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Our View: Good and bad bank split could be only option for BoC

Bank of Cyprus Chief Executive John Hourican

PERHAPS the splitting of the Bank of Cyprus into a good bank and a bad bank should have been done last summer when the idea was first mooted by the Governor of the Central Bank Panicos Demetriades. However there was very strong political opposition to this suggestion, the majority of the parties siding with the big developers who stood to lose the most from such a move. The big developers, with the big NPLs, organised themselves into a pressure group and eventually got their way.

It now appears that this was just a temporary reprieve for the developers. In an interview he gave to Reuters this week, CEO John Hourican said the bank was reviewing its restructuring plans and had appointed HSBC to help “us look at our overall corporate finance agenda including the entire structure of how the group is organised.” He said that he would like to re-open the entire option list for the bank, with a view to “accelerating the restructuring plan”. He wanted to know whether the bank would “continue with the plan it currently has” or whether there was “a possibility of a more formal good bank/bad bank”.

This could be interpreted as an admission by Hourican that restructuring plan that kept the €22 billion of good and bad loans in one bank was not producing the desired results. It would appear that efforts to bring NPLs under control have been unsuccessful – in fact they are on the rise – thus hampering the bank’s prospects of a return to normalcy. A bad bank would free the BoC of its problem loans and allow the creation of a normal bank that could support the economy noted Hourican.

The need for the bank to be separated from its toxic assets was also a proposal in the October report of the Commission set up to look into the future Cyprus banking sector. It was ignored then, but the split now seems unavoidable, even though conditions are even worse. However we should note bad banks had been used successfully to clean up the banking sectors of Ireland and Spain. There does not seem to be an alternative for the BoC, which is having great difficulty operating as a normal bank with its toxic assets.

There was an immediate reaction to Hourican’s interview from the bank’s board, the Cypriot members of which have links with the political parties. A report in Thursday’s Phileleftheros claimed several Cypriot directors were caught by surprise as the split into a good and bad bank was not envisaged by the restructuring plan. But the restructuring plan is not written in stone. If it has failed to achieve the desired results there is no harm in making changes so that it does.

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