31 10 2014

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How the restructuring of Laiki would work

Elias Hazou

THE LEGISLATION passed by the House on Friday allows authorities to split the island’s stricken lenders into ‘good’ and ‘bad’ banks, and is designed to prevent primarily Laiki from collapsing due to lack of liquidity.
The healthy bank would keep deposits under €100,000 and all performing loans, allowing it to start with a clean slate.
In line with the Deposit Protection Scheme in Cyprus, deposits up to €100,000 per natural person are guaranteed at 100 per cent, including the accrued interest.
All licensed banks and branches in Cyprus subscribe to the scheme, and all currencies of deposits are covered.
By way of example, where two natural persons hold a joint account of €200,000, that amount will be ‘split up’ for each of the persons and thus be fully guaranteed.
The same goes for a joint account of three persons with €300,000.
The €100,000 cap on compensation relates to the total deposits held by a customer in a certain bank. The net compensation amount is calculated as the difference between the deposit amounts and the pending loans or other credit facilities or claims by the bank on the customer.
The Deposit Protection Scheme does not however cover deposits held by legal entities, such as provident and pension funds, funds held by semi-governmental organisations and municipalities and other collective investment schemes.
Since that would leave hundreds of provident and pension funds in the lurch, the government was said to be considering a small levy on all banks as compensation.
Meanwhile dodgy loans and deposits of over €100,000 would be channeled into the so-called bad bank.
The deposits transferred to the bad bank are not wiped out; they remain there nominally, but the account holders won’t have access to the money.
Debts to a bank undergoing resolution – or an orderly wind down – will not be written off or down, whether they end up in the good or bad bank.
Essentially the bad bank will buy up the bad loans of Laiki with significant nonperforming assets at market price. By transferring the bad assets of an institution to the bad bank, the bank would clear its balance sheet of toxic assets but would be forced to take write downs.
Banks becoming insolvent as a result of the process can be recapitalised, nationalised or liquidated – in Laiki’s case, the latter is the most likely scenario as the bank is already under state control.
The bad bank would then seek to recoup as much of its bad assets as possible. The cash would go into the accounts of the ‘sequestered’ deposits of over €100,000. As money flows in, the depositors would be able to draw from their accounts.
But this could take years. Additionally, it’s doubtful whether ultimately the amounts held in these accounts would be ‘filled up’ completely. Analysts estimate that depositors would recoup anywhere from 30 to 90 per cent in the best-case scenario, but add that a 50 per cent haircut is more realistic.
The good Laiki – whether absorbed into the Bank of Cyprus, as rumoured, or whether it stands alone – would almost inevitably have to be downsized. That’s because it would deal almost exclusively with loans and would have to ditch other operations that would become redundant.
As stated in the law passed on Friday, depositors have priority in compensation over shareholders in the event of resolution:
Under the law, a ‘Resolution Fund’ is set which is activated in the event that a bank is at risk of defaulting or not meeting its capitalisation or liquidity requirements.
Running out of cash is precisely the problem Laiki faces, after the European Central Bank said it would stop Emergency Liquidity Assistance to Cyprus’ banks unless the Cyprus government struck a deal with international lenders by tomorrow.
It empowers the Central Bank to act as the ‘Resolution Authority’. In the event of a resolution, shareholders would be the first to take any losses, followed by creditors (depositors).
The 61-page document states: “creditors of an institution that is subject to resolution will not be in a worse financial position as a result of resolution measures compared to the position they would be in if the said institution was alternatively wound up.”
Although all sorts are numbers are being banded about these days, analysts said yesterday that Laiki’s restructuring and the dumping of its bad debt would generate perhaps as much as €2.6 billion.
And the sale of all three Cypriot banks’ operations in Greece – rubberstamped by Greek authorities earlier this week – will raise some €250 million in capital immediately.
That’s €3 billion less than the €5.8 billion figure which Nicosia needs to raise to qualify for a promised €10 billion loan from the EU and the IMF.
Efforts yesterday were focused on making up this €3 billion shortfall. One MP told the Sunday Mail that international creditors – known as the troika – were insisting on a large haircut – perhaps as high as 25 per cent – on deposits of over €100,000 for the Bank of Cyprus.
Russians are unlikely to be hit hardest by the mooted 25 per cent tax, given that just five per cent of deposits in Bank of Cyprus come from Russia, Reuters reported.
To avoid a haircut in all but name, the government proposed instead a voluntary scheme where large depositors would contribute part of their money in exchange for bank stock – most probably in the form of preferred shares. Though still a haircut, depositors would be compensated.
The glitch in the talks with the troika was what would be used as collateral or guarantee for the shares. One proposal was that the collateral could be revenues from a “solidarity fund” created to pool state assets, including real estate, as well as from future gas proceeds. Also, that wouldn’t require the passage of a relevant law, the MP said.
This seemed to tie in with comments made yesterday by DISY no.2 Averof Neophytou, who said a deal with the troika could be clinched without additional legislation.
The situation remained hazy, however, as the troika team was said to be initially averse to the idea, given that it was far from clear how much cash the “solidarity fund” can raise.



The national solidarity fund
THE law passed on Friday creating a “solidarity fund” aims to bolster banks and the state during its state of emergency.
The fund aims to finance banks and the state whenever necessary, drawing funds from natural gas revenues and bonds that it will issue and sell.
Others sources of revenue will be company shares or bonds the fund will acquire and manage, some of the church’s wealth and some state property as well as donations from anyone wishing to contribute. It has been described as a fire sale of the county’s assets.
The idea of the fund was tabled as a means to collect the cash demanded by the troika – €5.8 billion – as Cyprus’ contribution to its bailout.
The scheme was rejected by the lenders.
One of the reasons was that they rejected the transfer of cash from semi-state companies’ provident funds into the fund while there were no guarantees that it would raise the necessary capital.
Provident funds will take a huge hit from the restructuring of the Popular Bank and a possible haircut of Bank of Cyprus deposits.
So far, no estimate has been offered as to how much the fund is expected to raise.
The fund will be managed by a seven-member committee – a chairman and six members – who will be appointed by the cabinet.


Capital control law
IN an unprecedented move for a eurozone member, parliament on Friday night passed legislation placing capital controls in a bid to avoid further destabilisation of its stricken-banking sector.
The law gives sweeping powers to the finance minister or the Central Bank governor to impose any of the following restrictions:

- restrict cash withdrawals
- ban premature termination of time deposits
- compulsory reprogramme maturing time deposits
- ban or restrict opening new accounts
- convert current accounts into time deposits
- ban or restrict non-cash transactions
- restrict use of credit, debit or prepaid cards
- ban or restrict cashing cheques
- restrict interbank transactions or transactions within the same bank
- restrict transactions between the public and credit institutions
- restrict movement of capital, payments and transfers
- any other control measure that the minister or governor will deem necessary under the circumstances for reasons of public order and safety
The measures do not apply to the government or the Central Bank.

Laiki bank will never be the same

Source Cyprus Mail

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