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Banking Sector Priorities in Northern Cyprus

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NC Banking system is very small and fragmented ... Major Turkish banks, now stronger, including now HSBC, have substantial presence ... – PowerPoint PPT presentation

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Title: 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?
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