Panayiotis Rougalas
Although Cypriot banks have made great progress over the last decade, foreign supervisors have reservations and summarise their concerns in three areas. According to views conveyed by senior European Central Bank (ECB) officials in meetings with Cypriot bank officials, while there are positive prospects, there are three thorns, one of which is long-standing. As conveyed to Cypriot bank officials who had meetings abroad with supervisors from the ECB, Cypriot banks should, firstly, faithfully apply the rules of anti-money laundering (AML); secondly, maintain strict criteria for granting new loans; and thirdly, the legal system should become stable, and the laws that are passed should not change at regular intervals. The third point is the "perennial" problem in Cyprus, which also affects the operation of Cypriot banks.
As explained to me, the recipients of the concerns of the ECB's senior officials on the issue of the implementation of AML rules are also the standing position of the European Union officials. As the official line of the EU, the risks associated with money laundering and terrorist financing are a source of serious concern for the EU financial system and the security of its citizens. The AML rules, as documented by the EU, make it more difficult to hide illicit funds through shell companies and tighten controls on high-risk third countries. It also strengthens the role of financial supervisory authorities and improves access to and exchange of information. The Fifth Anti-Money Laundering Directive has been adopted in Cyprus. It is also recalled that the role of the European Banking Authority (EBA) has been expanded, and its supervisory authorities have been given the legal duty to contribute to preventing the use of the financial system for the purpose of money laundering and terrorist financing.
European Union officials have a consistent position on the issue of the implementation of AML rules.
Lending criteria to be kept strict
Foreign supervisors are calling for Cypriot banks to maintain strict lending criteria, which is reminiscent of the saying "He who blows the porridge, blows the yogurt". From 2003 to 2012, banks granting loans to reduce excessive deposits were the major cause of the banking crisis. With Cypriot banks now having a respectable amount of deposits again, there is a fear that they might start to relax their lending criteria. Despite having already tightened their lending criteria, Cypriot banks are being blamed for it internally. However, foreign supervisors support the banks' stance and want them to continue being strict.
Data from the Central Bank of Cyprus proves that the banks are indeed strict with their lending criteria. The January 2023 Bank Lending Survey records stricter lending criteria for all loan categories. According to the CBC survey, in the fourth quarter of 2022, lending criteria for both businesses and all categories of loans to households became tighter for the third consecutive quarter. Due to the continued high uncertainty, banks perceive increased risk, which continues to contribute to tightening their lending criteria. The survey explains that the introduction of tighter business and mortgage lending criteria in the fourth quarter of 2022 was due to banks' reduced risk tolerance. Banks' assessment of increased risk for business loans was related to the general economic situation and outlook, borrower creditworthiness, and collateral requirements, while the increased risk for loans to households was related to the deteriorating economic situation and outlook. In the same quarter, the overall terms and conditions of loans to households for housing and, more significantly, for consumer and other loans also became tighter. Tightening concerned banks' margins for both standard and higher-risk loans (margin increases), as well as other terms and conditions, such as the duration and size of the loan, for all categories of loans to households.
"Achilles heel"
The stability of laws that affect credit institutions is perhaps the biggest problem that needs to be addressed for foreign supervisors to be confident about the good performance of Cypriot banks. As conveyed by senior ECB officials to Cypriot bank officials, the perennial problem for Cyprus is the constant attempt to change laws that also affect the stability of the financial system. One typical example is the attempts to change the divestment framework in Cyprus, as well as the postponement of divestment procedures. The issue of changing laws is the "Achilles heel" of Cyprus, as conveyed, and it affects the investment community in general, not just banks. The Association of Cyprus Banks has previously reported on the attempted changes to the divestment framework, and European supervisory authorities, such as the European Central Bank, the European Banking Authority, and the Single Supervisory Mechanism, have indicated that constant amendments to legislation and especially the timelines relating to collateral liquidation procedures increase credit risk with significant consequences for credit institutions. The uncertainty surrounding the stability of the Cypriot legal framework has been summarised as being generally detrimental to the Cypriot economy.
[This article first appeared in Kathimerini's Oikonomiki edition and was translated from its Greek original]
