The European Commission said on Monday it had found recapitalisation and restructuring aid measures in favour of the cooperative banking sector in Cyprus to be in line with EU state aid rules.
In a statement, the Commission said the measures would enable the cooperative banking sector to become viable in the long term without continued state support, while limiting the distortions of competition created by the aid.
Commission Vice President in charge of competition policy Joaquín Almunia said: “The cooperative banking sector is heavily burdened by the poor quality of its loan book, due to past careless lending. The in-depth restructuring plan approved today lays the foundations to transform the cooperative banking sector into viable credit institutions servicing the Cypriot economy on a sustainable basis”.
Due to a high proportion of non-performing loans, caused by the current recession and careless lending in the past, the Cypriot banking sector needs to rebuild a solid capital buffer through a recapitalisation of €1.5 billion.
The restructuring plan approved on Monday represents a major overhaul of the structure and commercial practices of the group. The number of cooperative credit institutions will be reduced to 18 via mergers. They will be owned and controlled by the cooperative central body, which will in turn be owned by its new 99 per cent shareholder, the State.
Adequate risk management, loan underwriting and claim management policies will be developed. Managing actively the large amount of non-performing loans through a newly established specialised division is a key component of the plan. New management teams are in the process of being appointed, both at central and at credit institutions level.
This restructuring strategy for the cooperative banking sector has been developed in close coordination with the European Central Bank (ECB) and the International Monetary Fund (IMF) and is part of the assistance programme for Cyprus.
The Commission said it would closely monitor the correct and timely implementation of the plan. Given the challenge that the implementation of such an ambitious restructuring plan represents, it is encouraging that the authorities have started to implement its first key steps, such as the merger among the cooperative credit institutions. Such momentum will have to be maintained to ensure a successful implementation of the plan.
The cooperative banking sector is a key contributor to the financing of the Cypriot economy. It is focused on collecting domestic deposits and lending to residents. Until recently, there were close to one hundred cooperative credit institutions, which were not controlled by the cooperative central bank to which they were affiliated.
Each institution was owned by its members, namely its customers. This decentralised structure and closeness with borrowers led to careless lending, with no serious verification of the ability of the borrowers to repay their loans, and to a culture of non-repayment, the Commission said.
“As a consequence and due to the deep current recession, over 40 per cent the loan book is now non-performing, and this percentage is increasing.”