The idea of creating a bad bank as an evolution of KEDIPES is being implemented by the Ministry of Finance and the exchange of views with the European Commission has already begun.
The reactions are positive, sources in the Ministry of Finance report to “F” and the discussion focuses mainly on the market value of the mentioned portfolios, a value which should not be evaluated as direct or indirect state aid to banks and credit companies as well as direct / indirect effects on public finances. Thoughts for KEDIPES to take on the role of bad bank began to mature last summer, but the ministry knew that in order to do so, supervisors, and especially the EU's Directorate-General for Competition (DGComp), would have to step down. the restrictions it has set on KEDIPES, which was set up to manage only the NPLs of the former cooperative bank.
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The lifting of the restrictions should be done by changing the laws that govern the establishment of KEDIPES and only the European Commission can decide this and in this case the Ministry of Finance should have a dialogue with Brussels.
The Ministry of Finance, examining the possibilities of transformation of KEDIPES, which is already from August 2018, an Asset Management Company which currently manages exclusively the portfolio of assets, mainly MEX, of the former Cooperative Bank of Cyprus, into a national which may, under certain conditions, proceed with the purchase of non-performing loans from one or more credit institutions or other credit companies.
Based on the business plan of KEDIPES, its transformation into a national asset company and under certain conditions will be able to provide during the period 2021-2023 an important solution to the issue of MEX through the possible purchase by credit institutions and credit companies, loans amounting to approximately € 1.5 to € 2 billion.
Conditions
More specifically, KEDIPES with the receipt of the relevant approvals will be able through its cash from its operations (restructuring, real estate sales, loan sales, etc.) and under certain conditions, to buy MEX of the banks for a period of 3 years. More specifically:
(a) The loans that KEDIPES will be able to buy should have been MEX in the balance sheets of the Banks as at 31/12/2019.
(b) Necessary condition that the loans will be purchased at their market value on the basis of relevant estimates.
(c) The possible loan purchases will relate exclusively to loans secured by the first home or the first commercial property, with a maximum market value of the security of € 350,000.
The SSM model
The planning must be based on the model desired by the Supervisory Mechanism (SSM): National “bad banks” must be private or a combination of private and public participation and self-financed. Second, states should not grant state aid. Third, the banks to operate in a way that serves the characteristics of the banking system of each country. Fourth, to communicate and be controlled by a pan-European data center from the ECB and the SSM. Fifth, to ensure transparency between banks, investors, shareholders and borrowers.
Banking concerns
Banking sources explained that another important point is the pricing of the loans that will be transferred. The red line is: If the “bad bank” buys a loan at a value above fair value, it can be considered as state aid and provoke the reaction of the EU. On the other hand, if the loans are bought at lower prices than those that have been transferred to the banks' balance sheets, then the banks will suffer losses. An important question is whether the Cypriot banks, most of which have gotten rid of a large part of their non-performing loans, are willing to participate in the bad bank and on what terms.
