According to the latest data from the Unified Supervisory Mechanism, the liquidity coverage ratio (LCR) of Cypriot banks is several times higher than the EU average.
As you may know the liquidity coverage ratio (LCR) is the ratio of high-quality liquid assets of the bank to the amount required to cover the increased outflow of funds from the bank within 30 days. It reflects the bank's level of resilience to short-term liquidity shocks - a phenomenon typical of crisis periods when there is a significant outflow of customer funds.
According to EU regulations, the LCR for European banks is set at 100%, but for Cypriot financial institutions it is now 311.61%.
This is the third largest LCR among other EU countries. The current situation raises concerns as the EU average LCR is 171.78%. LCR, in essence, refers to the proportion of highly liquid assets held by banks to ensure their continued ability to meet short-term obligations.
Capital and liquidity buffers
According to the ECB, "capital and liquidity buffers were designed to enable banks to withstand stressful situations such as the current one."
The European banking sector has accumulated a significant amount of these buffers. The ECB said it would “allow banks to temporarily operate below the capital levels specified in the Pillar 2 Guidelines (P2G), Capital Preservation Buffer (CCB) and Liquidity Coverage Ratio (LCR).
The ECB believes that these interim measures will be strengthened by a corresponding relaxation of the countercyclical capital buffer (CCyB) by the national macroprudential authorities. "
Banks will also be allowed to partially use capital instruments that do not qualify as Tier 1 capital of ordinary shares (CET1), such as additional Tier 1 or Tier 2 instruments, to meet the requirements of component 2 (P2R). By the way, he is putting forward a measure that was originally supposed to come into force in January 2021 as part of the latest revision of the Capital Requirements Directive (CRD V).
The aforementioned measures provide substantial relief for banks' capital investments in support of the economy. It is expected that banks will use the positive effect of these measures to support the economy, and not to increase dividends or variable remuneration, said the European Central Bank.
The above measures “provide significant capital relief to banks in support of the economy. Banks are expected to use the positive effects coming from these measures to support the economy and not to increase dividend distributions or variable remuneration,” the ECB said.