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Cyprus is overbanked, and the economy suffers

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Too many banks in Cyprus

Cyprus is overbanked, and this affects its economy.

There are seven local banks operating in Cyprus, according to Central Bank of Cyprus Central Bank of Cyprus statistics. Some experts say there should be only three.

There are also 22 subsidiaries and branches of foreign credit institutions.

This is not good for the either the banks or for their customers.

“So, we have low profitability in an overbanked market where liquidity is still abundant. That is a dangerous mix,” warns Christo S. Savva, associate professor of Econometrics with the Faculty of Management and Economics at the Cyprus University of Technology.

“With domestic bank assets at about 200 per cent of GDP, Cyprus remains one of Europe’s most overbanked economies,” according to the credit rating agency COFACE.

Statistics from 2018 show that the number of assets per bank employee in Cyprus were only at €8 million, compared with the EU average of €16 million, and the and the population per bank employee was 80 in Cyprus and 160 in the EU.

Of course, all of the EU is overbanked, so Cyprus is no exception. There are 41 bank branches for every 100,000 inhabitants, about double that of the US, according to the European Banking Federation, although the total number of banks in Europe has declined from about 8,000 in 2015 to about 6,000 this year.

But there is a challenge: Return on investment is low, right across the 27 Member States. Return on equity at the 113 banks the ECB supervises fell last year from 6.2 per cent to 5.2 per cent — far behind most of their US and Asian rivals.

Daniele Nouy, former chair of the Supervisory Board of the European Central Bank, argues that being overbanked creates weaknesses in the system. She refers to an ominous-sounding term that has become popular in the post-crisis debate on banking supervision – ‘debancarisation.’

Let us be clear, Nouy says, the problem is not too much banking, but too many banks. This has led regulators to encourage consolidation in the banking sector, which had begun slowing down well before the pandemic.

There has been a consistent, but falling, trend of banking consolidation following 2008 financial crisis, and in 2016 the value of transactions reached its lowest level since 2000.

The ECB has, in fact, on 1 September produced a Supervisory Guide for banking M&A, in an effort to kickstart the activity in Europe.

Still banking M&A is a risky business, as the process involves integrating both national and corporate cultures – and banks tend to be places where local culture is strong.

Within individual countries, there is a tendency to protect the national champion banks and local regulators may react badly to some M&A proposals as a result. There is also a danger of protecting failing banks within the local system even when their business model is no longer workable.

So too many banks, like too many cooks, spoil the industry. On the other hand, too few banks would mean insufficient competition and higher costs to consumers. Getting the balance right isn’t easy.

 

 

 

 

 



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