Eurogroup agreement on euro-area reform foresees a greater role for the European Stability Mechanism (ESM) as a backstop to the banking union. This is a welcome step forward but important issues remain. We assess the agreement on how to fund banks after resolution and the best way to organise the fiscal role in liquidity provisioning to banks. We argue that the bank resolution framework will remain incomplete and its gaps could result in important financial instabilities.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 7, 2018
Read article More on this topic More by this author

Blog Post

ECB’s huge forecasting errors undermine credibility of current forecasts

In the past five years ECB forecasts have proven to be systematically incorrect: core inflation remained broadly stable at 1% despite the stubbornly predicted increase, while the unemployment rate fell faster than predicted. Such forecast errors, which are also inconsistent with each other, raise serious doubts about the reliability of the ECB’s current forecast of accelerating core inflation and necessitates a reflection on the inflation aim of the ECB.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2018
Read about event More on this topic

Past Event

Past Event

The future of the External Investment Plan in the next MFF

What are the challenges for implementation of the new EIP?

Speakers: Zsolt Darvas, Mikaela Gavas and Hannah Timmis Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 5, 2018
Load more posts