Cyprus’ banks are now confronted with new challenges following yesterday’s decision by the European Central Bank to decrease the interest rate on the deposit facility by 10 basis points to -0.50%.
The ECB has pushed interest rates further into negative territory in order to support the region’s flagging economy. Negative rates penalise banks for holding cash rather than lending it out.
And what this means for Cyprus is that its banking system has to prudently manage a very high liquidity which is up to €14 billion.
But the island’s two big financial institutions – Bank of Cyprus and Hellenic Bank – find it hard to lend out since households and business establishments are already deep in debt. In fact, both lenders are now trying to make clients decrease their deposits.
Hellenic Bank has already imposed a negative rate on big depositors. And Bank of Cyprus is leaking out information that they are considering negative interest rates themselves. But not immediately, since they want to encourage big depositors to have the option of other alternatives.
A Bank of Cyprus officer told Insider: “A depositor, especially a big depositor, will soon be confronted with negative interest rates, it’s unavoidable. That’s why we are developing new services and products so that we can provide alternatives to clients enabling them to avoid charges on low-risk products with positive returns. ”
The officer also said: “Bank of Cyprus has said over the summer months that it is in no hurry to impose negative interest rates, since we are already in a position to encourage clients to switch to options other than deposits. However, the prevailing strong liquidity and ECB’s decision on negative interest rates create conditions that make it inevitable for Bank of Cyprus to announce negative interest rates sooner than expected.”