Cypriot banking sector resilient but must avoid complacency

Central Bank of Cyprus governor Constantinos Herodotou on Tuesday addressed the annual Nicosia Economic Congress, providing analysis and commentary on the country’s economy, both for the previous year, as well as in terms of short-to-medium term prospects.

During his speech, Herodotou said that the recent developments in the American banking sector, as well as the Credit Suisse collapse, offer a reminder of the need for constant vigilance, as unpredictable developments can spread panic and cause shocks in the markets.

“Our banking sector has successfully weathered the shocks of these developments so far,” Herodotou said.

“The supervisory obligation for banks to continuously manage the risk of concentration of exposure in assets and sources of financing has once again proven to be an optimal risk management practice, and as a result, our banks were significantly strengthened and better equipped to deal with similar events in the future,” he added.

The governor noted that the CBC has required additional preventive actions from 2021 onward, reinforcing the importance of managing risk in the Cypriot banking system.

He noted that excess liquidity and capital adequacy are at satisfactory levels. In addition, he explained that the liquidity coverage ratio amounts to 310 per cent in December 2022, a rate almost twice the corresponding average of the European Union.

The CBC chief also said that the common equity capital ratio is 17.7 per cent, noting that these percentages are “important indicators of the enhanced resilience of Cypriot banks”.

However, Herodotou cautioned that there is no room for complacency. For this reason, he explained, the CBC, in the context of its independent supervisory role, as well as to ensure the stability of the banking system, has taken a number of initiatives.

“The Central Bank has entered into an agreement with a consortium of companies made up of experienced international agencies, with the aim of forming a systemic solution that, together with existing tools, will be able to contribute to the further reduction of non-performing loans (NPLs) in the Cypriot banking system, thus helping small and medium-sized banks as well,” Herodotou said.

“We have also created the digital onboarding project for the banking sector for faster, more flexible and efficient banking services, for which a tender has already been announced,” he added.

He explained that this initiative has been undertaken despite the fact that it is not a direct competence of the Central Bank of Cyprus.

In addition to the above, with the aim of encouraging, promoting and supporting domestic financial innovation, the CBC announced last December, the creation and operation of an Innovation Hub.

The innovation hub, Herodotou said, aspires to be an official communication platform between the CBC, as a supervisory and regulatory authority, and companies or startups in the financial technology (Fintech) sector.

“The Innovation Hub constitutes a decisive step in the broader context of the supervisory objectives and priorities of the CBC, which concern issues of innovation, digital business resilience, digital transformation and cyber security,” Herodotou stated.

Herodotou wrapped up his speech by issuing a reminder that “oftentimes crises also provide opportunities for drastic changes that create new foundations for the future”.

“I am optimistic that with the appropriate actions, prudence and rationality, we will be able to successfully manage the aforementioned challenges in our economy and in its banking system this time as well,” he added.

Additionally, he stated that “Cypriot banks’ capital and liquidity ratios are satisfactory, which provides the guarantees to take the necessary measures to transform them, with the aim of a more sustainable and competitive future”.

“The Central Bank of Cyprus will support this effort,” he said.

“I am sure that with methodical handling and dedication, we can achieve our goals,” Herodotou concluded.

Meanwhile, Minister of Energy, Commerce and Industry Giorgos Papanastasiou also spoke at the conference, focusing on matters pertaining to his ministry’s areas of responsibility.

“The energy crisis, which was unprecedented, led the EU to urgently search for ways to diversify its energy sources and routes,” he said.

“In addition, the inflationary pressures in the world economies have compelled us to redefine our energy strategy,” he added, noting that the government’s primary concern is to reduce energy costs for all consumers, including households and businesses.

This, Papanastasiou explained, will enable the government to practically support the country’s competitiveness and promote the sustainable and healthy development of the Cypriot economy.

“Our policy has three key pillars: strengthening Cyprus’ energy supply security, lifting its energy isolation, and operating a competitive electricity market and internal natural gas market,” the minister concluded.