The Banking Sector in Cyprus

Transcription

1 The Banking Sector in Cyprus Constantinos Stephanou Senior Financial Economist, The World Bank LSE Conference on the Cyprus Economy London, 10 February

2 Contents 1. Characteristics of the banking sector Structure, size and performance Contribution to the economy 2. Issues for discussion Current vulnerabilities and recapitalization needs Systemically important banks 2

3 1. Characteristics of the banking sector 3

4 Main Characteristics Large and successful banking sector Three pillars: domestically-owned banks, foreign bank branches and subsidiaries, cooperatives High degree of concentration Top 3 banks account for 54% of total deposits and 47% of total loans Traditional banking model Broad range of services (universal banking) Significant contribution to development of Cyprus as international business centre 4

5 Banking Sector Size for Selected Countries (end-2009) 2500% 2000% Total Assets (% of GDP) 1500% 1000% 500% 0% Cyprus Greece Ireland Luxembourg Malta Netherlands UK Foreign Branches Foreign Subsidiaries Domestic Credit Institutions Source: ECB. Note: These figures include the overseas assets of domestically-owned banks. 5

6 Evolution of Banking Sector Size for Selected Countries ( ) 900% 800% 700% Total Assets (% of GDP) 600% 500% 400% 300% 200% 100% 0% Cyprus Greece Ireland Malta Netherlands UK Source: ECB. Note: These figures include the overseas assets of domestically-owned banks. 6

7 Contribution of Financial Intermediation to Cyprus ( ) 9% 8% Contribution of Financial Intermediation (% of Total) 7% 6% 5% 4% 3% Source: Cystat. Gross Value Added Employment 7

8 2. Issues for discussion 8

9 Current Vulnerabilities and Recapitalization Needs Vulnerabilities Exposure to Greece (~EUR 28 billion for domesticallyowned banks, while Greek banks represent 10+% of domestic banking sector) Exposure to troubled domestic real estate and construction sector Dependence on non-resident deposits (27% of sector deposits), most of which are short-term in nature Links to the sovereign and repeated rating downgrades The 2 big banks need EUR 3.6 billion (~20% of GDP) in capital by end-june 2012 to comply with European Banking Authority requirements 9

10 Systemically Important Banks The two big banks are systemically important Large size (compared to economy) Dominant domestic presence There exist mitigating factors Strong domestic franchises, traditional model Conservative prudential framework but they do not change the fact that the collapse of one of them (however unlikely) could disrupt the flow of financial services and have significant negative spillover effects 10

11 Size of Selected Credit Institutions to GDP (end-2010) 300% 250% 200% 150% 100% 50% 0% Total Assets (% of Home Country GDP) MPB (CY) BOC (CY) NBG (GR) EFG Eurobank (GR) BNP Paribas (FR) Credit Agricole (FR) Deutsche Bank (GER) UniCredit (ITA) Bank of Ireland (IRE) AIB (IRE) Bank of Valletta (MLT) BCEE (LUX) ING (NL) Rabobank (NL) Santander (ESP) Credit Suisse (SWI) UBS (SWI) Nordea (SWE) RBS (UK) HSBC (UK) Barclays (UK) Source: The Banker, World Bank. Note: These figures represent a bank s total assets at group level, including from overseas operations. The acronyms in brackets indicate the country where the bank is based: CY=Cyprus, 11 GR=Greece, FR=France, GER=Germany, ITA=Italy, IRE=Ireland, MLT=Malta, LUX=Luxembourg, NL=Netherlands, ESP=Spain, SWI=Switzerland, SWE=Sweden, UK=United Kingdom.

12 Concluding thoughts The banking sector has served Cyprus well to date The question going forward is whether banking sector growth can continue indefinitely and at what cost Systemic risks are important given the banking sector s size and structure The experience of other countries (e.g. Iceland, Ireland, Switzerland, UK) will be useful in this context The current crisis provides an opportunity (and need) to rethink the business model for the sector This is not merely a technocratic issue since it involves difficult policy trade-offs that carry implications on the growth model pursued by Cyprus in recent years 12