CBC governor warns against complacency

Governor of the Central Bank of Cyprus (CBC), Christodoulos Patsalides, has told banks to take into account both the social aspect and the enhancement of the competitiveness of the economy when formulating their pricing policy.

Failure to do so, he warned, could harm their image and put at risk the reputation of the banking sector.

In an interview with Cyprus News Agency, ahead of the meeting of the Board of the ECB on monetary policy issues next week, Patsalides pointed to the sluggish economic growth of the Eurozone suggesting that “there seems to be room for interest rate cuts.”

The governor noted that the Cypriot economy had shown significant resilience in the midst of continuous external shocks, with growth rates that far exceed the EU average. The boosting 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, he said.

He acknowledged the high levels of capital and liquidity of the Cypriot banking system, but warned against complacency. There were risks, such as geopolitical, climate and cybersecurity, and these were not easy to predict and assess.

“Today’s sound financial indicators are not capable by themselves of ensuring long-term stability and sustainability,” he said.

Regarding the transformation of the CBC, he said the role of the bank’s supervisory authority required 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 zone average. In the second quarter of 2024, the GDP growth rate was 3.6 per cent compared to 0.2 per cent in the euro zone.

He explained that the diversification of economic activity, had contributed to this, citing the promotion of the tourism product in new markets, the information-communication-technology (ICT) sector and shipping services. Even the professional services sector, was recovering despite the negative effects of the ongoing sanctions against Russia.

Cyprus, as a small and open economy, had to compete in a rapidly changing international environment. The new geopolitical, climatic and technological reality, “demand the modernization of the economy and society,” he said.

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. These were among the highest in the euro zone.

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

During the same period the return on equity reached 21.3 per cent, much higher than the European average of 10.9 per cent, he said, adding that NPLs had decreased substantially and were now at a single-digit rate (6.9 per cent).  However, they were still above the euro zone banks’ average while progress was not uniform across all credit institutions.

He said that despite the high interest rates, NPLs did not show a deterioration, whereas in some other euro zone countries the quality of loan portfolios was declining.

Despite the sound performance of the banking sector as a whole, he advised against complacency.

It was important to ensure the highest levels of governance, adding that the cornerstone of the ECB’s Single Supervisory Mechanism (SSM), which celebrates its tenth anniversary this year, was the promotion of good and effective governance.

The CBC was sending all credit institutions the message that it attaches particular importance to governance issues, he said.

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.

As regard interest rates, Patsalides said that Cyprus was a small economy and it was normal for rates not to adjust at the same pace as in larger economies.

Noting that lending rates in Cyprus react with a time lag of one and two quarters to changes of the ECB’s base rate, he said that because of the small size of the market, it was not unusual for some transactions to deviate from the broader trend.

Lending rates, however, remained on a downward course with the average cost of new borrowing recording a decline of more than 0.60 per cent from the highest rate at the end of 2023, he said.

Deposit rates lagged more because of the comparatively higher surplus liquidity of Cyprus banks than the rest of the euro zone. The gap was getting smaller, but at a slow rate.

Despite this, Patsalides believed banks should demonstrate a more holistic approach in terms of their pricing, taking into account the social aspect as well as strengthening the competitiveness of the economy.

In the medium term, the interest of bank shareholders should be aligned with the goals of the society and with the effort of safeguarding 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 deposit and lending rates charged by each bank in order to ensure some transparency. The plan is to offer the public, on a monthly basis, of analytical data of weighted average interest rates for various lending and deposit products, charged by each bank.

This, Patsalides said, aimed at providing households and businesses with immediate access to information about each bank’s rates.