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Bad bank beneficial only under certain conditions: Fin Min

Creating a bad bank to manage problematic loans would be beneficial only under certain conditions, Finance Minister Harris Georgiades said on Friday.

Georgiades agreed that a bad bank or an asset management company (AMC) was an option “but as we have heard from foreign experts, this is a prospect whose implementation requires specific preconditions and would be beneficial only under certain conditions.”

The minister was speaking after a conference on the management of non performing loans (NPLs), organised by the European Investment Bank and the chamber of trade and industry.

“Consequently, it is not automatically an easy or feasible, or useful option,” he said.

Creating such a company did not mean the borrower would automatically be absolved or remove the need to carry out viable loan restructuring.

“It just transfers the matter from the bank to a separate company,” he said.

Georgiades said the government was not examining the possibility, but it was listening to recommendations and establishing the pros and cons of each option.

He added that NPLs were the most serious challenge the economy continued to face.

Georgiades said progress has been recorded on all fronts since the peak of the crisis in 2013, but this should not lead to complacency.

The Cypriot banking sector’s NPLs were around 48 per cent of the total – some €27bln. Despite the high rate, it did appear that the upward trend seen in the past couple of years has been halted.

In December, an International Monetary Fund official said there was no room for the creation of an AMC that will be funded – entirely or in part – by taxpayer money to address the issue of NPLs.

Vincenzo Guzzo said it would be a mistake, after the efforts made thus far to strengthen public finances, to use the government’s balance sheet to fix the banks’ balance sheets, and noted that attracting private funds to create a privately-owned and funded AMC could be a viable alternative.

But even a privately funded AMC would require carefully-planned mechanisms to function properly.

“We should be mindful of the challenges in transferring assets at a price agreeable to both the private investor and the bank, in the absence of state funding or government guarantees,” he said.

“Moreover, banks have already established their own internal workout units, and it is not clear that a third-party AMC would be more efficient at restructuring NPLs than the banks themselves.”

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