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Banks did not achieve the desired reduction in NPLs, Georghadji says

Central bank governor Chrystalla Georghadji

Cypriot banks in the years following the 2013 financial crisis did not achieve the desired reduction in non-performing loans, Central Bank Governor Chrystalla Georghadji has said, adding that the further reduction of NPLs to sustainable levels constituted a primary objective.

“The international experience has shown that the immediate recognition of NPLs and the decisive action would bring significant benefits, as it would contribute to the smooth functioning and the protection of the financial system and to the recovery of the real economy,” Goerghadji said addressing a discussion hosted by the Union of Economists titled “The Cyprus financial system; challenges and prospects.”

Georghadji said many of the problems that emerged following the financial crisis of 2013 continue to exist, albeit there was significant progress.

She vowed the CBC would continue to closely monitor the situation in the banking sector and to take the necessary measures so that confidence in the banking system would not be shaken.

Head of the CBC Supervision Yiangos Demetriou said the CBC believes that expediting the reduction of the NPLs continues to be the primary objective as bad loans limit the banks’ capacity to provide new credit to the economy.

Noting that NPLs have declined from €27 billion in 2014 to approximately €20 billion by the end of 2016, Demetriou said “NPL reduction albeit noteworthy must be expedited.”

He referred to recent decline in restructured loans noting this manifests that tackling the remaining non-restructured NPLs by restructuring alone is proving too hard.

Demetriou said consolidation of the banking sector is expected to continue, noting that possible bank mergers that would strengthen their business models would sustain the positive image to the banking system.

Since 2013, Demetriou said, the banking sector has shrunk markedly from €123 billion in assets to €67 billion by the end of the third quarter of 2017. As part of the Cypriot bailout the Cypriot banks were forced to sell their overseas assets mainly their operations in Greece.

“Today’s economic environment can contribute to tackling the challenges and exploiting the opportunities that may arise,” he added.

Demetriou acknowledged the legal framework for insolvency and foreclosures implemented post 2013 is to a large extend inapplicable, adding the CBC has drafted a report pinpointing the inefficiencies and other obstacles to the faster reduction of NPLs.

“Both lenders and borrowers should move on with more courageous and decisive solutions sharing losses when no other solutions can be found,” he said, adding that delays in solving the problem would be detrimental to both sides.

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