Elizabeth Macol, a member of the ECB's Supervisory Board, stressed the need to find the right mix in terms of the divestiture framework, stressing that if the framework is designed lightly, it could have the opposite effect, destabilizing the banking sector.
In an interview, Ms. Macol pointed out that the changes already made in the context of last year's divestitures, such as appealing to the Financial Commissioner for breach of the Code of Conduct and extending deadlines throughout the process, “could have a negative impact on banks and cause further delays “.
READ ALSO: DBRS: Significant progress in reducing NPLs in Cyprus
Mr Macol acknowledged the progress made in the Cypriot banking system in reducing NPLs after the 2013 crisis, but cautioned due to the high level of uncertainty surrounding the overall impact of the pandemic following the end of the moratorium on installments. possible consequences of the withdrawal of budget support measures.
“In any case, the MES index in Cyprus remains high and the effects of the pandemic remain a source of uncertainty,” he told KYPE, adding that implementing well-planned restructuring in response to such situations is “an excellent credit risk management tool”.
Regarding the government's intention to transform the state-owned KEDIPES from the management body of the former SKT to the asset management body for the entire banking system, the SSM official said that such a well-planned effort would complement the banks' efforts to However, great care is needed to reduce the risks associated with this scheme, as well as concerns about overall payment discipline.
The Cypriot banks and the pandemic of Covi d
Asked about the course of the banking sector in Cyprus during the pandemic and whether the Cypriot banks can face a possible new wave of NPLs given the high levels of old NPLs, Ms. Macol said that compared to the 2013 crisis, Cypriot banks are better prepared to deal with the rise in problem loans.
“Banks now have stronger capital positions compared to the post-crisis period and have made significant progress in making their balance sheets more resilient,” he said, adding that according to data from the Central Bank of Cyprus, NPLs in Cyprus fell. by € 23.3 billion from December 2014 to December 2020 “.
However, he stressed that “we must not forget that we are still going through a period of great uncertainty about the overall” impact of the pandemic on borrowers and therefore on the balance sheets of banks “, as he said,” we have not yet seen them appear on the balance sheets the possible effects of the full withdrawal of budget support measures. “We do not yet know if some areas will be more difficult than others when support is no longer available.”
“What we know from experience is that impairment losses on loan portfolios usually occur only with a delay. We also know that we do not yet have data on future bankruptcies that at the moment may not be reflected in the balance sheets “, said Ms. Macol, adding:” Therefore, the Cypriot banks must be prepared for the impact of the pandemic on their balance sheets and do the relevant planning wisely “.
The context of the sales
Asked to comment on lawmakers' efforts to change the framework for divestitures as the Cypriot banking sector continues to be burdened with high NPLs, Ms Macol said policies that protect borrowers could benefit both the economy and banks. provided they are properly designed and implemented.
“But these policies, if designed lightly, can have the opposite effect, destabilizing the banking sector. “So the right mix has to be found,” he said, noting that we should not forget that although banks have reduced their NPLs on their balance sheets, this does not mean that debts have magically disappeared, but still exist in other areas. of the Cypriot economy.
According to Ms Macol, changes to the insolvency and divestiture framework have indeed helped to remove some obstacles to insolvency and the divestiture process. However, there are still several obstacles to be addressed, such as the low utilization of insolvency and pre-insolvency tools and delays in pending litigation in the judiciary.
“In addition, the amendments made in the context of last year's divestitures, which make it possible to appeal to the Financial Commissioner for breach of the Code of Conduct and extend the deadlines for the various steps of the process, could have a negative impact on banks and cause further delays, “he said.
Conversion of KEDIPES into Bad Bank
Regarding the intention of the Cypriot authorities to transform the state-owned KEDIPES, the state-owned asset management company entrusted with the management of the NPLs of the former Cyprus Cooperative Bank, into a bad bank for the whole system, Ms. Makol noted that despite In any case, the CIS index in Cyprus “remains high and the effects of the pandemic are still a source of uncertainty” and that more and more continuous efforts will be needed, together with development economic policies, for the important reduction of NPLs.
He said that, as a principle of banking supervision, we welcome the wider possibilities that banks have to reduce their NPLs, from securitization to the establishment of well-designed asset management companies. “Properly designed, state-backed solutions that promote the sale of NPLs can complement the efforts of the banks themselves by offering additional options for dealing with NPLs more quickly,” he said.
He further stressed that the success of asset management schemes as an effective solution to reduce NPLs depends on many factors: He described as crucial a sound sales framework, as well as the appropriateness of the time horizon of the scheme and the type of assets transferred to this (eg retail versus corporate exposures).
Saying that plans to expand the existing scheme at national level have not yet been completed, Ms Macol noted that “great care is needed to reduce the risks associated with this scheme, as well as concerns about the overall discipline of the payment of payments “.
Mergers, acquisitions and chain networks
Asked if mergers and acquisitions were deemed necessary in the Cypriot banking system, given current challenges such as low profitability and increasing competition from financial technology companies (fintech), the supervisory board official said that decisions on and acquisitions should be taken exclusively by market participants, adding that our role is neither to promote nor to prevent them.
In general, Ms. Macol noted that there is indeed a problem of oversupply in some countries, which can be addressed in various ways. “Consolidation is of course one of the possible options: well-designed and well-implemented consolidation plans can help address long-term structural issues, such as low profitability and oversupply,” he said.
He noted that mergers are not the only option available to improve structural profitability and cost-effectiveness in the Cypriot banking sector.
“For example, for institutions with extensive branch networks, digital transformation could lead to significant cost reductions if supported by efficient internal governance and reorganization,” he said, adding that one of our supervisory priorities is to evaluate business models and the profitability of banks, and in the light of the growing digital transformation, which has been boosted by the pandemic and the rules of social distancing.
“In this regard, our supervisory teams will continue to closely monitor the banks' strategic plans and the relevant measures they are implementing to address various structural deficiencies,” he said.
Asked about the challenges in the European banking sector after the pandemic, Ms Macol said European banks had shown a significant degree of resilience during the pandemic thanks to both unprecedented and coordinated public policy measures and efforts to strengthen fundamentals after the Great Depression through regulatory reforms, including the establishment of the ECB Banking Supervision.
In terms of future developments, he said, there are still some challenges, the most important of which are the quality of assets and the persistently low profitability of the banking sector.
Finally, when asked about the reports of the President of SSM that 40% of the supervised banks apply outdated practices for credit risk and if this also applies to the Cypriot banks, Ms. Macol referred to a broader dimension based on the overall picture of banks under the supervision of the SSM.
“About 40% of banks do not live up to our expectations for forecasting, loan grading, lending measures and the soundness of their business capacity to prepare for the expected increase in NPLs.”
He said that “what is rather surprising in a crisis situation is that in some portfolios we have found an improvement in the parameters (ratings) of credit risk, especially in terms of the possibility of default.”
As he explained, this may be a result of the fact that banks have not yet fully included the impact of 2020 in their risk assessments, as they are based on the financial situation of borrowers in 2019 or the better ratings may be due to certain support measures, such as public guarantees and, if so, whether these improved ratings can be maintained in the long term. “
Noting that banks with higher interest rates on deferred loans may face challenges in identifying risks at the level of individual borrowers, Ms Macol said this needs to be improved – credit risk practices need to be strengthened to overcome challenges. “Banks need to get a clearer picture of potential credit crunch and provide the transparency they need. “In this regard, we are closely monitoring the forecasting practices of banks,” he concluded.
Phillenews / ΚΥΠΕ