By George Psyllides
BANK OF Cyprus (BoC) may have officially come out of administration and look ‘healthy enough’ in black and white after seizing 47.5 per cent of uninsured deposits, but there is no knowing, despite all the talk, when or if people will ever trust the system again.
When people are told over and over by both Cypriot and EU officials that a haircut on deposits would not happen, and then it did, could there be any coming back from that no matter how many figures you push around on paper?
Trust, the foundation of banking was lost overnight.
Authorities are now struggling to regain the lost confidence but it will not be an easy task, and the social dimension will be the biggest challenge.
“It will certainly be difficult because the decision violated the foundation,” said sociologist Nicos Peristianis. “It was not just a detail. Banking is based on trust.”
In the five months following the decision, there have been stories of people stashing money at home – to the delight of burglars – others carry thousands of euros on them, and yet others turned to safety deposit boxes.
A lot do everything they can to take their money out of Cyprus but not many deposit cash, at least not in Cypriot banks and certainly not in the Bank of Cyprus, which seized 47.5 per cent of uninsured deposits – over €100,000 – to recapitalise.
Those depositors received equity in return.
At the same time, the island’s second biggest bank, Laiki, is in the process of being wound down.
The system is basically being held together by the “temporary” capital controls introduced in late March – the first time in the eurozone — which the government wants lifted soon.
Wishful thinking, analysts say. Iceland too introduced “temporary” controls following the collapse of its banking system. The measures remain in place today around five years later.
So how will the Cypriot authorities convince people to put their money back in the system?
How will anyone convince the man who went to his Laiki branch around a week before the haircut asking to withdraw half his €3.0 million but was convinced not to by his banker?
Peristianis says it all depends on how much the government will do to convince people but also a lot depended on the European Union and how it handled the aftermath of the crisis.
Comments from EU officials that the Cyprus bail-in was a template, meaning it would also be done elsewhere, just serves to “intensify concerns,” Peristianis said.
Cypriots tend to be “quite suspicious in general but when one wins their trust they do not lose it easily,” Peristianis said.
A senior banker agreed that it all depended on how the authorities would handle the situation.
And it all boiled down to rebuilding people’s trust in the Bank of Cyprus.
“You cannot have trust in the banking system unless you build trust in BoC,” he said, speaking on condition of anonymity.
So far however, officials are not going about it the right way.
“How can you regain trust in BoC when the news of the day is who will control it?” he said.
To make matters worse, the people arguing about it are politicians – a group who enjoy the same level of confidence as bankers. Zero.
“The politicians realised that talking about the Cyprus problem is of no interest so they realised its good to speak about things they do not know,” the banker said.
For the past four months Cypriot and foreign depositors have witnessed a public debate on whether BoC will be saved, went through the saga of appointing an interim board, and the saga of appointing an interim CEO.
Then there were the President Nicos Anastasiades’ leaked letter to ECB President Mario Draghi about the difficulties faced by BoC, followed by their high-expectations meeting, which ended in anticlimax.
“Why should a depositor feel any trust?” the banker said.
BoC has recently exited administration and its Core Tier 1 capital is 12.4 per cent – higher than the compulsory 9.0 per cent capital adequacy.
This however means nothing whatsoever to an OAP whose only concern would be keeping their money somewhere safe.
So is there a way out?
“The way a bank establishes trust is based entirely on how the organisation acts and behaves from the teller to the CEO,” the banker said.
In this case, BoC needs to turn to its workers.
“They have a great influence in the market. The way they act, think and behave towards customers or their interaction with peers, family, and friends is the key determinant of whether you build trust or not,” he said.
BoC must first bail-in its personnel’s trust, before it reaches out to the public.
“There is no other way.”
The lender’s new leadership must build their trust towards the organisation from the bottom up.
Workers also have an additional motive to see the bank get back on its feet.
A large chunk of their provident fund has been turned into shares, turning them into stakeholders.
“Their wellbeing upon retirement is directly linked to the performance of the organisation. This is a strategic link,” the banker said. “The teller who receives a customer will know that if he behaves in a way to keep the deposit in the bank he will be protecting the liquidity of the organisation in which he has a stake – maybe not significant for the organisation but important for him.”
Of course the media also have a role to play. The constant bombardment with reports concerning the bank’s salvation do more harm than good.
Peristianis says the media must show restraint and an end must be put to speculation and rumours about the lender’s future.
The Central Bank of Cyprus must take the lead and draw a clear, coherent communications strategy in a bid to silence the cacophony of voices, many of which have other vested interests.
“It undermines the bank’s foundations,” Peristianis said. “They ought to draw a common line to regain trust.”
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