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Banks need to step up efforts to tackle NPLs, CBC boss says

Central Bank Governor Constantinos Herodotou

Central Bank of Cyprus (CBC) Governor Constantinos Herodotou called on Cypriot banks to step up their efforts to further reduce non-performing loans (NPL) as the current conducive environment remains in place.

Addressing a conference titled “Indebtedness and NPL, achievements and challenges” co-hosted by the CBC and the European Commission’s representation to Cyprus, Herodotou said Cypriot banks may have reduced their NPL by €19 billion since their peak in December 2014 but “there is still work to be done” as Cyprus’ NPL ratio stands at 30 per cent compared with the Eurozone average of 3 per cent and the Single Supervisory Mechanism’s 10 per cent threshold.

Herodotou said the banks should step up their efforts to tackle NPLs as the current environment remains helpful due to negative interest rates which push up collateral valuations while the investor’s “search for yield” pushes asset valuations higher, thereby facilitating NPL portfolio sales.

But he added that the ECB’s governing council is examining its monetary policy strategy, which could signal a change in the negative interest rates policy, due to possible bubbles in asset valuations and stock market bubbles, believed to be associated with negative interest rates.

“That’s why I urge the banks to mobilise and fix their balance sheets these favourable conditions last because I can assure that everyone in the (ECB) governing council is concerned about the other side of the effects of negative interest rates,” Herodotou said.

He also urged banks to up the pace in NPL resolution as implementation phase of minimum requirements for own funds and eligible liabilities (MREL), a new capital buffer in case of bank resolution, is about to begin which “for our bans is a costly capital requirement” due to high NPLs.

Furthermore, Herodotou said stable legal environment is “an absolutely necessary element” in dealing with NPLs.

On his part, Paolo Fioretti, ESM deputy head for banking and coordinator for Cyprus in the ESM’s early warning system  praised Cyprus’ “enormous effort” since the 2013 financial crisis but added however that “the NPL ratio in Cyprus remains the second highest in the euro area. And the improvement was almost exclusively due to the transfer of NPLs to outside the banking sector.”

“Private sector deleveraging has been more limited and sustainable debt restructuring has proven challenging,” he added, underscoring that it is important to maintain a stable and predictable legal environment.

Maintaining a stable legal environment, he added, “will lead to less volatile and more favourable and predictable NPL prices.”

“This is crucial for dealing with legacy issues related to unresolvable loans. It will also help to increase the banking system’s resilience going forward,” Fioretti concluded

Ierotheos Papadopoulos, Head of the European Commission’s representation to Cyprus also praised Cyprus’ progress since the crisis, noting however that Cyprus still has the second highest private debt in the Eurozone after Luxemburg and the second highest NPL rate after Greece.

“Therefore, we need to make another stocktaking on where Cyprus stands with regard to the banking sector, to look back and to look to the road ahead. All, either participating in the decision-making or not, from citizens to the politicians, academics and technocrats alike, need to place the public interest above everything else. More work needs to be done to further improve the banking sector,” he concluded.



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