Cyprus – Is a Banking Crisis Looming?
The Cyprus Informer asks “Cyprus – Is a Banking Crisis Looming?” as the Financial Mirror, Cyprus publishes an article entitled “Price war on Cyprus bank deposits to hurt real estate”
The situation reported by the Cyprus Financial Mirror sounds horribly familiar to those in the UK who first witnessed Barclays going to the UK Central Bank for big overnight loans as rates in the wholesale markets soared, market liquidity contracted and the Northern Rock and UK Banks raised retail deposit rates in an war for deposits.
The Northern Rock was heavily dependent on wholesale funding of its lending to home owners for mortages and simply speaking, when ordinary depositors became aware of the big loans it needed from the UK Central Bank, they decided that it was unsafe to leave their money with the Northern Rock and withdrew funds in huge queues over several days. This was a “run on the bank” an with both retail and wholesale funding sharply reduced the UK Central Bank had to give it a lifeboat.
The run on Northern Rock was only stopped when the UK Government agreed to guarantee all deposits regardless of size.
What is the position of the Cyprus Government because the signs described in the article from the Cyprus Financial Mirror sound strangely familiar?
From the Central Bank of Cyprus
The level of compensation per depositor under the Scheme equals 90% of the amount of each protected deposit subject to a limit of the equivalent of Euro 20.000 in Cyprus pounds or in the currency of the member state of the European Union in which the deposit is denominated. The limit applies to the aggregate of each depositor’s deposits with the bank.
For the purposes of calculation of compensation paid to the depositor the amounts of deposits will be set-off against loans or any other credit facilities granted by the bank as well as any other counterclaim of the bank in respect of which a right to set-off exists.
And in addition to loans to homebuyers in Cyprus, the Cyprus Banks are heavily exposed to property lending to developers. How was this vast expansion in lending funded? From an injection of capital? No. From retail savings? No. From the wholesale money markets? Yes.
It is said that if the Cyprus Banks can weather this storm for another 3 months then Cyprus will have converted to the Euro and the European Central Bank will be able to help out.
Cyprus Financial Mirror – Price war on Cyprus bank deposits to hurt real estate
24/10/2007
An intense price war waged by Cyprus’ commercial banks in their bid to attract deposits is likely to hurt the property market, with bankers blaming the Central Bank for imposing tight liquidity conditions in order to control the spectacular increase in loans in the real estate and properties sectors.
Marfin Laiki Bank is widely blamed for starting the “price war” to attract deposits by offering exceptionally high rates on 3-, 6-, 12- and 24-month fixed periods, which are above the Lombard lending rate.
MPB is offering 20 basis points above LIBOR on 24-month deposits, which is seen as an aggressive move to attract deposits and confirms the tight situation in the Cyprus pound money market.
Laiki’s move was immediately matched by Hellenic Bank, which has sent a message to its peers that while it will not start a price war, it is ready to match any such attempt by the others.
Bank of Cyprus is widely seen following with its own move soon by offering exceptionally high rates, which is likely to be matched by Alpha Bank and the rest.
As one banker told the Financial Mirror, the tight condition in the Cyprus pound money market is a result of the efforts of the Central Bank to drain excess liquidity from the market, as part of its efforts to orchestrate a slowdown in loans directed to the property market.
The banks are also at fault, he said, as they rushed to give “too many property loans without the comparative increase in deposits, so now, in order to support those loans, they need to attract deposits, otherwise their ratios will not allow them to carry the loans in their books.”
The Central Bank’s decision not to accept an effort by banks to classify their euro surplus funds as local currency only three months ahead of the shift to the common currency has added to the banks’ woes, which otherwise, would simply count their euros in the minimum deposit/loan ratios of the Central Bank.
“The Central Bank wants to cool the property market loans and after reducing the deposit requirement for loans, and banning banks from lending to foreigners on margin, now they are squeezing the banks by tightening the liquidity situation,” the senior banker told the Financial Mirror.
– MiFid
The same sources however, added that once the euro becomes official currency, then the leverage of the Central Bank will decrease.
“Instead of wasting everybody’s time on these, they (Central Bank) should clarify other pressing issues, such as how you define euro loans from January between locals and non-residents, what will the impact of MiFid be and so many more pressing issues that have been left unattended.”
With only a week to go before the MiFid rules go into effect across most EU countries, including Cyprus from November 1, another senior banker told the Financial Mirror that there are many problems associated with the launch of structured products that need to be MiFid compatible.
“There are too many loopholes, gaps and different ways of interpretation as to how the new structured products should be in compliance with MiFid rules,” said the banker, blaming the authorities for not informing or issuing specific guidelines.
Structured products are those which combine a bank deposit or a guaranteed return with the performance of a specific sector (equities, bonds, commodities) and are increasingly proving popular as a way to attract long-term funds.
– Inflation impact
By cooling demand for property loans the Central Bank wants to reduce the sharp appreciation in property prices and at the same time reduce the inflationary impact on the rest of the economy.
With demand high for properties, developers and suppliers have been hiking prices and passing these on to the consumers who, in the belief that property price rises are justified because of the appreciation in property prices have, accepted such increases.
But this is having a negative impact on the headline inflation rate, which now risks getting out of control as most retail establishments have increased prices ahead of the launch of the euro as the official currency from January 2008. That is why the government has been trying to cool specific sectors of the economy in order to reduce the inflationary consequences.
The recent reduction of the VAT on up to 100 products, most of them directly or indirectly related to the construction industry, is seen as a vain attempt to control and reduce the headline inflation rate, which risks spiraling out of control in early 2008 when the impact of the dramatic reduction in taxes on vehicles will be removed.
“If this move to control inflation does not work, then the government may decide to further reduce taxation on cars,” an informed source told the Financial Mirror.
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The European Central Bank injected an unprecedented $500 billion into the banking system at a below-market rate, in a cash injection to counter the impact of the global credit crunch. The aim is to cut the cost of lending between retail and commercial banks, which has jumped in the past few weeks.
The rate at which banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 percent, after climbing 83 basis points in the past two weeks, the European Banking Federation said.
All banks with enough collateral, and which submitted bids of at least 4.21%, were eligible to receive funds from the ECB. The idea is to try and bring down interbank rates closer to the ECB’s target interest rate of 4%.
The decline is the first sign attempts by policy makers to revive interbank lending are succeeding. Central banks, led by the Federal Reserve, are seeking to restore confidence to money markets after the collapse of the U.S. subprime-mortgage market. The ECB loaned a greater-than-anticipated 348.6 billion euros for two weeks at 4.21 percent.
The ECB said bids at Tuesday’s auction were received from 390 banks and ranged from 4 percent to 4.45 percent. The central bank first offered extra cash on Aug. 9, when it lent 95 billion euros in emergency funding, a record at the time. Banks borrowed 2.435 billion euros at 5 percent Monday, the most since Sept. 26, the ECB also said today.
The three-month euro-borrowing rate fell 7 basis points to 4.88 percent, down from near a seven-year high, the EBF said.
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