Central warns banks ‘not to overdo it’

The Governor of the Central Bank of Cyprus has called on smaller local banks not to get carried away with loaning money, urging them to follow the example of bigger banks and focus on reducing toxic debt.

According to the Cyprus News Agency, CBC governor Constantinos Herodotou said “smaller Cypriot banks should follow the path set by larger ones in reducing their stock of non-performing loans, stressing that Cypriot banks should not utilize their excess liquidity to rush and give loans without scrutinizing the borrower’s repayment capacity.”

Herodotou, who spoke at a luncheon hosted by the Rotary Club in Nicosia on Tuesday, said the Cypriot banking system has recorded “immense progress” in reducing its stock of NPLs from their peak of €28 billion to the current level of €9.5 billion, a reduction of 68%.

Noting the current NPL level at 32% of total loans, Herodotou said the Cypriot banks needed to do more in converging with the 10% which is the threshold set by the Single Supervisory Mechanism and the 3% NPL rate which is the current NPL average in the EU.

Herodotou reiterated the SSM does not expect the Cyprus NPL rate to drop from 30% to 10% in one year, but said they want to see a “credible path” forward.

“I think our big banks have been demonstrating that recently, and that’s every bit as pleasing. I think we need to encourage the smaller banks to follow suit now that they can see what has worked for the bigger banks,” the CBC governor said.

Herodotou also pointed out that it was “absolutely normal and expected” for bigger to lead the way in NPL reduction, adding that smaller banks need to plan NPL reduction through their business model.

“I believe now is the time for the smaller banks to start planning,” he said.

Herodotou also referred to the excess liquidity featuring the Cyprus banking system noting that Cyprus banks should not rush to give out loans, despite the fact that they are sitting on “piles of liquidity.”

“There is no liquidity issue with any bank in Cyprus, but at the same time there should be no rush in giving out loans, we should not repeat the mistakes of the past. Yes there is excess liquidity, yes our banks are facing two challenges - one is NPLs, the second is profitability - but we should not allow the banks to rush to give out loans,” he said.

Herodotou then called on banking institutions to evaluate loan risks and repayment capability, adding that banks should not be forced to compromise their requirements in order to make their balance sheets look good.

“And if the banks overdo it then is the job of the regulator to change the regulatory requirements either because the banks are overdoing it or because the Central Bank sees that certain sectors are overinflating,” adding that “we need to start preventing the bubbles from being created.”

Noting that bubbles always happen in every economy, Herodotou cautioned “we need to be more preemptive in that respect.”