Later this month, it is anticipated that the Central Bank of Cyprus will issue ‘guidelines’ requiring the commercial banks to better manage credit risk. (In an earlier article, “The Property Bubble“, Dr Alan Waring reported that the executives of one bank had been summoned to a ‘crisis meeting’ to discuss plans to deal with a possible wave of loan defaults by property developers).
It has been reported that these ‘guidelines’ will place demands on the banks to operate within the framework of an approved credit strategy and to determine the policy and the procedures for the management of the credit risk.
The guidelines will also define a set of ‘rules’ for recognising, measuring, observing and reducing credit risk, as well as the responsibilities of the Bank’s Board of Directors and other high-ranking officials regarding the management of the credit risk.
In addition, the guidelines will require banks to introduce an independent unit to secure the suitability and enforcement of the principles for the management of credit risk and will also recommended the introduction of internal rating of the lending based on the credit risk.
In recent times, loan growth in Cyprus has been accelerating at an alarming rate. In May, it stood at 33.47% against 35.35% in April 2008 and more than double the 15.83% in May 2007.
Will this move by the Central Bank mean that the commercial banks will have to scrutinise property developers’ loan applications more closely – and their management be held responsible for loan making decisions? If so, I envisage a further drop in building permit applications, which are already down by more than 15% on last year.