cyprus banking sector - lessons from restructuring and
TRANSCRIPT
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Cyprus Banking Sector -Lessons From Restructuring And Current ChallengesA Banker / Economist Perspective
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Presentation Structure
• Part I- The Pre Crisis Situation
• Part II- The Crisis & Current Situation
• Part III- The Challenges Ahead
• Part IV – Epilogue
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The Pre Crisis SituationThe Bubble
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Property PricesEU Entry Euro Introduction
BuySell /MAP Platis Property Index
Rents Index
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Over leveraged Private SectorHousehold Loans/GDP (Eurozone 2013)
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Over leveraged Private SectorBusiness Loans/GDP (Eurozone 2013)
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Oversized Banking System*
*Banking System Assets / GDP 2012
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Main Causes Constrains
• Greece
Greek Bonds
Greek Economy
Fraud?
• Cyprus
Property Bubble
• Size of Banks
• Problematic CY Government Finances
Aspects of the Crisis
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The Crisis & Current SituationDevelopments so far
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March 2013 Eurogroup Main Banking Terms
• Sale of Greek Operations of CY Banks
• Laiki split Good – Bad
• BoC got good Laiki and depositor bail-in
• Co-ops got State Aid and Obligation to Restructure
• Hellenic Capitalized through share issue and bond conversion
• Capital Controls
• New Banking Rules
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March Eurogroup Impact
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Depositor ConfidenceCurrency in Circulation
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Banking ImpactBanking System Prior to MoU
Banking System
Central Bank Controlled
Specialist Institutions
1 Unit
Deposit Money Banks
Commercial Banks
9 Locally Active
4 Locally Owned
5 Foreign4 Greek Subs
International (Offshore)
26 IBUs
1 Rep. Offices
Co-op Central Bank
Superintendent of Co-ops
Co-op Credit Societies
Limited Liability
28"Savings" Banks
Unlimited Liability
65 Credit Societies
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Banking ImpactAfter MoU
Banking System
Central Bank Controlled
Specialist Institutions
1 Units
Deposit Money Banks
Commercial Banks
11 Locally Active
0 Local
11 Foreign4 Greek Subs
International (Offshore)
26 IBUs
1 Rep. Offices
Co-op Central Bank
18 Co-op Credit
Institutions
Superindetentof Co-ops
1) Logistics
2) “Interesting” Legal
issues created
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Resizing the Banking System*
Banking System Cut to
Size?*Banking System Assets/GDP 2013
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The Crisis & Current SituationLessons from the Restructuring
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Lessons from the Restructuring 1• Legal Issues are in the Background Bail-in Bond Holders Other Issues Base Rates
Sale of Greek operations
Laiki Guarantees
Changes in the Rights / Obligations of Banks / Borrowers / Guarantors on “live” agreements
• Capital Controls are messy No need to repatriate earnings facilitates strategic default and strain
liquidity
• DG Competition Rules on State Aid Can Cause Instability if applied to Banks
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Lessons from the Restructuring 2
• Bail-in and protection of non sophisticated investors
• Bail-in and wealth redistribution effects
• Bail in and business working capital
• Bail-in in the absence of capital mobility
A Better System is Needed one
Resembling the Rules of Capital Markets
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Lessons from the Restructuring 3
• Problem Loans take time to fix Strategic defaults and asymmetric information
Re-contracting and free riders
Defaulter expectations
Politicians
Lawyers
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The Challenges AheadImmediate Challenges
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The Banking Challenge in a Nutshell
Shareholder
s
DepositorsBorrowers
State
• High Profit
• Quick Returns
• Cheaper Loans
• Protect “homes”
• Write-offs
• Maximise Votes
• Cheap Finance
• Protect itself
(and
Taxpayers?)
• Safety
• Return
• Access
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New Operating Environment
Cyprus
• Angry Frightened Customers
Haircuts
Bond Holders
NPL customers
• Hostile Political Environment
New Legislation Customer Risk Margins
Fees
“Penalty” interest rates
“Unfair” contract terms
• Troika/Central Bank/ECB
NPLs
Loan Origination
Insolvency Regime
Europe/International
• SSM
• Bank insolvency regime
• “New” views on tax jurisdictions
• Laundering tightening worldwide
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Challenges
• Problem Loans (NPL’s)
• New Lending
• Bank Profitability
• Turning into a Bad Bank
• Depositor Confidence
• GOVERNANCE
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Problem Loans
• Can repay through restructuring Prolongation
• Can partly repay Interest Rate Reduction
Debt Haircut
• Bank will be repaid via Collateral Sale of Collateral
How long does it take
At what price
By Calling in Guarantees
• Loss Expected Adequacy of Provisions
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NPL dynamics
New Defaults
Problem Loans
Restructured
NPLs
Cured
Re-Defaults
Stabilizing?
Collection
through
Collateral
Viable
?
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NPLs and Public Policy
• Changes introduced increased reported NPLs
• NPLs ratios are more likely to increase further
• People worry about Deposit Haircut
• NPLs are perceived as Bad Provisions is the Keyword
• NPLs attract Media Attention which amplifies fear
• ………..Banks need to Manage NPLs but collectively we also need to Manage NPL expectations
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New Lending
• Bank Capital
• Bank Liquidity ELA
• Over - Leveraged Private Sector Risk Premia?
Long term customer affordability
NEED EQUITY FINANCING
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Turning into “Bad” Banks
• NPLs dynamics
• New Lending
• Private Sector Deleveraging
• Debt for Land Swaps Property Management skill issues
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Governance
• At Banks Board Fusion
Strategy
• At Central Bank
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The Challenges AheadLonger Term Challenges
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Aspects of the Cypriot Banking Sector Size issue
• Size / Growth of the non-bank “Offshore” Sector
• Few large Banks (Concentration)
• Co-ops (Merged)
• CY banks active in broadly same areas - markets, countries
• Greek Bank Subsidiaries
• Difficult Market Access CY-Banks
Government
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Cyprus Contagion Channels
• External Channels Greece
Greek Bank Subs
• Intra-Cyprus Contagion Channels Bank to Bank
Deposit Guarantee Scheme
Interbank Placements
Bank to Government
Government to Bank
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Greek Subs
• ??????
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Longer Term Challenges
• New Banking Model BoC / Coops too big?
IBU?
Cyprus Government Bond Holdings
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ECB, SSM & SRM
• New untested bodies
• “Eager” to show their worth
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Epilogue
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Aftermath 1
“The final and common feature of the speculative episode …… is what happens after the inevitable crash. This, invariably, will be a time of anger and recrimination …
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Aftermath 2The anger will fix upon the individuals who were previously most admired for their financial imagination and acuity…..
Developer Businessman
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Aftermath 3
There will also be scrutiny of the previously much-praised financial instruments and practices……. implausible securities issues ……. that have facilitated and financed the speculation.
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Aftermath 4
There will be talk of regulation and reform.
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Aftermath 5What will not be discussed is the speculation itself or the aberrant optimism that lay behind it. Nothing is more remarkable than this: in the aftermath of speculation, the reality will be all but ignored.”
J.K.Galbraith
A Brief History of Financial Euphoria 1993
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Thank you