By Angelos Anastasiou
In a dark corner of the banking sector, a clause from an old banking law may just prove to be the nuclear weapon borrowers who claim to have been duped into investing in Bank of Cyprus and Laiki Bank bonds have been searching for in their years-long struggle.
The borrowers’ association issued a statement on Tuesday urging borrowers who were granted loans for the purchase of bank securities in Bank of Cyprus and now-defunct Laiki Bank – the value of the assets having been wiped out in the banking carnage of March 2013 – to formally inform the lenders that they do not recognise the loans.
A day later, the association’s head Costas Melas argued on state radio that, according to a 1997 Banking Operations law, as well as a 1999 CBC directive, banks “may not grant credit facilities for the purchase of their own issued capital, or their parent or subsidiary companies”.
“Therefore, since the banks did something that is expressly disallowed by law, the loans they made are invalid, and even illegal,” Melas said.
“This is what we advise borrowers who have found themselves in such a predicament – to reply to the banks in the first instance that they consider the loans invalid and do not recognise any repayment due thereof, and if the bank insists, to seek legal advice on how to protect themselves.”
The 1997 law stipulates that a bank licensed in Cyprus “may not grant credit facilities to individuals who are not bank employees over the amount of £50,000 per person, in order to abet the purchase of its own shares, or the shares of its parent company, or the shares of any subsidiary company of the bank or its parent company”.
However, this clause poses a couple of problems for Melas’ assertion. First, the loans in question relate to bank-issued securities, not shares. But these types of securities are capital-raising tools, and the revenues from their sale were counted in the bank’s capital ratios, thus allowing the lenders to remain compliant with Central Bank-mandated minimums – not to mention shoring up the share price. For all intents and purposes, then, banks lending out money to “abet” the purchase of the securities were simply boosting their own capital base – much as they would do with a share-capital issue.
Second, these loans weren’t taken out to fund the purchase of securities per se, so the bank was technically not in breach of any laws. Instead, depositors were offered the exchange of their deposits for the equivalent in interest-bearing securities, with a credit facility attached equal to the amount they “invested” – a loan backed by the very securities they were enticed into buying. Thus, they were offered both use of the cash they had parked in the bank in the first place, plus the equivalent invested. But, of course, it is not hard to identify such a luring, if slightly intricate, mechanism as “abetting” the purchase of the bank’s own capital-raising financial products.
Far too late, in 2014, the law was amended to forbid “credit facilities, direct or indirect, for the purchase of its own capital means or the capital means of its parent company, or shares in any subsidiary company of the bank or its parent company”. But this amendment does not apply to the loans made before it was passed.
