The banking sector in Cyprus appears adequately capitalised, following the positive results from rigorous testing by the European Central Bank (ECB), who conducted comprehensive health check on 130 European financial institutions.
The results are positive also for the wider Cypriot economy, showing that the country’s efforts and actions taken in 2014 have served to strengthen the local banking sector. The results also confirm that the banks will not need state support, thus decreasing public debt by the release of around €1bln earmarked in the economic adjustment programme. Successfully completing the exercise is an important milestone for Cyprus, who has worked hard to rebuild the economy since its 2013 bailout.
The results showed that the capital buffers of the four Cypriot banks included in the sample more than cover the capital needs which were calculated through this exercise. Three Cypriot banks completed with a capital surplus the European Central Bank's comprehensive assessment, whereas one bank completed the exercise with a manageable shortfall. The ECB comprehensive assessment revealed capital shortfalls for Bank of Cyprus, the Cooperative Central Bank (CCB) and Hellenic Bank, whereas Russian subsidiary RCB registered capital surplus.
The test was made on the basis of the December 2013 balance sheets. However the CCB was recapitalised by a €1.5 billion capital injection by the Cyprus government, while Bank of Cyprus proceeded with a €1 billion capital raise, which offset the capital shortfalls. According to ECB results, Cyprus Cooperative Central Bank recorded a surplus of €331 million, Bank of Cyprus registered a surplus of €81 million, whereas RCB completed the exercise with a surplus of €112 million.
Hellenic Bank registered a capital shortfall of €176 million. However the Bank announced that it had made further mitigating factors amounting to €71 reducing the overall capital shortfall to €105. The Bank announced it will proceed with a capital raise via a rights issue, to cover the capital shortfall that emerged from the exercise.
The results of this exercise are set to strengthen the confidence of investors and depositors in Cypriot banks. The Central Bank of Cyprus (CBC) was also satisfied with the results, noting that they will be conducive to further strengthening of Cypriot credit institutions, which will in turn contribute to economic growth. The CBC added that these results will also contribute to the lifting of the remaining capital controls imposed on Cyprus.
The Association of Cyprus Banks (ACB) noted that the completion of the exercise strengthens the efforts made both at home and European level to achieve transparency, consolidating stability and building confidence in the financial system and the banking sector across Europe. According to the Association, the results of the Comprehensive Assessment, especially for Cyprus, show that “our banks have responded positively to the strict quality control requirements of the assets and exercise stress test and that is in a position to cope with future risks that might arise from a possible rapid deterioration of economic data.” The ACB believes these positive developments enhance the international credibility and the public’s confidence in the Cypriot banking system, which are essential elements in the overall effort to achieve recovery and a return to economic growth.