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

    APRA Publishes Approach to Regulating and Supervising GCRA Risks

    APRA published an information paper that sets out a more intensive regulatory approach to transform governance, culture, remuneration, and accountability (GCRA) practices across the prudentially regulated financial sector.

    November 19, 2019 WebPage Regulatory News
    News

    IAIS Publishes Application Paper on Recovery Planning

    IAIS published the final application paper on recovery planning, along with the resolution of comments on the draft application paper.

    November 18, 2019 WebPage Regulatory News
    News

    FSB Publishes Summary of November Meeting of RCG for MENA Region

    FSB published a summary of the November meeting of the Regional Consultative Group (RCG) for Middle East and North Africa (MENA).

    November 17, 2019 WebPage Regulatory News
    News

    EBA Single Rulebook Q&A: Second Update for November 2019

    EBA updated the Single Rulebook question and answer (Q&A) tool with answers to eight questions that relate to the Bank Resolution and Recovery Directive (BRRD) and the Capital Requirements Regulation and Directive (CRR and CRD).

    November 15, 2019 WebPage Regulatory News
    News

    FASB Delays Effective Dates for CECL, Leases, and Hedging Standards

    FASB issued two Accounting Standards Updates finalizing the delays in effective dates for standards on current expected credit losses (CECL), leases, hedging, and long-duration insurance contracts.

    November 15, 2019 WebPage Regulatory News
    News

    ESMA Updates Q&A on Securitization Regulation in November 2019

    ESMA updated questions and answers (Q&A) on the Securitization Regulation (Regulation 2017/2402).

    November 15, 2019 WebPage Regulatory News
    News

    HKMA Announces Finalization of Banking Liquidity Amendment Rules 2019

    HKMA issued a letter informing all authorized institutions that negative vetting of the Banking (Liquidity) (Amendment) Rules 2019 (BLAR) has now expired. Thus, the BLAR will now come into operation from January 01, 2020.

    November 15, 2019 WebPage Regulatory News
    News

    FSI Examines Use of Red Team Testing to Enhance Cyber Resilience

    The Financial Stability Institute (FSI) of BIS published a paper that examines the contribution of red team testing frameworks toward enhancing cyber resilience.

    November 15, 2019 WebPage Regulatory News
    News

    BCBS Consults on Revised Disclosures for Market Risk Framework

    BCBS launched a consultation on the revised disclosure requirements for the market risk framework for banks.

    November 14, 2019 WebPage Regulatory News
    News

    BCBS Consults on Disclosure Templates of Sovereign Exposures of Banks

    BCBS published a consultation on the voluntary disclosure templates related to sovereign exposures of banks.

    November 14, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 4167