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Banking commission final report released

The Independent Commission on the Future of the Cyprus Banking Sector has published its final report and recommendations for the long term recovery of the Cypriot banking industry.

Bank-of-Cyprus-HQLAUNCHED in November 2012, the Independent Commission on the Future of the Cyprus Banking Sector was set up by the Central Bank of Cyprus to make recommendations on ways to raise the strength of the sector, to improve supervision, and to promote banking competition in Cyprus for the benefit of consumers and businesses.

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

Readers' comments

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  • @Denis & @Robert

    Currently non-Cypriots are buying around 82 properties/month.

    Assuming that 75% of these are vacation homes it’s going to take 68 years to clear the unsold inventory!

  • Denis O'Hare says:

    @ Robert Briggs
    Thank you, your support is much appreciated.

    It was not my comment Robert it was a quotation from the report and I am not surprised you are also a little bit confused by the jargon used in this context.

    I would imagine that the authors meant that if the banks can settle some of these developer mortgage NPLs by seizing and selling the developers’ assets (e.g. these 50,000 unsold properties) that they could reduce this particular burden which is ‘leveraging’ (or skewing) the banks’ loan portfolio and overall financial standing.

    However, it would appear that they have not been informed that the market has collapsed and these deteriorating properties will be almost impossible to sell in the foreseeable future. Many will be unfinished and also on incomplete sites, others will be illegal as a result of planning irregularities – who will complete them, the banks? Perhaps this is why BOC hasn’t made all these additional Laiki staff redundant?

    Others will be on sites where the (usually large) developer has initially been given a loan perhaps 5 or more times the actual value of the land (via bent bankers, valuers, land registry officials, et al) and perhaps has also not been serviced for years. As we have seen more and more lately some developer land title deeds will also have numerous legal claims against them as a result of court judgements sought by other creditors (plus the Inland Revenue).

    Consequently, in these situations these NPLs cannot be cleared simply by “quickly” selling the properties on these sites, it is far more complicated than these authors have been informed.

    It also appears from the report that they consulted with quite a few individuals and organisations in coming up with these findings and suggestions – one wonders why didn’t they just ask Nigel about this issue! – at least they would have immediately been given the true picture.

  • Robert Briggs says:

    @Mr Denis O’Hare, many thanks to You and your Team’s awesome and brave efforts to secure justice for the property buyers who have been stitched up and ripped off, here in Cyprus.

    However in your comment, “the banks will deleverage,” what does this mean?

    Once again, many thanks for all your help and advice. RB.

  • Andrew says:

    So the Cyprus Banks employed “Risky strategies,had Weak governance, used bad Business methods,together with Ineffective supervision all wrapped up in an inbred Culture” and yet there is no mention of the whole shambles being concealed by lawyers.

    The social cost of seizing homes from buyers who have already paid in full for their homes are not even pondered. In fact the “social cost” is barely considered at all.

    What a shame that thousands of hoodwinked buyers did not get a reprieve. Why not give to everyone, who has bought a home in Cyprus, their Title Deeds now?

  • Steve.R says:

    Everybody is still missing the point here. Without title these repossessed properties will be worthless. Add the fact that most will have Specific Performance registered against them then it just gets a whole lot worse. The price these properties would fetch would hardly cover the legal costs.

    I was informed by Alpha Bank over 18 months ago that they do not have the facility to repossess and re-sell properties. It looks like more jobs for the lads then. The very people that let you down in the first place are now getting another bite of the cherry. A lot of these dwellings have been abandoned and in a bad state of repair so it drives the price down even further. I don’t have the answer but this situation must have arisen somewhere else in the world

  • @Denis O’Hare – they’re clearly confusing ambition with ability.

  • Chris Elliott says:

    Fully agree with Denis comments that due to Cyprus size and level of NPL it would be a sensible approach for the banks to restructure the debt and sell off these properties at realistic price to attract foreign buyers back in to the property market. However until such time as the title deeds fiasco is finally resolved then Cyprus property market will continue to suffer and house prices will be in free fall

  • Denis O'Hare says:

    The words ‘naive’ and ‘whitewash’ come to mind – just an example from the Report:

    “We believe that Cyprus’ small size could make recovery more achievable than in larger countries going through a similar process. For example, the unsold inventory of vacation houses is about 50,000. Provided prices are lowered sufficiently after repossession by the banks, an inventory of this relatively small size could be cleared quickly through sales to foreigners. NPLs will be reduced quickly and the banks will deleverage.”

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