By Angelos Anastasiou
DELEGATIONS from the four Cypriot banks undergoing the European Central Bank’s (ECB) stress-testing simulation exercise to determine capital-raising needs are on their way to Frankfurt, where they will be presented with “partial and preliminary” results of their respective asset-quality review (AQR) later in the week.
The exercise will be concluded prior to the ECB’s takeover of oversight for systemic banks throughout the Eurozone – 124 in all – in November.
Full results will be officially released on Sunday, October 26, though banks will be given advance notice two days earlier in order to prepare their response ahead of resumption of business on the following Monday.
Delegates from the Bank of Cyprus, Hellenic Bank, the Cooperative Central Bank, and RCB – formerly Russian Commercial Bank – as well as the Central Bank of Cyprus will receive preliminary findings in separate three-hour meetings with ECB officials – the BoC and CCB on Tuesday October 28, and Hellenic and RCB one day later.
Banks will be asked to submit any remarks and objections to the figures, which will be considered when drafting final reports.
ECB stress tests comprise an analysis of each bank’s balance sheet as at the end of 2013, allocating risk-weighted value to its holdings – or asset-quality review – and a subsequent estimation of recapitalisation needs under normal economic circumstances – the baseline scenario – and under extreme economic conditions – the adverse scenario.
At a minimum, banks will be required to hold an 8 per cent capital buffer in Core Tier 1 capital under the assumptions of the baseline scenario, and 5.5 per cent under those of the adverse scenario.
Should any bank’s figures drop below either of these benchmarks, it will be required to raise sufficient capital to meet them.
Earlier hopes that Cypriot – and Greek – banks may have been cast in a more favourable light due to a severe banking crisis ravaging both economies, which would earn them more flexible stress-testing, have been dampened by last week’s ECB decision to include Greek and Cypriot banks in its programme to purchase asset-backed securities and covered bonds from Eurozone credit institutions.
The test results – both partial this week and official later on – come against a background of political and economic uncertainty in Cyprus, with the foreclosures bill in limbo pending the Supreme Court’s ruling on the accompanying bills voted by the House and vetoed by President Anastasiades.
The contentious bills, which limit the reach of the basic foreclosures legislation, are not merely a source of political conflict but also prevent the release of the next tranche of financial aid to Cyprus from its international creditors.
At 15.1 per cent of Core Tier 1 capital following its successful recent raising of €1 billion in new capital, the Bank of Cyprus seems best-positioned to pass the test, though it also suffers tremendous amounts of non-performing loans.
Hellenic, recording 8 per cent of shock-absorbing capital, has also announced a rights-issue on an as-needed basis according to the test results.
But the prospect of the CCB, which has already been recapitalised with €1.5 billion of government money, being forced to tap an additional billion earmarked by the government for its future recapitalisation needs raises red flags for the Finance ministry, as it would further strain public finances and question expectations of Cyprus’ quick economic turnaround.