The infamous 2013 Cyprus bailout captured worldwide attention, as it was the first-ever and only bailout globally with a condition to impose a bail-in on bank deposits – a move considered inconceivable until then. As part ofthe terms, Cyprus was bound by a Eurogroup decision to set the controversial eurozone precedent of imposing losses on shareholders and large depositors in two of its major banks, Bank of Cyprus (BoC) and Laiki Bank.
It is no secret that risky expansion strategies, imprudent lending and weak bank governance all contributed to the downfall of the two Cyprus banks. However, the most significant internal cause was the failure on a national policy level to recognise potential shocks and the risk of running a large banking industry with loose supervision. The collapse of the Greek economy and Cyprus’ significant exposure to Greek government bonds was the last straw for the sector.
Following the events of March 2013, there were widespread predictions of the obliteration of Cyprus’ financial sector. However, out of more than 40 banks operating in the country only two local banks were directly affected. The EU-imposed measures were severe, yet unlike other EU countries undergoing bailout programmes, Cyprus did not see a run on the banks or social unrest, but a defiant show of resilience and a rapid return to growth.
There is no doubt the local banking sector has faced major challenges over the last few years, but they are on a steady recovery path, providing exciting prospects for innovative financial instruments and new players to enter the market.