Cyprus Mail
Cyprus

Editor’s choice: reader’s letter – Is the central bank on automatic pilot?

Central Bank governor Chrystalla Georghadji

The Central Bank of Cyprus (CBC) and its governor are noticeable by their total absence in matters of financial reform and bank supervision. If the CBC is indeed failing on governance, as we were led to believe by one of the two board directors who resigned, it is time someone broke into the cockpit to salvage the remnants of the banking system as there is no trust anymore in the CBC.

If the present situation is allowed to continue without any serious change either by the banks or the government (the CBC is not involved according to the minister’s view) then there will no foreign direct investment and parliament might as well issue dictats to run the banks.

The CBC and its governor, if unable to act as a proper guardian of the financial sector and push actively and with a loud voice for reform, might as well not exist and we would be better served by the European Central Bank (ECB). The foreign investors who recapitalised the banks see an active parliament and a passive CBC: a recipe for disaster

In the storm that followed the troika’s brutal action to resolve Laiki and to bail in Bank of Cyprus, the only bank that was bailed out (by the tax payer) was the co-op which the government and parliament could not allow to go bankrupt for political reasons. It seems this would have been the best option as their balance sheet is probably the worst.

The parliament of course would never contemplate such action and were more willing to allow Laiki to close down and Bank of Cyprus to be saved by taking 47.5 per cent of depositors’ money.

The parliament can scream and shout, but they are more responsible for the mess of the banking system since every measure that could have improved it has either been rejected or watered down.

The question is what has the CBC proposed or actively promoted to resolve the banking system’s faults?

It is no surprise that the CEO of the Bank of Cyprus, in one of his rare accurate observations, said that the MPs were protecting the big developers, and here again the CBC was passive. It is as if the CBC and its governor were not involved in addressing the non-performing loans (NPLs) which have plagued the economy and made distressed borrowers’ lives much worse.

If we look back to July 2013 at what was proposed to salvage the banking system from its growing and serious problem of real estate-linked NPLs, we see that at all times it was the politicians, and the banking officials controlled by them, who objected to a solution akin to other Eurozone member states; that of taking the loans off the balance sheet.

In August 2013 all political parties and the head of the church, without knowing any details of a proposal agreed between the CBC, the ministry of finance and the troika, engaged in a chorus of disapproval. The Central Bank was accused at the time of acting without the approval of the new owners of the Bank of Cyprus and the minister, who took part in the discussions, went quiet. When the CEO of the Bank of Cyprus gave an interview to Reuters in April 2014 and mentioned the bad bank solution it was anathema to some and he was forced to retract by the former chairman of the Bank of Cyprus who knew better; the former chairman was happy to explain that a development bank would be a better idea, the words uttered after a meeting with the president.

So whilst all this has been happening, what role has the CBC played to promote any solution? Such a role is vested in the Central Bank by law and by the ECB and yet we have a board and governor more interested in the loans to MPs and the activities of the former deputy attorney-general. At least the former director Stavros Zenios, better informed about the issues of NPLs, understood there was no policy making role for the board due to the non existent collegiate behaviour of the governor and quit. This is praise worthy and perhaps the governor’s lack of action in rectifying the issue of her competence and inter personal skills make her a liability to the banking system and to the economy.

If the governor cannot perform her role, and the CBC is a lame duck, she should do the honourable thing and resign and let a new person with adequate skills take over. The minister of finance’s recent comments damage the independence and credibility of the CBC irreparably. The governor has been indirectly accused of being inept and ineffective by none other than the minister of finance.

If the CBC governor could show the public and small businesses that she has actively pushed the banks to restructure loans properly, addressed the NPLs, campaigned for better governance at banks and for more transparency, there could be a mitigating case for her to stay on. Instead, the banks get on with their job with little care for what the CBC does or says. Can the governor put up a fight with Josef Ackermann or Irena Georgiadou and tell the boards they are not doing their job? Can she tell the banks’ boards what to do when she herself has shown to be effectively unable to master the issues? By not acting, the CBC has let parliament determine the efficacy of the banking system, and that is not their role .The CBC is not an institution which belongs to an independent official appointed for a term. It is more the custodian and steward of the banking system and by definition the financial sector at large.

It is time to see if the CBC is on automatic pilot or can be steered by the captain since the buck stops with her.

 

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