The major sacrifices made in order for Cypriot and Greek banks to emerge from the crisis and regain public trust were highlighted by the Governors of the Central Bank of Cyprus, Christodoulos Patsalides, and the Bank of Greece, Yannis Stournaras, who stressed the need to avoid returning to such situations.
At the same time, they pointed out what banks in Cyprus and Greece must pay attention to in order to safeguard their achievements and avoid reliving past conditions.
Speaking at a roundtable discussion organized by the Central Bank on financial literacy, the Governor of the Bank of Greece explained how Greek banks managed to exit the crisis, noting that Greece was a special case.
As he explained, “Greece’s problem was initially a public debt refinancing issue, which later became a banking problem. In other words, the crisis in Greece did not start with the banks.”
He added that Greek banks never had balance sheets exceeding 1.5 times the country’s GDP, unlike other countries such as Cyprus, where the ratio was much higher.
Therefore, he stressed that in Greece the crisis did not originate in the banking sector, unlike in other countries that entered adjustment programs. “Portugal was somewhere in the middle. Greece, however, is a unique case where the state and its debt refinancing transferred the crisis to the banks through the bonds they held and mainly through the non-performing loans created as a result of the crisis. As a result, the fiscal crisis became a banking crisis,” he said.
Painful management and sacrifices
According to Stournaras, managing the situation was painful and required recapitalizations, a reduction in the number of banks, mergers, restructuring, and later the implementation of the “Hercules” scheme.
“With all these measures, we now have a much healthier banking system, with profitability, liquidity, and prospects,” he said. He added that during a crisis there is a trade-off between financial stability and competition.
“I don’t like that we have only four systemic banks, and now we are trying to create a fifth pillar. I also don’t like that Greece, along with Cyprus and Slovenia, has among the lowest deposit interest rates,” he noted.
He explained that this is partly due to the high concentration of the banking system created during the crisis. “When you have to choose between financial stability and competition during a crisis, you choose to protect people’s deposits.”
“So you prioritize financial stability and leave competition for later. That ‘later’ has now come for Greece—and probably for Cyprus as well. Now we have a booming economy and a strong banking system, and it is time to improve competition by building a system of smaller but strong banks,” he added.
Competition will improve deposit returns
He expressed the view that increased competition, along with initiatives such as the Savings and Investment Union and the creation of Savings and Investment Accounts, will help improve returns on household deposits.
Stournaras emphasized that Greece’s experience is a lesson that must be remembered to avoid repeating the causes of the crisis: a combination of state deficits, wage and pension increases beyond productivity, and an unsustainable social security system.
“To reach where we are today, significant sacrifices were required. At the same time, Greece received the largest financial support ever granted to a country—around €280 billion, more than 150% of GDP in new loans. We refinanced our entire public debt at an interest rate of 1.1%, with a 20-year repayment period and held by official institutions. This achievement is not just for us but for future generations,” he concluded.
Patsalides: Banks must consider reputational risk
For his part, Central Bank of Cyprus Governor Christodoulos Patsalides said that in Cyprus the crisis of confidence was far greater, as Cyprus experienced a deposit haircut—something that did not happen elsewhere in the EU.
“For many years, this created a huge problem for the banking sector and the broader economy. Banks had to regain their footing and recover,” he said.
He recalled that banks were closed, non-performing loans rose to around 50% (reaching 63% at Bank of Cyprus), and there was a capital shortfall despite the bail-in.
“Over time, banks recovered and regained public trust. Today, we have impressive results, with capital adequacy above the EU average, strong liquidity, and non-performing loans below the EU average,” he added.
He stressed that banks must now focus on reputational risk, which should not be underestimated. “While economies are doing well today, conditions can change. Beyond capital buffers, banks must adopt the right approach toward society,” he concluded.
The discussion was moderated by University of Cyprus Professor Andreas Milidonis.
