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Our View: Unfortunately law can’t be passed to boost confidence in banks

AN EPIDEMIC of small reductions in bank interest rates on selected loans broke out this week. First the Bank of Cyprus and Alpha announced small cuts and they were followed by Hellenic and Piraeus; co-ops also said they would lower rates.
The move will have pleased the political parties which had been calling for lower rates for some time, threatening to regulate these through legislation if the banks failed to act. Bills regulating interest rates were to have been discussed at the House finance committee on Tuesday, but the meeting was put back a week.
But committee chairman Nicholas Papadopoulos spoke on behalf of all the parties in warning that “steps must be taken to lower interest rates, otherwise parliament will legislate.” The banks heeded this advice in order to avoid legislation which, most probably, would have stipulated bigger cuts across the board as the politicians’ primary concern is to show the electorate they were taking measures that would help.
In effect, the rate cuts were political rather than business decisions, taken under duress by the bank boards to avoid reductions by legislation that could have been unmanageable under the current conditions. Unfortunately, they were not an indication that things have been improving or that the banking sector was on the path to recovery. Nor will these token reductions of half or one percentage point on housing loans make the slightest bit of difference to individuals or the economy.
To be fair, the politicians are right to make an issue out of the excessively high interests – the highest by far in the Eurozone – but these are a symptom of the banking crisis that could not be remedied through legislation. The problem is much deeper, relating to the lack of confidence in the banks and the steadily declining deposits combined with the heavy losses and high provisions. The latest estimate of the total non-performing loans is in the region of €15.5 billion.
The argument, put forward by DISY deputy Prodromos Prodromou that NPLs were directly linked to the issue of interest rates which made the cut necessary was correct, in theory. In practice, however, it is highly unlikely that lower rates would reduce NPLs significantly. Would a reduction of one or two percentage points in interest enable a cash-strapped company or a jobless individual that had not been making loan repayments to resume paying?
So far, banks have reduced monthly instalments by lengthening loan repayment periods which was helpful but this would have no effect on their balance sheets in the way lower interest rates would. Of course politicians do not see things in this way, complaining that high rates are suffocating the economy and discouraging investment. This is a very similar criticism as that made against the government regarding its failure to spend money on development.
The truth is the state has no money to spend on development projects just as there is no money in the banks for investment. Interest rates for new loans are high and prohibitive for investment because banks are illiquid which means funds for loans are in very short supply. If the rates were lowered by law, banks would offer even fewer loans.
It would be wonderful if the politicians could tackle the banking crisis through legislation that would miraculously reduce NPLs and make funds available for investment. The troika clearly stated the nature of the problem in its second quarterly review of the adjustment programme. “Looking ahead, the main challenge is to repair the banks’ balance sheets and restore depositor confidence. This is key to the resumption of credit to the private sector, which is needed to support the economic recovery,” the troika report said.
While there has been progress in the restructuring of the banking sector and the banks have been recapitalised (over-capitalised some have said) there is still no public trust. The Bank of Cyprus now has a CEO and Hellenic Bank met is capital needs with private investors’ funds – a big vote of confidence – but it seems there is still a long way to go before depositor confidence is restored. Unfortunately, deputies cannot pass a law forcing people to trust the banks again, after everything that happened this year.

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