Governor of the Central Bank of Cyprus (CBC), Christodoulos Patsalides, has sent a message to the banks to take into account both the social aspect and the enhancement of the competitiveness of the economy when formulating their pricing policy and warned against the risk of harming their image and the risk to the reputation of the banking sector.

In an interview with CNA, ahead of the meeting of the Board of the European Central Bank (ECB) on monetary policy issues (on the 18th of October 2024), Patsalides points to the sluggish economic growth of the Eurozone and also to indicators of economic trends, such as the PMI (Purchasing Managers Index), which fell below the 50-point mark. Stressing that "there seems to be room for interest rate cuts" he said that all factors should be discussed, including any effects from the developments in the Middle East.

The Governor noted that the Cypriot economy has shown significant resilience in the midst of continuous external shocks, with growth rates that far exceed the EU average, stressing that the strengthening of the economic growth path should be based on the expansion of the productive fabric, fiscal discipline, structural reforms, as well as the strengthening of governance, based on best international practices, both in the public and private sectors.

Regarding the image of the banking sector in Cyprus, he recognized the high levels of capital and liquidity that characterize the Cypriot banking system, stressing  that there should be no complacency. He talked about the emerging risks, such as geopolitical, climate and cybersecurity, risks that are not easy to predict and assess.

"Today's sound financial indicators are not capable by themselves of ensuring long-term stability and sustainability," he underlined.

He also announced changes at the end of the year, towards the regulatory burden and the proper operation of banks to serve their customers, without differentiating the goal of zero tolerance in the fight against money laundering.

Regarding the transformation of the CBC, its Governor said that the role of the Cypriot supervisory authority requires the adoption of a reliable central banking model, bearing in mind the evolution of the ECB itself and the characteristics of Cyprus. "Collectivity and efficiency are needed in the way decisions are made and executed," he pointed out.

Asked about the Cyprus economy, he said that it has demonstrated considerable resilience and flexibility despite the successive geopolitical and other difficulties of recent years, showing growth rates higher than the euro area average. In the second quarter of 2024, GDP recorded a growth rate of 3.6%; far exceeding the corresponding growth rate in the Eurozone which was 0.2%, he stressed.

He explained that towards this end, what has contributed was the diversification achieved in economic activity, for example the promotion of the tourism product in new markets, the information-communication-technology (ICT) sector, shipping services, and professional services, which despite the negative effects of the ongoing sanctions against Russia, they seem to be recovering in recent quarters.

The strengthening of the growth course of the economy, he pointed out, must be based on further expansion of the production network, the maintenance of public finance discipline and  structural reforms, as well as on the strengthening of governance, based on the best international practices. 

Cyprus, the Governor said, as a small and open economy, is called upon to compete  in a rapidly changing international environment. The emerging risks and challenges in the new geopolitical, climatic and technological reality, demand the modernization of the economy and society.

Asked about the performance of the banking sector, and the financial sector in general, Patsalides said that after a difficult decade, the banking sector today presents very high capital adequacy, liquidity, and profitability ratios, among the highest in the euro area.

In the first half of 2024, he added, the banking sector's common equity capital ratio stood at 22.5% compared to the European average of 16.1%, while the liquidity coverage ratio reached 328% compared to the European average of 163.2%.

During the same period the return on equity reached 21.3%, much higher than the European average of 10.9%, he said, adding that NPLs have made substantial progress and are at a single-digit rate (6.9%).  However, they are still above the Eurozone bank's average while progress was not uniform across all credit institutions.

He said that despite the increase in interest rates to address inflation, NPLs do not show a deterioration, whereas in some other Eurozone countries the quality of the loan portfolio is declining.

Despite the sound performance of the banking sector as a whole, he continued, there should be no complacency.

He recalled statements by Chair of the ECB's Supervisory Board, Claudia Buch, who stressed that emerging risks such as geopolitical, climate, and cyber risk are not easy to predict, assess, and therefore manage well.

Therefore, Patsalides said, it is important to ensure the highest levels of governance, adding that the cornerstone of the ECB's Single Supervisory Mechanism, which celebrates its tenth anniversary this year, is the promotion of good and effective governance.

Cyprus, as an active member of the Single Supervisory Mechanism, benefits the most from the experience and quality of the exercise of supervision, he underlined.

The Governor said that the CBC is sending all credit institutions the message that it attaches particular importance to governance issues.

Today's sound financial indicators alone can not ensure long-term stability and sustainability, he stressed.

Referring to electronic money institutions, which are growing at high rates as a result of the rapid development of digital technology, he said that the CBC aims at a proper proactive and dynamic supervision in this area as well.

Replying to another question, the Governor said that Cyprus is a small economy and it is normal for interest rates not to adjust at the same pace as in other larger economies.

Noting that lending rates in Cyprus react with a time lag of one and two quarters to changes of the ECB's key interest rates, he said that due to the small size of the market, it is common for some transactions to deviate from the broader trend.

However, Patsalides told CNA, lending rates remain on a downward course with the average cost of new borrowing recording a decline of more than 0.60% from the highest rate towards the end of 2023.

Deposit rates lag more due to the comparatively higher surplus liquidity than the rest of the eurozone. Therefore the gap is getting smaller, but this happens slowly.

Despite this, he stressed, Cypriot credit institutions should demonstrate a more comprehensive approach in terms of their pricing, taking into account the social aspect as well as strengthening the competitiveness of the economy.

Patsalides added that in the medium term, the interest of banks' shareholders should be aligned with the goals of the society and with the effort of ensuring the competitiveness of the economy. 

Otherwise, he warned, the image of the banking sector will be eroded and reputational risk may lead to undesirable results.

Recently, the CBC published for the first time the levels of deposit and lending rates per credit institution. Asked what was the purpose of this move, Patsalides told CNA that this move was intended to further strengthen transparency.

In this context, he pointed out, the CBC proceeded with the publishing -on a monthly basis- of analytical data of weighted average interest rates for various lending and deposit products, per bank.

This publication, Patsalides said, is to inform the public, providing households and businesses with immediate access to more detailed information, noting that households and businesses should continue to be informed by the credit institutions about the interest rates on offer.

Concluding, he said that the CBC will expand this kind of information and intends to promote changes in the regulatory framework regarding reputational risk.