Featured Product

    IMF Publishes Reports on the 2018 Article IV Consultation with Cyprus

    December 03, 2018

    IMF published its staff report and selected issues report under the 2018 Article IV consultation with Cyprus. Directors welcomed the recent reforms undertaken to address key vulnerabilities in the banking sector, including the resolution of a large systemic state-owned bank. Directors observed, however, that private and public debt remain large while non-performing loan (NPL) ratios are still among the highest in Europe. Directors emphasized the importance of put in place measures to facilitate a steady decline in NPLs on a durable basis.

    The staff report highlighted that NPLs remain very high, partly due to weak enforcement and strategic debtor behavior, although NPLs are now declining rapidly as bank balance sheet cleanup efforts pick up. NPLs declined by EUR 11.5 billion, lowering the size of NPLs from 161% of GDP in 2014 to 84% of GDP in second quarter of 2018. The reduction reflects write-offs, restructuring, repayments with cash and debt-to-assets swaps, and new tools such as sale of loans. The NPL ratio is set to decline further as they are removed from bank balance sheets, although they remain high and will be a burden on the economy until fully resolved. The recovery rate has been low and the re-default rate among restructured loans has increased lately. In the face of increased competitive pressures and upcoming regulatory changes, continued vigilance over bank lending policies and adequacy of provisioning coverage and debt-to-asset swaps policy are needed.

    To reduce vulnerabilities and catalyze NPL resolution, the authorities recently took two key steps. In September, the assets (primarily performing loans) and all customer deposits of the troubled second-largest, government-owned bank (CCB) were sold to Hellenic Bank, leaving the bulk of the NPLs in a residual entity, which has evolved into a government-owned Asset Management Company (AMC). In July, the Parliament adopted a package of amendments to strengthen the legal framework for NPL resolution. The strengthened foreclosure and insolvency frameworks should discourage strategic defaults and help entice eligible borrowers to engage in durable loan workouts. Little progress has been made toward fundamentally addressing the problems in the issuance and transfer of title deeds, thus further complicating potential restructuring or collection of the corresponding NPLs. A regulatory and supervisory framework for the newly established credit-acquiring companies, with focus on reporting requirements, on-site inspections, and off-site monitoring, needs to be developed.

    The selected issues report reveals that sustainable restructuring of NPLs has been challenging. Almost two-third of the restructuring flow is on the loans already restructured at least once. The need to accumulate provisions, along with declining net interest margins, have also put downward pressure on bank profitability, undermining NPL resolution. Loan-loss provisions at Cypriot banks are close to 50% of NPLs, slightly above the EU average, as of first half of 2018. ECB data indicates that provisioning and collateral coverage is close to 100% of NPLs. Nevertheless, given that the time required for the foreclosure process is long, banks needed to continue to accumulate provisions as continued difficulties in collateral recovery increased the risk that transaction price of NPLs may be lower than their book value, leading banks to further recognize losses. More recently, however, the accumulation of provisions has facilitated the sale of NPLs by banks. Despite some revival of lending activity, the role of bank credit as a funding source remains limited. External inflows, draw down of savings, use of own funds, and unpaid debt service obligations are contributing to financing economic activities, but these sources may not be sustainable over the medium term. Addressing NPLs to lower borrowing costs and reviving credit supply will be important for supporting longer-term growth.

     

    Related Links

    Keywords: Cyprus, EU, Banking, NPL, Article IV, NPL Resolution, IMF

    Related Articles
    News

    EC Adopts Financial Reporting Changes Arising from Benchmark Reforms

    EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.

    January 14, 2021 WebPage Regulatory News
    News

    BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk

    BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.

    January 14, 2021 WebPage Regulatory News
    News

    HMT Updates List of Post-Brexit Equivalence Decisions in UK

    HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.

    January 14, 2021 WebPage Regulatory News
    News

    EBA Issues Erratum for Technical Package on Reporting Framework 3.0

    EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.

    January 14, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets

    APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.

    January 14, 2021 WebPage Regulatory News
    News

    EBA Publishes Risk Dashboard for Third Quarter of 2020

    EBA published the quarterly risk dashboard, along with the results of the Risk Assessment Questionnaire survey among 60 banks and 15 market analysts.

    January 13, 2021 WebPage Regulatory News
    News

    ECB Analysis Shows Privacy as Biggest Concern in Use of Digital Euro

    ECB concluded the public consultation on the introduction of a digital euro in EU.

    January 13, 2021 WebPage Regulatory News
    News

    ECB Finalizes Guide on Supervisory Approach to Bank Consolidation

    ECB published a guide that sets out the supervisory approach to consolidation in the banking sector.

    January 12, 2021 WebPage Regulatory News
    News

    SRB Chair Outlines Work Priorities for 2021

    The SRB Chair Elke König published an article setting out work priorities for 2021.

    January 11, 2021 WebPage Regulatory News
    News

    FDIC Selects Companies to Compete in Final Phase of Tech Sprint

    FDIC has selected 11 technology companies—including BearingPoint, Fed Reporter, Inc, and S&P Global Market Intelligence, LLC—for inclusion in the third and final phase of the rapid prototyping competition.

    January 11, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6417