Cyprus Mail

CBC: NPLs may have fallen but they’re still in the economy 

Central Bank Governor Constantinos Herodotou

While the Central Bank of Cyprus (CBC) was happy to see banks’ exposure to NPLs reduce due to deleveraging, it was not thrilled that these bad loans were still in the real economy, and they must be dealt with, Governor Constantinos Herodotou said on Tuesday.

Speaking at The Economist conference in Nicosia, Herodotou began by disagreeing with a comment from former Greek Finance Minister Gikas Hardouvelis who said in his talk that he thought there was too much regulation. Hardouvelis said that before the financial crisis regulators were “asleep at the wheel. Now they’re overdoing it”.

But Herodotou disagreed. “We must not forget that the purpose of oversight and regulations is to protect the taxpayer, depositors and the real economy from the effects of bad management and wrong decisions by the management of banks,” he said. “We should not have short memories about what happened in 2013.”

Even though confidence in the banking system had returned, there were profitability challenges, the CBC boss said. “We need to continue to be prudent. In the search for profitability banks should not relax their lending standards and not be driven by profitability issues.”

Herodotou said demand for new lending was clearly increasing and that in the last 2.5 years some €7bn in new lending has been advanced. NPLs he said stood at €28bn at their peak and were now at €9.5bn.

The central bank was happy, he said, to see the sector reducing its exposure to NPLs through deleveraging but as regulators, the CBC was not happy to see these NPLs still in the real economy “and they have to be dealt with”, he said. “The easiest and fastest method is to sell loans, but we need to do more to ensure that these loans maintained by households and businesses are properly restructured so that economic growth can be sustained,” he said.
Referring to the CBC’s commitment to parliament to prepare a foreclosures’ complaint mechanism, Herodotou said the central bank was in touch with the European Central Bank before presenting the mechanism to the House.
Herodotou said loans to deposits ratio was half what it was in 2016. “It means we have more deposits than loans,” he said. “There is a lot of liquidity in the sector despite rumours to the contrary.”

The CBC chief also said that 80 per cent of bank deposits were currently from domestic residents. It means we are no longer reliant on foreign deposits,” he added.

Bank of Cyprus CEO Panicos Nicolaou said Cyprus would not be “a normal economy as long as we have NPLs”, and fiddling around with foreclosures legislation would have a major negative effect, he said referring to the political parties.

The other major challenge for banks were fin-tech companies, Nicolaou said but “big tech” was even more of a challenge. He cited the fact that the population of the eurozone was 250 million people whereas Facebook, which plans to launch its new currency Libra, has 3.4 billion users. “Facebook’s Libra has been a wake-up call,” he said, describing it as the transformation of tech into finance.

Nicolaou foresees a disruptive period ahead for banks globally in this respect. “Changes will be fast and 80 per cent of traditional banks may not even exist in ten years from now. We need to transform,” he added.

Hardouvellis, who spoke before the two Cypriot officials also commented on what he called “inflexible labour contracts in the banking sector”.

“I feel bank employees in Cyprus think they are public employees,” he said, adding that the public sector in Cyprus did not feel the crisis. An added pressure to the economy would be the final decision on the reversal of civil servants pay cuts, the former Greek minister said. “This is coming from people who do not understand there was a huge crisis and they want back the good times of the past,” he said.


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