EU regulators will order the three major Cypriot banks to raise provisions even higher, according to recent press reports.
The Single Supervisory Mechanism (SSM), which supervises Bank of Cyprus, the Cooperative Central Bank and Hellenic Bank, as well as RCB Cyprus, has recommended that the three Cypriot banks ‘sacrifice’ their 2016 profits to enhance their provisions against non-performing loans (NPLs).
According to European Banking Authority (EBA) methodology, the coverage ratio of NPLs at Bank of Cyprus (BoC) was 39% at the end of June, compared with 50.2% at Hellenic and 43.9% at the Cooperative Central Bank.
The European regulators have set the coverage ratio threshold at 50% and could even apply a larger increase. NPLs in Cyprus amount to €25bn according to Central Bank data.
This means the European regulators are likely to repeat what they did in 2015, namely to demand more provisions late in 2016 that will wipe put profits recorded earlier in the year. All three banks recorded modest profits in the first half of 2016.
A possible increase in ordinary share capital is also being discussed between the ECB and Cypriot banks, the press said.
Coops told to cut capital ratio
In another development, the SSM Single Supervisory Mechanism has cut the regulatory threshold for the Cooperative Central Bank from 12.25% to 11.75% – the same as the other two banks. The CCB’s ratio as of June 2016 was 16.4%.
BoC and Hellenic also have CET1 ratios well above the regulatory minimum. BoC’s is at 14.4% while Hellenic’s is at 13.8%.
Bank leaders are not hiding their concern about the growing regulatory requirements. Indeed, they predict that supervisory requirements will increase even more next year, because of additional funds required as buffers.
It is possible that the ECB will place deadlines on each bank for reducing non-performing loans.