The ‘existential threat’ to conventional banking models


By Rennos Ioannides*

Previous articles in the Bankers’ Alert series have examined how conventional banking models, which are inherently conservative, may inhibit banks’ efforts to successfully clean up their balance sheets, by efficiently dealing with the insurmountable level of Non-Performing Loans (NPLs).

We have argued that traditional banking rationalism, in the form of the traditional management of NPLs, may not be the wisest choice in times of turbulence, whereby one in two loans is non-performing, against a backdrop of intense pricing competition among banks, which is squeezing their profitability. Instead, crisis conditions require, by their very nature, thinking outside the box, in conjunction with pace and determination.

Arguably, more radical and revolutionary strategies and actions ought to be taken by banks. Otherwise, their very existence may be put in jeopardy, given that the magnitude of their NPLs is eating away on their profitability and their capital adequacy on the one hand and absorbing their liquidity and their resources on the other. As a consequence, the capacity to provide new lending to fund productive opportunities is severely curtailed, stifling as a result the entire economy.

Certain banks have recently embarked upon a ‘road of recovery’, taking a number of ‘quantum leaps’:

– They have realised that NPL management is beyond their core skills and have brought in, or outsourced to, specialised experts to help them out

– They have created partnerships with specialised experts to set up independent debt servicing platforms. Being outside the conventional banking business structure, these accommodate much greater flexibility with regard to the range, the boldness and the long-term sustainability of the solutions offered to borrowers.

Even more far-reaching quantum leaps are available though:

Bank partnerships: A conceptually sound move would see smaller banks joining forces to create a shared independent debt servicing platform. Smaller banks would benefit from substantial economies of scale in terms of costs, resources, expertise and effectiveness. Not to forget that local borrowers are typically multi-banked, thus making a concerted bank effort, to deal with the totality of their debts, a pre-requisite to debt sustainability.

Asset management company (AMC): Going a step further, banks may pull up their resources to jointly set up a local AMC. Admittedly, normal practice calls for the state to participate and play a pivotal role in such a venture. Although at present it seems unlikely that the state can or would want to participate in such a venture, given the state of public debt, we cannot rule out this possibility in the future from becoming an obligatory requirement, should progress towards bank balance sheet cleaning up prove insufficient.
A more revolutionary move would, however, entail local banks assuming the driver’s seat, by taking the initiative for the creation of a local AMC, without public participation or with minority public participation. All, or a number of local banks, join together to participate in a local AMC, with a totally separate and independent managerial and operational structure. Private sector investment must invariably be sought to join in the set-up and contribute to the funding part of the scheme. Selected parts of the banks’ NPL portfolios, and possibly of their real estate owned portfolios, are transferred in exchange for shareholding participation in the new venture. Arguably, a carefully constructed AMC can actually fall outside the scope of the Bank Recovery and Resolution Directive which would typically trigger off resolution for the participating banks (see, for example, the ECB’s Financial Stability Review, November 2016).

Admittedly, this is no easy or simple task, either organisationally and procedurally, or with respect to funding and valuing the assets to be so transferred. It is a possibility, nevertheless, not to be outright overruled and discarded without some deliberation, given that it may present local banks’ only realistic opportunity to swiftly unclog their balance sheets and allow them to revert to their reason d’etre of financing the real economy.

Merge and consolidate: The local banking sector is undoubtedly hampered by excess capacity with too many banks chasing too few credit-worthy opportunities. The intense competition is exacerbated by the unprecedented growth of alternative digitalised channels and financial technology companies on the one hand and sharply rising compliance, regulatory and reporting costs on the other hand.

As put forward by the CEOs of the country’s major banks, consolidation will invariably take place. Indeed, there is no other way, particularly with regards to the many smaller banks operating in Cyprus, to gain economies of scale and cost efficiencies and sufficient clout in the market. Carefully carved-out mergers and acquisitions must be seriously considered by market participants and such strategic considerations must be placed high on the agenda of bank boards.

Successful revolutions are typically marked by speed, determination and decisiveness, unrelenting perseverance and tenacity, bold and daring moves, and intense flexibility and adaptability but also strict discipline at the same time. These are not typical traits of the conventional set-up of banking rationalism and conservatism.

In these critical times, however, whereby banks are striving to make ends meet and to de-congest their heavy loads which are suffocating their survival, revolutionary moves may indeed be their best bet to transform their future.

Fundamentally, this series of the Bankers’ Alert articles is proposing a more radical approach for the management of the key issues faced by local banks, the main one of course being none other than NPLs, as food for thought for fruitful deliberations about the future of our banks.

As things currently stand, this future is, to say the least, uncertain in light of the multiple and severe pressures faced by the banking sector. The viability and sustainability of banks’ business models will undoubtedly come under intense regulatory scrutiny and questioning in the years to come.

It is, therefore, high time that banks start debating their futures and, indeed, the very essence of their viability and survival. There is substantial cumulative knowledge and expertise internationally which can be explored and exploited to assist the discussion.

To paraphrase John Hourican, CEO of the Bank of Cyprus, banks must face their existential threats head-on.

(*) Rennos Ioannides is a financial analyst [email protected]


About Author

Stelios Orphanides is a journalist at To contact Stelios Orphanides: [email protected]

  • Bob Ellis

    No amount of reshuffling or fancy palns will cover 40 years of corruption, nepotism and mismanagment at all levels. At least one more high street bank will have to close to show that Cyprus is serious about dealing with the unresolved issues that are not being dealt with. At the current diminishing rate the NPL mountain will be at 15% in 2072! still an unacceptable number. Sitting with our fingers in our ears and our eyes closed will not make the problem go away.

    • Cydee

      Bit like putting one clean dinner-plate on top of a dirty one…..