NICOSIA, Cyprus, June 27, 2013 /PRNewswire/ --
The Independent Commission on the Future of the Cyprus Banking Sector (ICFCBS) has today published its interim report on the restoration of sound banking in Cyprus. The report proposes an extensive package of measures and reforms which it says are essential to put Cyprus' banks back on a strong long-term footing, and raise the standard of banking supervision to international levels.
The 100-page report was compiled by an independent Commission of four international banking experts appointed by the Central Bank of Cyprus (CBC) to help overcome the legacy of the recent crisis, and develop long-term plans. The interim report contains proposed recommendations for Cyprus' banking sector and invites comments from interested parties for the Commission's final report later this year.
Reviewing events of the last few years, beyond certain external factors, the Commission says that serious failings in the governance and management of banks as well as in the supervisory system at all levels led to the crisis, and will need to be corrected in order to restore confidence and soundness.
At the highest levels, the report says that Cyprus suffered its banking crisis because it had no coherent national policy to handle its booming banking sector, and failed to restrain the banksbecause they seemed to be "doing a good job". One of the report's top recommendations is that Cyprus develop a comprehensive banking policy which takes account of the risks as well as the rewards of running a big banking sector, and ensures that the country has effective mechanisms to deal with them. Even though the Cyprus banks are now shrinking, Cyprus will continue to have a heavy dependence on banks because there are few financing alternatives.
The report also says that Cyprus must open up its banking system to fresh people and ideas in order to rid itself of the taint of politics and cronyism. It notes, for example, that there are few non-Cypriots on bank boards, and that they are expressly excluded from the board of the CBC. The report calls for a new culture of independence and openness, saying that "changes of this kind wouldtransform the banking industry in all the necessary ways, by delivering bettergovernance, better banks, better supervision and greater trust internationally".
The report contains some 40 recommendations for the long term recovery of the Cypriot banking industry. Its main points include:
On banks and banking:
- It is unfortunate that Cyprus' loan agreement with the Troika requires it to merge Cyprus Popular Bank with the Bank of Cyprus because this will create a bank with a dominant share of the market and raise competition and systemic concerns. The merger should be completed as soon as possible to allow a return to normality, but it will have to be reviewed once conditions have settled down.
- The co-operative banks should be merged into a single joint stock entity with commercial management and placed under the direct supervision of the CBC, turning the sector into a competitive commercial force.
- Although Cyprus' international financial centre business has been badly hit by the measures emanating from the crisis, it could be preserved. However, it would have to be of higher quality, less dependent on tax breaks, more diversified geographically, and able to offer an international standard of service in areas such as wealth management. It would also have to be subject to strong supervision, and anti-money laundering controls will need to be strictly and visibly enforced.
- Cyprus bank customers should prepare for major changes in banking service. The high personal level of service they have enjoyed will be reduced by cutbacks in the branch network and a shift to more objective forms of loan origination. There will also be a move to electronic and remote forms of banking.
- The availability of credit could be constrained by the shift to a more concentrated and heavily regulated banking sector, and to stricter loan origination practices. The authorities may have to take action to make credit available to fuel Cyprus' economic recovery.
- The cost of credit has to come down, however the banks will need to maintain their margins to restore profitability. It is likely, therefore, that deposit rates will fall adding to the risk of deposit flight. Further administrative measures may be needed temporarily to ease the transition.
- In the longer term, Cyprus needs to develop policies to encourage alternative forms of financial intermediation to reduce its exceptionally high dependence on banks.
- The corporate governance of banks needs a complete shake-up to restore the status of boards and independent directors. This should include transparent procedures for appointing non-executive directors, and the creation of robust systems for controlling risk. The audit functions, both internal and external, need to be strong and independent.
On financial stability:
- Cyprus needs a system of banking supervision which is not only highly competent professionally, but in which all the necessary parts are well co-ordinated. This requires structural change.
- The current five components of Cyprus financial regulation should be combined into a single entity and placed within the CBC which has the legal and financial independence to handle this role, and whose supervisory competence is in the process of being strengthened.
- Better institutional arrangements are needed to ensure a regular and open dialogue between the CBC and government, and remove personality conflicts.
- Clearer systems and responsibilities are required to monitor macro-prudential risk and issue early warnings about looming banking problems.
- The CBC'sindependence is essential to a sound supervisory system. But this needs to be balanced by clear accountability of the CBC.
- The governance arrangements at the CBC need to be strengthened to provide a better balance between the executive and the non-executive sides. There should be a transparent process for the appointment of non-executives, and a system of board committees to provide independent overview of the performance of the executive.
- The supervision function in the CBC should be subject to independent audit to improve its accountability. It needs to be more strongly resourced, and would benefit from greater international assistance.
- The protection of bank consumers in Cyprus needs to be improved. The CBC's responsibility for conduct of business regulation should be clarified, and the role of the Financial Ombudsman and the Banking Codes should be strengthened.
David Lascelles, the Commission's chairman, said that while the list of recommendations looked daunting "it is in Cyprus' power to address all of them". He notes that the future of the Cyprus banking system would have to bemodest for a few years, but there is no reason why it should not flourish again, only in a more stable way.
The interim report was compiled over a six month period following extensive research by the Commission and more than 50 interviews in Cyprus and abroad. The full report can be found at http://www.icfcbs.org
Note to editors:
The Independent Commission on the Future of the Cyprus Banking Sector was established by the Central Bank of Cyprus in November 2012. Its terms of reference can be found at the Commission's website, http://www.icfcbs.org.
The members of the commission are:
David Lascelles, chairman. David Lascelles has been analysing the banking industry for more than 30 years as Banking Editor of the Financial Times and more recently as Senior Fellow of the Centre for the Study of Financial Innovation, an independent London think tank. David has also been a university lecturer in banking and a bank non-executive director.
George Charalambous has been a key figure in the Cypriot financial sector for many years, as senior general manager of the Bank of Cyprus and more recently as chairman of the Cyprus Securities and Exchange Commission. A graduate of the London School of Economics and the Athens School of Economics, he has also held senior positions at several other institutions including the Central Bank of Cyprus and the Cyprus Development Bank.
David Green is a leading international expert on financial stability matters with over 40 years as a central banker and financial regulator. During his career he has worked in the Bank of England and the Financial Services Authority, and more recently in the UK's integrated regulator for corporate reporting, the Financial Reporting Council. He has also been advising the Central Bank of Ireland.
Pierre de Weck is a senior Swiss banker with more than 35 years' experience of banking at the international level. During his career he has held senior positions at Citibank, UBS and Deutsche Bank, working in Europe, North America and with the Middle East. Most recently he was a member of the Group Executive Committee of Deutsche Bank where he was Global Head of the Private Wealth Management Division with €300bn of client assets in over 70 countries.
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SOURCE Action Global Communications Ltd