Abstract
The boom that sowed the seeds of the crisis was to a large extent driven by a business model that was heavily dependent on the financial sector, with domestic banks and politically connected law firms playing a major role.
This chapter draws on a document submitted by the Central Bank of Cyprus to the judicial enquiry on the economy, chaired by retired judge George Piki, in August 2013. and PIMCO (2013). Data sources include: ECB , CBC , PIMCO (2013) and World Bank .
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Notes
- 1.
The law firms had a distinct advantage over other firms because they could help their clients register companies and could act as their nominees. They could also provide a range of other services, including, for example, international tax planning and naturalisation (e.g. the scheme for obtaining EU citizenship by investment).
- 2.
Including the Cooperative Central Bank but excluding the cooperative credit institutions.
- 3.
Bank of Cyprus , Laiki Bank, Hellenic Bank , Cooperative Central Bank, Housing Finance Corporation, Cyprus Development Bank.
- 4.
- 5.
The comparison with Luxemburg allowed policy makers in Cyprus to deflect criticism of the large size of the banking system relative to GDP before the crisis. However, the important point that was omitted was that Luxemburg’s banking sector is dominated by foreign banks and hence none of them present a systemic risk to the country.
- 6.
These figures include the assets of the Co-operative Central Bank but exclude the assets of the credit cooperatives .
- 7.
Private credit includes loans to Cyprus residents (excluding MFIs and general government) and investments in bonds and other debt securities issued by Cyprus residents (excluding MFIs and general government) provided by banks and credit cooperatives .
- 8.
Based on data from the quarterly financial accounts. It includes loans to households and non-profit institutions serving households.
- 9.
Based on data from the quarterly financial accounts. It includes loans and debt securities of non-financial corporations. It should be noted that the data include organisations or businesses of residents without a physical presence in Cyprus .
- 10.
CBC residential property price index.
- 11.
Preliminary data for the end of December 2012 for the Bank of Cyprus and Laiki Bank.
- 12.
See PIMCO (2013).
- 13.
The definition of NPLS was brought in line with international norms soon after the change of CBC Governor in 2012.
- 14.
Banks started reporting their exposure to government bonds to the CBC in June 2009 on a quarterly basis.
- 15.
See the book website.
- 16.
The deeper recession in 2013 probably reflects the shock to confidence and the introduction of capital controls . The quicker than anticipated recovery can probably be ascribed to the fact that the bail-in spared the economy from additional austerity measures that are often recessionary.
Bibliography
Demetriades, Panicos. 2015. Political economy of a euro area banking crisis, London School of Economics, Financial markets group, Special paper series, No. 245, The Cambridge Journal of Economics, forthcoming. doi: 10.1093/cje/bex001.
Lascelles, David. 2013. Independent commission on the future of the Cyprus banking sector, Final report, 31 October 2013. http://www.centralbank.gov.cy/media/pdf/LSE_ICFCBS_Final_Report_10_13.pdf.
PIMCO. 2013. Independent due dilegence of the banking system of Cyprus, February. Available from: http://www.centralbank.gov.cy/media/pdf/cyprusindependentduediligencereport_18april.pdf.
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Demetriades, P. (2017). The Key Ingredients of the Crisis. In: A Diary of the Euro Crisis in Cyprus. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-62223-1_17
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DOI: https://doi.org/10.1007/978-3-319-62223-1_17
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