4 February 2015
Responding to criticisms from one of its own board members, the Central Bank of Cyprus has announced its intention to commission a major study of its operations with a view to bringing in “restructuring and modernization”.
The CBC board member, Stavros Zenios, expressed his frustration with senior management in the Central Bank who appear to be resistant to much-needed change. This, he wrote in his blog on 1 February 2015, is despite its presiding over the worst banking crisis in the country’s history which had devastated Cyprus. He points, too, to the reports of international observers who have highlighted weaknesses in the Central Bank. Obviously FBME Bank shareholders, managers and staff have had first-hand experience of this since its invention of a Resolution Decree to take over the Cyprus branch of the Bank in July 2014.
Mr. Zenios’ 1 February blog said that members of the Central Bank’s board of directors realise the need for reform. He praised the excellence of the staff, but laid the problems at the door of senior management who seem to believe all is well. “Nothing changes in the CBC,” he wrote, “except the governors,” he wrote.
He called for the implementation of recommendations from the Lascelles Committee in its report on the future of the banking sector in Cyprus, which was published in October 2013. Furthermore, he wrote, “… the Central Bank of Cyprus avoids any actions that reveals its own mistakes,” and called for much greater transparency in the institution.
Fast off the block, the Governor of the Central Bank announced two days later (3 February) that a study will be commissioned into the functions of the body. She said some research has been already put in place and that a decision was taken last September to “completely reorganise and modernise the CBC”. This is part of the growing recognition that the Central Bank is an institution that is exposing the country to risk.
This website would like to make one contribution to the various subjects for the Central Bank of Cyprus to include in its study: among the risks faced by banks there is the issue of individual failure in supervisory authorities.
The massive failure of several banking institutions in Cyprus in the past few years is a matter of public record. Clearly, the Central Bank did not prevent these from occurring as it should have done. In its supervisory activities the Central Bank should have kept a much closer eye (or four eyes, as it recommends to banks) to mitigate the worst manifestations. But there is a pervading sense of the supervisory authority being asleep at the wheel – or perhaps being ill-equipped to even drive safely! Inevitably, the question has arisen whether the level of expertise in the Central Bank at senior management level is suitable. Similarly, the illegal application of Resolution measures to FBME Bank’s Cyprus branch has also opened the country to massive potential loss through claims for compensation. Finding a solution could help the Republic find a way out of its current dilemmas.
If central bankers are to be used as financial supervisors then there needs to be created some form of inspection of their skills and effectiveness – similar to the ‘fit and proper tests’ applied over many years to senior bankers. These tests are designed to prevent unsuitable people from running a bank and are applied by the Cyprus Central Bank as part of its supervision process. Failure by key personnel within a bank to pass such tests will prevent them being appointed to their proposed position or even to the refusal of a banking license for the institution. While ‘fit and proper tests’ cannot totally eliminate risk and failure, they do provide a standard against which performance can be judged and improvement benchmarked.
It should be relatively straightforward to adapt such testing for those in senior positions in the Central Bank. Those in managerial roles must have the qualifications, knowledge and experience to carry out the tasks for which they were appointed. For instance, just as the person who audits a bank should have considerable knowledge of banking, so it follows that the person employed to carry out an effective supervision of banks’ procedures must be likewise experienced in banking. Quality rather than a person’s political contact levels should be the determinant in being selected. Supervision of banking and other financial services cannot be left to chance. It is not something that can be learned in five minutes and it is clearly wholly inappropriate to populate senior positions with political appointees no matter how well they might have done elsewhere.
If bankers can be given ‘fit and proper tests’, then so should central bankers. Nothing else should be acceptable.
P.S. Incidentally, each Director of FBME Bank Limited and each Director of FBME Card Services Limited, and the senior management of both entities have passed their respective ‘fit and proper tests’. Together with the help of approximately 400 other employees – and hundreds more before them – they have built up over 30 years a healthy, ‘Fit and Proper’ Bank.