Cyprus Mail
Cyprus

BoC auditor speaks of risky lending policies

Constantinos Tsolakis

By Poly Pantelides

THE ISLAND’S biggest lender’s expansion overseas was driven by a risky lending policy, which led to an increase of non-performing loans and risky assets, the Bank of Cyprus’ (BoC) internal auditor has said.

Constantinos Tsolakis testified yesterday in an inquiry into how the country’s banking system and economy degenerated in the years leading to March’s €10 billion EU/IMF bailout.

Tsolakis, the BoC’s internal auditor since 2007, witnessed the bank’s expansion in markets including Russia in 2008 through the purchase of Uniastrum Bank. In the summer of 2012, the bank asked for a €500 million bailout to meet its recapitalisation needs following the loss of the majority of over €2 billion of Greek government bonds purchased in late 2009 and early 2010, which were written down during a sovereign debt write-down in 2011.

Between 2006 and 2011 loans would be handed out even lacking evidence they could be repaid, or even when clients’ previous loan agreements were problematic, Tsolakis said. “Relaxing the criteria for loans translated to an increase in non-performing loans (NPLs),” he said.

As part of Cyprus’ bailout, the BoC came under the administration of the Central Bank and emerged on the other side only this week after its uninsured depositors were forced to recapitalise it. Depositors have had to accept the conversion of 47.5 per cent of their deposits larger than €100,000 into shares.

In the previous years, between 2006 and 2011, the bank became saddled with problematic loans, including some that came in tow with Uniastrum. Tsolakis said the new recapitalised BoC has decided to push ahead with legal action to pursue compensation in relation to the Uniastrum loans. He was not asked to elaborate, but the circumstances of the purchase are part of an ongoing criminal investigation.

Tsolakis conducted a special investigation in relation to three clients, and interviewed five bank employees, he said.

One bank employee said that any suggestions he or she would make, would not be accepted if they could possibly lead to the loan request being rejected. “Whenever I could, I included terms to improve bank positions, but that was not always possible,” the same bank employee told Tsolakis.

Another bank employee said that because of “upper management’s desire to expand” they were forced to grant loans that did not meet all lending criteria. “Because of the culture in the bank, I couldn’t easily express disagreement,” the employee told Tsolakis who was interviewing him in relation to a €20 million lending limit extended to a client in relation to an immoveable property purchase.

“It is this culture that brought the bank to this dire condition,” Tsolakis said.

A consequence of increasing lending was that in the short term this pushed up profits after tax and generated arguments for executives’ big bonuses, granted at the end of the year, Tsolakis said.

“NPLs had no impact on bonuses… because the management team had already received the bonuses.”

Meanwhile, the bank continued investing in risky Greek debt, presenting those bonds as “held to maturity,” an accounting action allowing the bank to present the bonds at face values and not current values, avoiding showing losses on the bonds, as NPLs eroded the bank’s balance sheets.

In December 10, 2009 former BoC chief executive Yiannis Kypri told financial news portal Stockwatch the BoC had reduced its exposure to Greek sovereign debt to roughly €0.1 billion (Tsolakis said it was €180 million). About a year later, the BoC came to hold over €2.0 billion, suffering major losses as a result.

“To the question, did the board know? The answer is that since financial reports were being presented every three months… yes, the board must have known about the purchases,” Tsolakis said.

He also relayed a report by former chief executive Yiannis Kypri who claimed that in a May 2010 board meeting in Greece, board member Costas Severis suggested to former CEO Andreas Eliades they sell the Greek bonds.

“Eliades unleashed a scathing attack and no other board member expressed a different view,” Tsolakis said.

Tsolakis said Eliades informed him in July 2012, when Eliades was forced to step down, that Central Bank governor Panicos Demetriades asked for Tsolakis’ resignation. A few months later, in November 2012, Tsolakis handed over a special report to the Central Bank at their request. Though Tsolakis’ describes bad governance practices implicating Eliades and former group general manager of risk and markets, Nicolas Karydas, he never interviewed them.

Tsolakis was asked to comment on Eliades’ loans and referred to some €2 million Eliades had taken out in Greece.

Although presented as a housing loan, only €280,000 went towards housing needs, and the rest was used by Eliades to pay back debt in Cyprus, Tsolakis said.

Related Posts

Prison director Anna Aristotelous to meet with President Anastasiades

Andria Kades

Crackdown on illegal workers at abattoirs

Andria Kades

Stelios Awards now accepting applicants for thirteenth year

Iole Damaskinos

Cyprus Bar Association to stage a two-hour protest on Thursday

Andria Kades

Cyprus can adapt to changing circumstances, says finance minister

Post office warns of scam

Staff Reporter