Bailout for two banks in the north

OFFICIALS at the north’s ‘central bank’ said yesterday there was no need for concern after it sequestrated two high street banks on Friday.
The sequestrations came into effect after the Kibris Continental and the Yesilada Banks were judged to have insufficient funds to continue operating as private concerns. They have both now been taken over by the Savings Deposits Insurance and Financial Stability Fund (TMSFIF), a mechanism funded by the banking sector and operating under the authority of the ‘central bank’.
Vargin Varer, one of members of the ‘central bank’ board overseeing the sequestration told the Cyprus Mail yesterday that the move should not be seen as a cause for concern, and that this was a precautionary measure aimed at preventing future problems for investors.
“The sector is very healthy. Apart from the two banks which have been taken into public ownership, the average capital adequacy ratio is over 20 per cent,” Varer told the Mail. The Yesilada and Continental Banks both had ratios of below the requisite eight per cent that allows them to operate in the north.
According to the sequestration rules in the north, the two banks will continue operating but under the control of the TMSFIF. Eventually they will be privatised or merged with one or more of the other 22 banks operating in the north.
Varer yesterday refuted speculation that the two banks had fallen victim to the global economic downturn, citing the cause of their decline on “unsound risk management”, which dated back several years. He said the ‘central banks’ had repeatedly warned the two banks they must increase the ratio of capital – something they both failed to do. Varer added that the former management of the two banks could be found personally responsible for any outstanding bad debts the bank had incurred.
In 2001, the collapse of a handful of Turkish Cypriot banks led to widespread public unrest in the north as thousands lost their savings. Varer insisted yesterday that such a situation was not about to arise again and likened the ‘central bank’s’ move to preventative surgery. He also cited measures that were taken following the 2001 crisis that had made the sector considerably safer for investors, one of which was to insist that banks maintain sufficient capital in ration to their investments.
However, Varer also likened the action to the British government’s bailing out of Northern Rock last year.
“It is similar in that the government has stepped in to bail out the bank’s customers,” he said, but added that the move was dissimilar in that it was not tax payers’ money that was being used to keep the banks afloat but a fund made up of contributions from the banking sector itself.
According to Varer, Continental, while under private ownership, had two major shareholders, a Turkish Cypriot and a Turkish mainlander, while the Yesilada Bank had a larger number of shareholders, all Turkish Cypriot, each owning four to five per cent of the company.
Both banks were offering attractive interests rates of around 13 per cent annually on Turkish lira, and around 6 per cent on sterling. It is also rumoured the banks invested heavily in the north’s  ailing property and land development industry. Varaer however sought to play down the effect of the collapsing construction industry by saying the banks had invested in a wide range of enterprises on the island.