The outcomes of the Comprehensive Assessment conducted by the ECB
Between November 2013 and October 2014, the European Central Bank carried out a comprehensive assessment of 130 banks in the euro area, covering approximately 82% of total bank assets, in preparation for the Single Supervisory Mechanism which became fully operational on the 4th of November 2014.
As far as the Cyprus Banking Sector is concerned, a significant progress has been made since the banking crisis of March 2013.
Which is the background of the Cyprus Banking Crisis of 2013?
- The Cyprus Banking Sector had an exceptionally high exposure to Greek Government bonds.
- As a result two of the main Cyprus Banking Institutions, Bank of Cyprus and Laiki Marfin Bank suffered significant losses.
- Laiki Marfin Bank was dissolved and the uninsured deposits of over 100.000 EUR were written off.
- The shares of Bank of Cyprus were withdrawn from Cyprus Exchange and the uninsured deposits of over 100.000 EUR were converted into a second class of shares.
- A series of restrictions on the capital movement was imposed on all Cyprus Bank accounts.
- €10bn secured from Troika (IMF, ECB and EC) in exchange to restructuring reforms in Cyprus economy.
Which Cyprus banks were assessed within this framework?
- Bank of Cyprus
- Hellenic Bank
- Co-operative Central Bank
- RCB Bank (which was included only in the second phase of the stress test)
Which were the objectives of this assessment?
- Transparency: “The improvement in the transparency through the improvement in the quality of the available information on the financial condition of each bank.”
- Corrective action: “The strengthening of the balance sheets of banks by taking corrective action to deal with any issues which may arise through the comprehensive assessment.”
- Trust & Confidence: “The improvement in the trust towards banks by ensuring that, after taking the relevant corrective measures, the banks will be healthy and creditworthy.”
How exactly was conducted the assessment?
The assessment was conducted in two phases:
- The asset quality review: The main aim of the first phase was the assessment of the value of the loan portfolios and their collateral (guarantees) as well as of the relevant provisions.
- The stress test exercise: The main objective of the stress test phase was designed to simulate the capital of banks based on two three-year macroeconomic scenarios: the baseline scenario and the adverse scenario. The baseline scenario was designed to assess whether the existing capital reserves of banks are sufficient over a three-year horizon consistent with current macroeconomic forecasts. As for the adverse scenario, it aimed to evaluate the strength of the Cyprus banking sector when subject to extreme macroeconomic conditions for three years.
Which were the outcomes of the assessment?
- According to the results of the baseline scenario, calculated after taking into account the recapitalizations already made or announced in 2014, no Cyprus bank needs additional capital. “The € 1bn available in the support program of the Cyprus economy, which was intended to cover capital needs of the Cypriot banking system, will not be used and will remain available as a buffer”. As a result, the country’s debt will be € 1billion lower than expected in the Memorandum.
- The corrective measures that have been implemented ensure that after the Cyprus Banking Sector is being rebuilt on sound principles, after the severe crisis it has faced in 2013.
- It is also expected that the results of this exercise will help to strengthen the confidence of the individuals and companies, interested in opening a bank account in Cyprus.
Generally speaking, the results for the Cyprus Banking System and indirectly for the Cyprus economy have been satisfactory. Indeed a significant progress has been made since March 2013. For more information on the Cyprus Banking Sector or for any question related to banking procedures or your relationship with your bank, you can get in touch with our team.