The most salient risks come from commercial banks domiciled in Cyprus. These banks have the strongest links with the local economy, are most heavily exposed to significant haircuts on Greek government bonds, and are likely to experience further deterioration of their loan portfolios in both Greece and Cyprus. Risks from other financial institutions operating in Cyprus should not be overlooked, but they are not the main focus of this report.
Cyprus banks face capital needs estimated at €3.6 billion on a preliminary basis by the EBA. Cyprus banks would need this much of a buffer against losses on
sovereign debt holdings in order to reach a core Tier 1 capital ratio of 9 percent. In the event of additional shocks such as acceleration in the pace of NPL formation, capital needs could increase.
sovereign debt holdings in order to reach a core Tier 1 capital ratio of 9 percent. In the event of additional shocks such as acceleration in the pace of NPL formation, capital needs could increase.
It is unclear how banks will raise necessary capital. They are expected to de-lever balance sheets, issue contingent convertible securities, retain profits and cut costs. If these sources prove inadequate, they would need the support from the government or external sources.
The system appears capable of absorbing moderate funding shocks at the aggregate level, but individual banks could face pressures. In the event of rapid and persistent loss of deposits, liquidity buffers would eventually be depleted.
This paper was prepared based on the information available at the time it was completed on November 4, 2011. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Cyprus or the Executive Board of the IMF. The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information. © 2011 International Monetary Fund November 2011. IMF Country Report No. 11/332
