By Angelos Anastasiou
The performance of Cypriot banks during the European Central Bank’s ‘stress-test’ was the single greatest achievement since the March 2013 implosion of the island’s economy, Finance Minister Harris Georgiades said yesterday.
The test was designed to measure the shock-absorbent capacity of 130 banks across Europe, both under current economic projections – the baseline scenario, with minimum capital requirements at 8 per cent – and significantly deteriorating ones – the adverse scenario, requiring a minimum of 5.5 per cent in tier 1 capital.
Three out of four Cypriot banks participating in the exercise – the Co-operative Central Bank, RCB (formerly Russian Commercial Bank), and the Bank of Cyprus – were found to have met minimum capital requirements under both sets of circumstances, while Hellenic was determined to need to raise some €105 million in fresh capital, which it had already announced plans for prior to the test results.
Stress-testing was scheduled to be completed prior to the ECB taking over full supervision of Eurozone banks in November.
“It is our single greatest achievement since March 2013,” Georgiades told state radio yesterday. “Cypriot banks found themselves staring down the abyss between 2011 and 2013, and one of them collapsed. Today we can say that Cypriot banks enter the Single Supervisory Mechanism adequately capitalised and in a position to face the most remote, extreme risk,” he added.
Georgiades said the test results meant that following a sharp credit crunch, the banking sector could now start servicing the economy’s needs, but this should under no circumstances mean a return to the excesses of the past.
“Today we have a completely different landscape than in previous years,” he said. “Not only is there tougher supervision at the European level, but also at the national level we have legislated a stricter set of rules.”
The finance minister pointed out that the results proved the final stabilisation of the Cypriot banking system, and warned against persistent rumours that have hurt confidence in banks since March 2013.
“There is no more room for irresponsible rumours and joke analyses relating to our banking system,” he said.
Presenting the results of the stress test on Sunday, Governor of the Central Bank of Cyprus Chrystalla Georghadji was equally triumphant.
Exalting the banks’ feat as the single greatest achievement since the “2013 devastation,” Georghadji noted that Cyprus may now look to the future optimistically.
“Following the release of the test results, we hope that banks will now channel deposits into the real economy,” she said.
“It is an accomplishment of extraordinary importance – one that very few thought was possible, and even fewer fought for,” Georghadji said.
The Governor said she felt vindicated for the CBC’s early urgings to banks to raise capital, even though “at the time some reactions and objections were raised.”
“We stayed the course,” she said. “And here we are today, able to look to the future with optimism.”
A year and a half after the March 2013 Eurogroup decisions that shattered depositors’ trust in banks, leading to the imposition of strict controls on the movement of capital, Georghadji said the test results would boost confidence and pave the way for the lifting of the last of the controls.
In a news conference on Monday, Georgiades also remarked on the possibility of lifting capital controls.
“There is no specific timetable in lifting the last remaining restrictions in capital movement imposed in 2013,” he told reporters.
“After yesterday’s outcome and the restoration of confidence in the banking system, we will gradually continue until the last remaining restrictions are lifted.”
Georgiades said that as a result of a period of unreasonable lending immediately preceding March 2013, households and companies had accumulated enormous private debt – at around €60 billion.
“Under these circumstances, the banking system should continue with those steps that will on one hand allow this very high lending to fall and the restoration, at the same time, of the ability to provide new lending where new loans can be given without the mistakes of the past at competitive interest rates,” he said.
Addressing mounting non-performing loans and the lowering of interest rates remained the two main challenges facing the banking sector and the economy at large, according to the finance minister.
“Although interest rates are at their lowest point ever, they remain high compared to the European average,” he said.
“Therefore we are interested in seeing the effort to consolidate loan portfolios as it is a necessary component for our banking system to be able to serve the economy’s need.”
According to the stress test results announced by the ECB on Sunday, the Co-operative Central Bank (CCB) posted a capital surplus of €331 million, the highest among the four Cypriot systemic banks under review, despite drawing the most provisions for bad loans, thanks to a €1.5 billion capital injection from taxpayer money last year.
But more importantly, the CCB’s capital adequacy also means it won’t have to draw on the €1 billion earmarked for its capital needs as part of a €10-billion bailout loan by the EU and the IMF.
“That, along with a recent Eurostat downward revision of GDP levels, means that €1 billion is deducted from public debt calculations, bringing it down to a viable 105 per cent – down from a projected 127 per cent,” Georgiades said.
RCB followed, with a surplus of €112 million, and the Bank of Cyprus, which issued €1 billion of new capital over the summer, passed the test’s minimum
requirements with €81 million to spare.
The only Cypriot bank to be in need of additional core-tier 1 equity was Hellenic Bank, which was found €176 million short. The bank had announced plans to issue new capital for existing shareholders, following a recent €71 million rights conversion, of approximately €105 million.
“The amount of capital to be issued will be finalised in the coming days,” said Hellenic’s chairwoman Irena Georgiadou.
“The amount will be much higher than the minimum needs determined by the ECB review,” she added. “The cushion is going to be very big.”
While 25 of the Eurozone’s 130 biggest banks failed the ECB test with a total capital shortfall of €25 billion, 12 have already raised €15 billion thus far to repair their balance sheets.