OUTGOING CENTRAL Bank governor Christodoulos Christodoulou yesterday laid into commercial banks for advancing as much as £600 million in unsecured loans for the purchase of shares during the 1999 stock market bubble.
In a 12-page farewell speech, Christodoulou said when he took over his post five years ago the banking sector was in a tragic state but that strict measures during his term had turned it around by the end of 2006.
“One of the most crucial issues I confronted when I took over as Central Bank governor in May 2002 was the tragic state of our banking system. I discovered that banks, during the period of the stock market bubble, had given unsecured loans for the acquisition of shares worth £600 million In some cases there was not even a written application from the interested party, or an examination of a loan petition,” said Christodoulou.
“Without an exaggeration, our banking system was heaving under the huge burden of bad debts from the stock market quagmire.”
Christodoulou said in addition to “this act of irresponsibility” some bank boards acting in an arbitrary and irregular manner had invested a large portion of their provident fund reserves in their own shares.
As a result of these actions he said the deficit of the three main banks at the end of 2002 was a total of £135 million.
He said the Central Bank had to confront the situation discreetly and carefully to avoid a crisis in confidence or panic by the public. Measures taken included prohibiting the banks to pay out dividends temporarily, having them strictly scrutinise loan applications, and lowering bad debts. Changes to the banking laws were also effected.
Christodoulou said the days of executive chairmen from the seats of the aristocracy were now over and the era of “tying up the dog with sausages” was ended.
“Now, chairmen, consultants and managing officers must be distinguished for their professional ability and experience,” he said.
“It is obvious our financial system, is entering a new era of increased demands in all sectors. Profitability and their survival will depend on their ability to respond to the competition. That requires flexibility, quick decision making, initiative and creativity.”
Financial results for the island’s banks were particularly satisfactory in 2006, Christodoulou said as a result of the changes made over the past five years.
He said the satisfactory growth in the economy, the modernisation of financial systems and continuous supervision had contributed to the improvements, had assisted profitability. Bank cost-cutting and improved services to the public had also helped the increase their market share and revenue.
But Christodoulou said what had happened during the market bubble would not be swept under the carpet.
“The Central Bank continues to demand that the banks continue their investigations and to apportion blame to those who were involved in this reckless behaviour of giving unsecured loans from 2000 to 2002,” he said. “The Central Bank wants those responsible to be called to account.”
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