By Giorgos Ioannides
The Co-op Bank has been split into a good “bank” and sold off to Hellenic Bank on what are deemed to be very generous terms while the bad “bank” will be transferred to a special purpose entity that will be set up and governed, from what we have been informed, by professionals who know about distressed debt management.
The political parties of the opposition are crying out for blood and blame the government, the finance minister, the EU, the Single Supervisory Mechanism (SSM), the Central Bank of Cyprus and want a public inquiry to find those to blame. No one yet knows what the outcome will be even if the experts, who form the inquiry team, find professional negligence.
Do we really want to spend thousands of euros and hours to get the answer we all know? All are to blame, from the legislature, the management, the regulators (in Cyprus and abroad) and the borrowers who did not pay their debts, although they could have.
The problems of the co-op movement go back decades in that they did not lend prudently and there was no proper supervision of the co-op which was under the auspices of the commerce and industry ministry.
All previous governments are thus liable for some of the blame as they did not heed the repeated calls from the Central Bank and the IMF to bring the co-ops under its universal supervision to ensure better governance and better practices.
We know that Akel refused to countenance such regulation and they have their share of the blame of the accumulated non-performing loans. Put simply, the co-ops in the villages, and also in the cities, lent against land and property, very often over valued collateral, and never looked at the ability of borrowers to repay. Did the banks in Cyprus do better? Well, we found out that the Bank of Cyprus and Laiki, better staffed and regulated, did the same! So, this cannot be the sole reason for the Co-op disaster.
Cyprus is not alone in having such a problem with bad lending practices at co-op movements. We have seen the same in the UK and Spain. In the UK the Co-op Bank was bailed in with bond creditors paying up for the losses. In Spain though the co-ops were basically bailed out with state funds provided by the SSM and the co-ops were completely restructured. The same problems existed as in Cyprus, especially the bad governance and political interference, but the solution in Spain was different in that the non-performing loans were moved off the balance sheets of the co-ops.
When we come to the events of the banking crisis in 2013, there was a complete lack of appreciation of the problem with the co-ops by the government, the Central Bank and the European Central Bank (ECB). The loans on the Co-op balance sheets were toxic. Post 2013 there were probably two asset quality reviews (AQR) to determine the level of capital and provisions required for all systemic banks in Cyprus. It is thus crucial when judging who to blame to look at the results of these AQRs.
What did the repeated AQRs show about the values of the collateral and who approved these asset reviews? Was the ECB not aware of the need for very high provisions when the first funding support was provided and the subsequent equity injection of €175 million? If the European Security Mechanism (ESM) lenders had done their job correctly, early intervention would have taken place; instead there was a five year wait.
The banking landscape in the EU in terms of non-performing loan management was only going to change for the worse and there were several warnings.
Some pointed out this was going to happen and were not heeded and then came the dreaded IRFS 9 which changed the treatment of NPLs. This was as predictable as night follows day but not much was done to move NPLs off the balance sheet of the Co-op Bank. Instead we heard that the Co-op was overcharging borrowers using its base rate instead of Euribor and this cost the Co-op €110m. Worse was bound to follow since the ECB/EBA went ahead with changes to how NPLs would be treated and how quickly banks would have to provide if these loans were deemed non-recoverable. No one can say we did not know.
So, in fact instead of the Central Bank/ECB and the finance ministry pushing the Co-op to take more drastic action, time was wasted trying to sell part of the Co-op.
This was a hopeless effort since the Co-op had a NPL ratio of nearly 60 per cent, lower provisions than were necessary and there was no business model that could make the bank profitable. The next step was to try and give 25 per cent as a gift to existing depositors which was not in line with the MoU signed with the troika as the government had committed to selling the Co-op Bank when rehabilitated at the highest price the government could achieve.
One needs really to ask what the management of the Co-op were doing for over five years, what the Central Bank proposed to manage the NPLs and what those, who we all expected to supervise our systemic banks and protect the tax payer, the SSM/ECB, do to reduce the cost of splitting the Co-op. Why was the situation left so late? Why is Cyprus again paying the price for the inaction of those responsible for bank supervision?
The Co-op management believed they had the ability to manage an impossible task and in fact resorted to charging high interest to the distressed borrowers who were unable to pay their loans. Distressed borrowers by definition cannot pay and charging them higher interest rates and expecting to recover the face value of the loan plus interest was not going to happen. Did they need a rocket scientist to tell them that?
In considering the inquiry the attorney-general must consider whether there was criminal responsibility. To be honest there was none. None of the Cyprus stakeholders or the management have unduly enriched themselves and they are not to be blamed for criminal actions. They probably acted in good faith at the time based on their knowledge and expertise and the political reaction to any drastic action such as foreclosure.
Parliament cannot shoot after the event as their laws made the job of foreclosure much more difficult. Is parliament criminally responsible? They will say they protected small delinquent borrowers and small businesses who had the primary home as collateral.
In my view the ECB/SSM is mostly responsible since they had better knowledge, experience and should have known better. They did not act earlier to protect the Cypriot tax payer and the AQR should have raised alarm bells if they took time to read the PIMCO report. What do those AQRs say and which firm produced them?
It is incumbent on the SSM to explain whether they warned the finance ministry of the repercussions of inaction in reducing the NPLs which should have been done in the strictest manner.
If they had done so the Cypriot tax payer would have been spared the cost of the split and there would be no need for the blame game. It seems the most important lesson from the 2013 crisis has not been learnt in Cyprus. Banks need proper corporate governance and no political appointees on the board.
The SSM should have intervened forcefully when two experienced and well-regarded bankers quit the Co-op Bank? We must not forget that the ECB approves senior appointees such as CEO and chairman of the board, and when both resigned within three years, the SSM should have stepped in to demand swift action.
What the SSM really did is the question we should be asking instead of a public inquiry to be told what we already know!