Roundup: Cyprus central bank warns of risks facing financial system

The Central Bank of Cyprus (CBC) on Wednesday urged banks to address the issue of impaired loans, warning that it is the biggest of six risks the financial system is faced with.

A stability report for 2015 posted on CBC's website said other risks threatening banks are the low level of credit demand three years after Cyprus was pulled back from bankruptcy in a 10-billion-euro financial assistance program, the high level of indebtedness of households and corporations and the high level of unemployment, though it is coming down.

CBC also cited two external potentially detrimental risks, the developments in Greece and geopolitical developments in and around the European Union.

"These could impact the financial stability of Cyprus," the report said.

Cyprus is set to exit a three-year economic adjustment program agreed with the Eurogroup and the International Monetary Fund, after its economy came out with flying colors.

It registered a 1.6 percent expansion in 2015 after four years of deep recession and is projected to grow by an additional 2.0 percent this year, according to the CBC document.

But the banks were the hardest hit as they suffered a total loss of 4.5 billion euros due to their extensive exposure to the devalued Greek sovereign debt in 2012.

The largest lender, Bank of Cyprus, was forced to seize 47.5 percent of deposits over 100,000 euros to replenish its capital to ECB levels and the second largest lender, Laiki Bank, went down under its heavy burden of emergency liquidity assistance.

The CBC said it is worried about the asset quality of the banks, which though adequately capitalized, are faced with non-performing loans amounting to 47 percent of total loans.

It added that tackling bad loans remains a critical issue.

"Addressing the high level of NPLs remains the key priority to restore credit and support growth," the CBC said.

However, it sounded an optimistic note saying that "decisive and efficient implementation of the newly enacted insolvency framework is expected to be conducive to resolution of non-performing assets."

The same legislation is also expected to help bring down the overall level of indebtedness by accelerating the restructuring of private debt, now standing at 280 percent of Cyprus's annual economy of 18 billion euros.

The CBC also urged commercial lenders to expand their lending so as to increase profitability.

On the bright side, CBC said the reliance of Cypriot banks on European Central Bank emergency liquidity was brought down from its peak of 11.4 billion euros in March 2013 to 4.9 billion euros in September 2015.

The CBC report coincided with a monthly report for February saying the Economic Sentiment Indicator declined by 0.5 units to 108.6 in January 2016, due to a deteriorated consumer confidence in the economy.

The report by the University of Cyprus Economics Research Centre (ERC) said the deterioration comes from adverse expectations concerning the households' economic situation and the possibility for savings in the next 12 months as a result of persisting high unemployment.

But the economic sentiment rose among the services sector, retail trade and manufacturing on expectations of increased production and sales in the next 12 months. Endit