12 December 2014
As we mentioned in a post on this website on 20 November, Liquidity Renewed, an interesting anomaly has arisen whereby a fine is levied on FBME Bank for deposits required by the Central Bank of Cyprus to pay depositors because of the actions of the Central Bank itself. In other words, the Central Bank forces FBME to do something, then levies a penalty on the Bank for having done it!
It is worth reminding ourselves of what has happened here.
The Central Bank of Cyprus cooked up a version of a Resolution Law, intended for banks facing insolvency, to use against the interests of FBME’s Cyprus branch – a Bank that was and remains healthy and highly liquid. It expropriated the branch, appointed an Administrator to control its activities and said it could sell off the branch and its assets as if it owned the Bank. This was on 21 July 2014.
By September, it was clear the Central Bank could neither sell the branch nor keep it effectively closed any longer. So, its Administrator was allowed to come up with one of his daftest ideas: restricting access to EUR 10,000 a day, payable only to those who are here or those who come to Cyprus. Having once established a level – thereby creating the conditions for an eventual run on the bank – they let him move the daily amount around: to EUR 5,000 a day, then EUR 2,000. This latest amount can be paid only by cheque drawable on a single Cyprus bank. This was done in the name of ‘protecting the interests of depositors’ apparently!
A large quantity of FBME deposits has to be held by the Central Bank of Cyprus to make these payouts. In addition to the statutory amount that all banks have to deposit with their supervisors – one percent of total deposits – another EUR 100 million of FBME assets were turned over to the Central Bank. Millions more were added to this in November.
This is obviously a special situation and one entirely of the Central Bank of Cyprus’ own making. FBME Bank would not have chosen to do this, but then the Bank would not have engaged in any of the highly restrictive and damaging practices forced on it by the Administrator and his masters at the Central Bank of Cyprus. So you wouldn’t expect there to be a further penalty incurred by FBME, would you. But that is exactly what is happening.
The European Central Bank issued a rule on 5 June 2014 saying that banks should keep no more than the one percent statutory amount in central banks. This is to ensure that they get their money out and working to rebuild the tottering European economies. If any bank did squirrel its funds away with central banks a penalty of 0.2 per cent would be levied on all deposits over that one percent. This is a good idea and one which is to be applauded.
But this can’t refer to FBME Bank deposits at the Cyprus Central Bank, surely? FBME doesn’t have a say in matters over which the Cyprus authorities have total control by their self-invented Resolution Decree. Nevertheless, they are being charged the penalty.
Even the Central Bank’s Administrator, Dinos Christofides, a man not noted for attending to the niceties of normal banking practice, knows this. He said he would lobby to have the fine reversed. But it hasn’t happened yet. It is under review apparently, but now that we have entered the fifth month it certainly looks like someone is not being entirely genuine about this review. Now, where have we heard that before?