Greed of Cyprus Banks Continues Unabated

By taking fixed deposits at the second lowest interest rate in the euro area at an  average of 1.8 % and lending part of these funds at the third highest rate in the euro area at an average of well over 4% and placing their idle substantial excess reserves in overnight deposits at the ECB “earning” currently a 3.25% interest rate, Cyprus banks are profiting selfishly from the highest net interest rate margins in the euro area[1]. It is greed in that Cyprus banks are failing to adequately finance investments and economic activity at affordable interest rates and in not offering depositors real positive interest rates on their savings.

Furthermore, it is the practices of Cyprus banks in basing the extension of loans mainly on the provision of security and in dealing stealthily with NPLs that diminishes the contribution of banks to economic development and in supporting society, while at the same time enabling them to extract profits from non-productive activities. Many potentially worthwhile projects are not financed because banks do not have the willingness and/or capacity to assess the economic viability of the project and the related ability of the borrower to repay. And when security-based loans become impaired, many of these loans are called-in and with their collateral sold at a profit to third parties, rather than being productively restructured.

Indeed, the behavior of Cyprus banks continues to be irresponsible toward supporting the economy and is profoundly anti-social.

The two biggest Cyprus banks raised profits to extremely high levels in the first 9 months of 2024 following the recording of their very large financial gains in 2023. The Bank of Cyprus increased its profit to over 400 million euro and the return on equity to 29.1%, while the Hellenic Bank boosted its profit to 284 million euro and recorded a return on equity of 23.7% in the first 9 months of 2024.  And reflecting the large amounts of interest income obtained from the ECB, the net interest income of these two banks rose by over 13% to 1.1 billion euro over the initial quarters of 2024 and accounted for the greater part of their profits.

The Cyprus authorities and the ECB with their inequitable policies and inadequate surveillance, in truth, enable Cyprus banks to continue with their unproductive operations and anti-social behavior in their relentless quest to financially compensate big bank shareholders and politically tainted senior executives.

Recommendations

The Cyprus government should levy a tax on the net interest income of banks from the ECB in addition to the corporate tax rate of 12% in order to deter unproductive activities and to return part of their profit gains to society.

The raising of ECB interest rates, especially the overnight deposit rate to 4% during 2023, was designed to take money out of banks and curb rising inflation. However, as there has been a substantial moderation of the inflation rate toward the ECB’s target of 2%, the need for a high overnight deposit rate currently at 3.25% is no longer warranted. Moreover, a number of banks in the euro area, in particular Cyprus banks, are placing considerable amounts of their funds in these low-risk overnight deposits, rather than allocating their resources more riskily to finance real economic activity. Indeed, Cyprus Central Bank Governor, Christos Patsalides should raise this issue at ECB Council meetings, stressing that the relatively high ECB interest rate on overnight deposits is tending to curtail bank-financed real economic development in Cyprus and most probably in some other euro area members.

A major problem for Cyprus is that in spite of their ample financial resources[2] banks and the government do not have the institutional capacity to evaluate, arrange and finance the implementation of economically viable investment projects. While bankers complain that there is a scarcity of credit-worthy customers, they as indicated above, do not appear to have the willingness and/or ability to appraise competently loan applications by borrowers on the economic viability of proposed projects. Indeed, banks should develop the capacity to move away from their current practice of approving loans mainly on the basis of the security provided by the borrower and in the case of non-restructured impaired loans give the borrower the first chance of repurchasing the loan at the discounted price.

Bankers can be trained and motivated to be more competent in evaluating the viability of loan applications and in the productive restructuring of impaired loans. Although such efforts may be somewhat helpful for the increased bank financing of worthwhile medium and small-scale projects, it is the repeated view of the economist Savvakis Savvides and this author that for large-scale investment projects, only the establishment of an independent development-type financing agency staffed with apolitical experts can be effective in competently evaluating, financing and arranging such projects, which in turn can result in their sound and timely implementation.

While execution of the above recommended measures should contribute to economic development, such action including extending and restructuring loans based on the ability to repay as well as the allocation of the proceeds of the greater taxing of abnormally high bank profits to special funds, should provide social support also. In addition, with Cyprus banks having abundant financial resources and making extremely high profits, these institutions should curb their greed for short-term profits and reduce interest rates and other charges for borrowers and raise deposit rates so as to help society more.

Finally, the government needs to be pro-active in persuading banks to be more socially responsible and could “start the ball rolling”, by reducing the defense tax from 17% on interest income from bank deposits toward 3%, the latter the rate levied on interest income from Government bonds.