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Our View: ‘Banking with human face’ brought down Co-op, not government

All the political parties have been shedding tears for the Cyprus Co-operative Bank since the government finalised its dissolution and the ‘sale’ of its allegedly healthy loan portfolio to Hellenic Bank. All the parties have blamed the government for what has happened and demanded a criminal investigation into what went wrong, having decided that all the problems of the CCB began in 2013 when the state took over ownership of the co-op banks as part of the memorandum, at cost an initial cost of €1.7 billion to the taxpayer.

Undoubtedly, the government has some responsibility for what happened but the truth is that the CCB was doomed because of the problems accumulated over decades of mismanagement, which the political parties regularly praised as “banking with a human face.” This banking involved giving out loans that would never be repaid, often at low interest rates and secured by grossly overvalued collateral. It was the practice for decades, with the unsupervised, politically-backed management of the Co-operative Central Bank doing as it pleased. The top executive of the Co-operative Central Bank is now in court facing criminal charges.

The CCB, which was created by merging all the co-op credit institutions, ended up with a toxic loan portfolio that no private company would have touched but the state was obliged to take it over so that the Co-op depositors would not suffer the same fate as those of Laiki Bank. The ridiculous thing is that the parties that are mourning the passing of the CCB today and blaming the government have a big share of the blame, as they prevented it from collecting from borrowers not servicing their loans.

Not only did they make the foreclosures law toothless, the protection of the primary residence, which the parties insisted on, meant the CCB could do nothing against defaulters as it had many primary homes as collateral. With this protection afforded to defaulters, even those that had been repaying their loans had an incentive not to do so. And there was no way a state-owned bank would kick people out of their homes in the years leading up to a presidential election. The result was that from the start of 2016 to the end of 2017 the CCB reduced its NPLs from €7.6bn to €6.2bn.

The government certainly made mistaken key decisions regarding the CCB but the political parties made a bad situation worse with their populist rhetoric about protecting primary residence, which destroyed the slim hopes of saving the bank.

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