Fears were growing for banks in Cyprus today after the country moved towards a possible part-nationalisation of the Cyprus Popular Bank, its second-largest lender.
The news could have implications for many savers here after a push by the Bank of Cyprus, the country’s biggest bank, in recent years to attract deposits from the UK with table-topping rates.
The Bank of Cyprus, however, is in a stronger position, according to results posted just a week ago.
Those showed profits for the first quarter of the year rising almost fourfold, to €295m, because of a change in accounting for derivatives on Greek government debt and a deferred tax benefit on the securities.
But even aside from that technical adjustment, profit was €99million.
The bank still needs to raise more money – another €200million – by the end of June to meet Europe’s new rules on cash reserves.
That figure is dwarfed by the €1.8billion needed by the Popular Cyprus Bank. The European Banking Authority’s rules state that core all European banks must meet a minimum Tier 1 ratio – a measure of financial strength based on reserves – of 9 per cent. Its current ratio is 6.8 per cent following a capital increase plan.
Bank of Cyprus’ results last stated: ‘The group expects to cover this capital requirement through the effective management of risk weighted assets and/or other actions.’
There was nobody available to comment at the Bank of Cyprus this morning. But the bank’s website states that it has ‘limited reliance on the wholesale markets for funding, therefore have not suffered the liquidity problems of other banks’ and that it has ‘little exposure to the toxic sub prime assets or financial instruments blamed for the recent turmoil in financial services’.
Savers should be reassured by savings compensation rules. Around 50,000 savers have deposits with the British branch of the Bank of Cyprus and those that do are not covered by Britain’s Financial Services Compensation Scheme (FSCS).
Instead, Bank of Cyprus UK operates using the ‘Passport Scheme’ run by the FSCS.
This allows Bank of Cyprus to use its home-nation savings safety net, the Cypriot Deposit Protection Scheme. Savers are protected up to €100,000, with any compensation coming directly from Nicosia.
But the Cyprus’ scheme is fully EU-affiliated and therefore guaranteed by Brussels. From January 1 2011, the €100,000 limit became standard across the whole of Europe, including the UK, and was fixed at the exchange rate – so compensation of £85,000 in the event of bank failure.
The EU passport scheme, however, would pay Britons in euros, and so would be £81,300 at today’s currency rate, following the weakening of the euro.
The passport arrangement is used by seven banks operating in the UK, the most well-known being ING Direct, whose savers are covered up to €100,000 by Holland’s compensation scheme.
Will Cyprus Popular Bank be nationalised?
Cyprus Popular Bank – which has not entered the UK savings market – is heavily exposed to Greek debt. The recent slide in Greece’s financial woes has heaped pressure on its lenders.
The bank needs to raise €1.8billion privately to meet a 30 June deadline set by the EU on banking reserves. But efforts by the bank’s management to find a Russian of Chinese backer has so far failed, according to the FT.
So yesterday the Cypriot parliament passed legislation that would enable it to part-nationalise the bank by swapping its bonds – loans made to the bank – for shares.
The law would mean the state would be the underwriter for a rights issue – the issuing of new shares to raise money – by the bank. The shares not bought would be taken by the Government.
The fundraising is equivalent to about 10 per cent of Cyprus’ total economy.
The bank was hit by the write-off of 76 per cent of €3billion it was owed by the Greek government. It recorded a loss of €2.8billion in 2011.
Cyprus is the eurozone’s third smallest economy and has limited options for funding a rescue The island has not raised money on international capital markets for a year. It has tried to avoid an EU bailout and turned to Russia for a loan in late 2011.
If there were a collapse in Cyprus, it should play out differently from the collapse of the Icelandic banking system, where the Government in Reykjavik had insufficient funds to repay British savers.
In that case, because Iceland did not belong to the European Union, Britain had to foot the compensation bill and then try to get the money back.
Bank of Cyprus has frequently appeared in savings best-buy tables in recent years. At present, its one-year fixed-rate bond is paying 3.2 per cent and its two-year fixed-rate bond 3.6 per cent.
Most UK savers with the bank have fixed-term accounts on which they would face penalties if they tried to make withdrawals.
Yesterday, the Spanish government stepped in to part nationalise the fourth largest Spanish bank, Bankia.
Savers with money in Santander UK, which is owned by Banco Santander, regarded as the strongest Spanish bank, are covered under the FSCS scheme as it is UK-based – so not the EU passport scheme. This means £85,000 is protected per individual.