Prudent credit risk policy needed amid deteriorating economic environment, says CBC Governor

The island’s central bank governor Constantinos Herodotou on Friday stressed the need for a prudent provisioning policy for bad loans in the midst of negative macroeconomic developments.

Herodotou made the comments at the 10th Banking Forum and Fintech Expo.

According to a statement from the Central Bank, in his speech, Herodotou said that in the wake of two consecutive crises, the first round of negative effects was limited for the banking sector.

However, he added, with the level of uncertainty remaining elevated, the full range of consequences has yet to be realised, especially in the area of credit risk.

Herodotou said the banking sector faces the challenges of negative macroeconomic developments, which may worsen asset quality, creating upward pressure on loan impairments and provisions.

“Prudent provisioning policies and providing customers with quick and sustainable restructurings are the appropriate way to effectively deal with the negative economic environment,” he stressed.

Herodotou further noted that the lesson to be learned from both crises is the importance that technology plays in the banking sector not only in the conduct of normal banking operations, but also in sustainability and profitability.

According to Herodotou, while the old structural weaknesses remain, competition from smaller online banks (challenger banks) is increasing.

“Consequently, banks must move more decisively on the path of digital transformation. This is the only way banks can address their structural weaknesses, maintaining their competitive advantages over new players in the market,” he concluded.