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15 July, 2024
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Elizabeth McCaul unveils hidden financial dangers

A new era of scrutiny for non-bank financial giants

Panayiotis Rougalas

Panayiotis Rougalas

A strong signal highlighting the need for closer scrutiny of non-bank financial institutions comes from Frankfurt, as Elizabeth McCaul, a member of the European Central Bank's Supervisory Board, emphasizes the potential risks.

Despite significant progress in Cypriot banks over the past decade, McCaul warns that recent interest rate hikes, while boosting profitability, may adversely impact loan demand.

She also underscores the importance of effective legislative frameworks for property value recovery. McCaul acknowledges Cypriot banks' substantial achievements but notes ongoing challenges, particularly in reducing bad loans.

When assessing Cypriot banks' progress, McCaul expresses gratitude to the Central Bank of Cyprus and commends their collaboration.

The sector has seen remarkable improvements, including a notable decrease in non-performing loans, increased efficiency, and strengthened capital through Tier 2 instruments.

Despite these strides, McCaul believes more action is needed, especially in addressing bad loans exceeding the euro area average.

The recent interest rate boost in Cyprus has improved banking sector profitability but raises concerns about its impact on loan demand, necessitating a focus on sustainable business models.

Addressing the key challenges for banking supervision, McCaul emphasizes the resilience of the European banking system.

While banks under supervision maintain satisfactory capital and liquidity ratios, McCaul highlights the need for vigilance in adapting to potential new risks.

Drawing attention to Credit Suisse's bankruptcy, McCaul stresses the importance of internal controls, risk management, and sustainable business models. The normalization of monetary policy poses challenges, requiring banks to monitor diversification of funding sources and adequacy of funding plans.

Regarding European banks' business models, McCaul refrains from providing investment advice but emphasizes the importance of a strong and sustainable business model.

Banks are encouraged to seize the current favorable conditions to enhance cost-efficiency, innovate, invest in IT systems, and strengthen corporate governance.

Looking ahead, McCaul raises concerns about the growing non-bank financial intermediation sector, urging improved oversight. The sector has doubled in the euro area since the 2008 financial crisis, accounting for half of the financial sector.

McCaul outlines three risks: the accumulation of leverage, liquidity problems, and counterparty risks. She stresses the need for regulatory measures to mitigate these risks and ensure stability in the financial system.

[This article was translated from its Greek original]

Cyprus  |  banks  |  economy  |  government

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