Featured Product

    IMF Report Examines Measures for NPL Resolution in Cyprus

    June 03, 2019

    IMF published its staff report in context of the Third Post-Program Monitoring (PPM) discussions with Cyprus. The Executive Board highlighted that durable declines in non-performing loans (NPLs) remain a priority to further reduce the sovereign-bank linkages. A package of legislative amendments in 2018 has enhanced the toolkit to address NPLs. While banks have made significant progress in offloading NPLs, their successful workout outside the banking system is still needed to reduce the high debt burden in the economy. Banks should be encouraged to maintain adequate provisioning coverage and capital, including by diversifying revenue sources and rationalizing operational costs.

    The report mentions that NPLs in Cyprus are among the highest in EU and the efforts to clean up bank balance sheets are ongoing. NPL ratio remains high, even though NPLs had declined to 30.5% of loans at the end of 2018 from 43% of loans at the end of 2017. Given the recent success and continued investor interest, further sales of NPLs are planned. The banking system remains highly liquid and NPL provisioning ratio has increased to 51%, which is above the EU average; however, profitability pressures remain amid a low interest rate environment and potentially higher provisioning needs, as banks seek to further offload NPLs. The banking sector reported the first net profit in eight years in 2018. However, operating profits declined due to falling net interest income and an inefficient cost structure.

    As per the report, risks to repayment capacity of Cyprus should be manageable. While banks and the non-financial private sector have undertaken significant deleveraging, risks emanate primarily from the still sizable NPLs and the debt overhang and fiscal contingent liabilities that could potentially undermine financial stability and debt sustainability. Delays in implementing NPL resolution measures or declines in real estate property prices could weaken bank capital positions by failing to generate improved payment discipline or adversely affecting collateral values, particularly if the NPLs are not sufficiently provisioned. The authorities considered risks to repayment to be somewhat smaller than viewed by staff. The strengthening of the foreclosure framework in July 2018, which has already led to increased foreclosure initiations and greater willingness of borrowers to engage in NPL restructuring should further allow banks to work out NPLs. Risks to the sovereign are largely contained, with the completion of the Cyprus Cooperative Bank (CCB) NPLs carve-out, the significant strengthening of the banking system’s loss-absorption capacity, the potential execution of additional market-based solutions for NPL resolution by banks in near future, and the transposition of the EU Bank Recovery and Resolution Directive (BRRD) to national law.

    The report further highlights that policies should aim to continue strengthening bank balance sheets while avoiding the commitment of public resources. Facilitating NPL resolution, including durable loan restructuring, collateral execution for NPL recovery, and sales of loans, is the key. Banks should maintain adequate provisioning coverage and capital buffers to insulate against potential losses from NPL workouts and sales of loans as well as any regulatory changes, including for building up of other systemically important institutions capital buffers. Efforts to facilitate NPL resolution should remain a priority. The 2018 amendments to the foreclosure and insolvency legislation and the adoption of a law on securitization have all enhanced the toolkit to address NPLs on a durable basis. To avoid merely converting credit risk into real estate risk, banks should be cautioned against warehousing properties from debt-to-asset swaps. The report notes that continued monitoring of Cyprus’s repayment capacity under PPM is warranted during the next 12 months. The Cypriot authorities have indicated their willingness to continue to engage with IMF under the PPM until 2020. 

     

    Related Link: Staff Report

    Keywords: EU, Cyprus, Banking, NPLs, Financial Stability, BRRD, NPL Resolution, Credit Risk, IMF

    Related Articles
    News

    BIS Examines Use of Big Data and Machine Learning at Central Banks

    BIS published a paper that provides an overview on the use of big data and machine learning in the central bank community.

    March 04, 2021 WebPage Regulatory News
    News

    APRA Finalizes Reporting Standard for Operational Risk Requirements

    APRA finalized the reporting standard ARS 115.0 on capital adequacy with respect to the standardized measurement approach to operational risk for authorized deposit-taking institutions in Australia.

    March 03, 2021 WebPage Regulatory News
    News

    ECB Publishes Guide for Determining Penalties for Regulatory Breaches

    ECB published a guide that outlines the principles and methods for calculating the penalties for regulatory breaches of prudential requirements by banks.

    March 02, 2021 WebPage Regulatory News
    News

    MAS Sets Out Good Practices to Manage Operational Risks Amid COVID

    MAS and The Association of Banks in Singapore (ABS) jointly issued a paper that sets out good practices for the management of operational and other risks stemming from new work arrangements adopted by financial institutions amid the COVID-19 pandemic.

    March 02, 2021 WebPage Regulatory News
    News

    ACPR Announces New Data Collection Application for Banks and Insurers

    ACPR announced that a new data collection application, called DLPP (Datalake for Prudential), for collecting banking and insurance prudential data will go into production on April 12, 2021.

    March 02, 2021 WebPage Regulatory News
    News

    BCB Maintains CCyB at 0%, Initiates First Cycle of Regulatory Sandbox

    BCB announced that the Financial Stability Committee decided to maintain the countercyclical capital buffer (CCyB) for Brazil at 0%, at least until the end of 2021.

    March 02, 2021 WebPage Regulatory News
    News

    EIOPA Launches Study on Non-Life Underwriting Risk in Internal Models

    EIOPA has launched a European-wide comparative study on non-life underwriting risk in internal models, also kicking-off of the data collection phase.

    March 01, 2021 WebPage Regulatory News
    News

    SRB Publishes Overview of Resolution Tools Available in Banking Union

    SRB published an overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to financial market infrastructure services in resolution.

    March 01, 2021 WebPage Regulatory News
    News

    EBA Consults on Pillar 3 Disclosure Standards for ESG Risks Under CRR

    EBA is consulting on the implementing technical standards for Pillar 3 disclosures on environmental, social, and governance (ESG) risks, as set out in requirements under Article 449a of the Capital Requirements Regulation (CRR).

    March 01, 2021 WebPage Regulatory News
    News

    ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting

    ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting

    March 01, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6655