Banking Sector Priorities in Northern Cyprus

1
Banking Sector Priorities in Northern Cyprus

• Peter Hayward
• The Management Centre - 27 May 2005

2
State of Play

• NC Banking system is very small and fragmented
• 25 banks but total assets of less than 3 billion
  (SC over 30 billion)
• Nearly all banks now meet minimum cap of 2
  million. But few meet EU minimum of 5 million
• Safety net restructured without incident
• 18 offshore banks, all Turkish related, down from
  30 a year ago

3
Banking system structure

• 2 public banks
• Large co-op central bank
• 6 branches of Turkish banks
• Some well established private banks
• Rest are privately owned very small

4
Deposit structure

• About half in TL
• Rest is FX, mainly , some and US
• Miniscule amount of CY
• Mainly savings deposits
• Unknown amount of foreign resident deposits but
  rising?
• local cheque clearings in major currencies

5
Asset Structure

• Very liquid mainly claims on NC central bank,
  Turkish govt. debt, and claims on foreign banks,
  principally Turkish
• Small loan book, much to public enterprises,
  guaranteed by NC govt.
• Private lending still small but growing fast
• Resulting only partly from high reserve and
  liquidity requirements.
• Counterpart forms bulk of CBs FX reserves

6
Asset quality

• Much of lending is old claims on public
  enterprises, often non-performing
• Government guarantee has not been performing
  either and interest is rolling up. Some is FX,
  but rest is denominated in TL at very high
  nominal rates
• So the problem is essentially fiscal
• Private loan book still small so is not a threat,
  but growing fast so needs watching

7
Supervision

• After the crisis a major clean-up with 12 banks
  (with connected lending issues) closed and in
  process of liquidation. Depositors fully
  compensated
• Attempt to regularise unserviced PE debts in
  public banks depend on government resources
• Supervision of remainder much improved
• New legislation and reporting system

8
Safety net

• All savings deposits (the bulk of total) were
  fully insured until July 2004.
• Closure of 12 small banks did not lead to runs.
• Safety net modified in July 2004. Limit to
  50,000 to 1/6/2005 and to 20,000 per account
  thereafter.
• Confidence maintained and deposits have continued
  to grow rapidly. Contribution of foreign inflows,
  including from Turkey and SC.
• Turkey withdrew its comprehensive guarantee in
  July 2004

9
Unfinished business

• Need to restructure publicly guaranteed
  businesses, remove claims on them from the banks,
  and recapitalize public banks
• Substantial fiscal implications with time costing
  money
• Need to weed out small banks by raising minimum
  cap and encouraging mergers
• Continue to improve asset quality

10
The challemges

• Ensure the banks contribute to economic growth
• Collateral is a major issue so long as land
  titles are unresolved. Main reason for small
  size of business loan book
• Good title would have been the major benefit of
  the Annan plan
• Competition with banks from the south
• Money laundering issues
• Accounting standards may be another

11
Advantages

• Major Turkish banks, now stronger, including now
  HSBC, have substantial presence
• No exchange controls makes the system very open
  (more so than SC)
• Improved economic policy, reduction of inflation
  and real interest rates in Turkey are improving
  confidence

12
New players?

• The long established cooperative movement needs
  reform and could then play a role
• Needs to sort out its legacy problems
• Asset based financing to avoid the real estate
  collateral issue. New specialised lenders?
• Enough intermediaries already?