CYPRIOT BANKS REDUCING US RISK EXPOSURE

UNCLAS NICOSIA 000763

SENSITIVE
SIPDIS

TREASURY FOR OFFICE OF EASTERN EUROPE

E.O. 12958: N/A
TAGS: ECON EFIN PREL CY
SUBJECT: CYPRIOT BANKS REDUCING US RISK EXPOSURE

REF: NICOSIA 759


1. (SBU) In response to the upheaval in US markets, Cypriot
financial institutions are taking a very conservative
approach to risk management and reassessing their financial
exposure to US financial firms. Most seriously, on September
17 the Bank of Cyprus, the country's largest bank, issued
instructions that it would no longer accept assignments of
insurance policies issued by AIG or its subsidiaries.
Furthermore, already existing assigned policies from AIG
would be required at their expiration to be replaced with
policies issued by other insurance companies. Ambassador
Urbancic raised the matter with the Finance Minister (reftel)
and econoff spoke with the Governor of the Central Bank,
Insurance Commissioner, and Bank of Cyprus' director of risk
management. The instruction was reversed on September 22.
The risk manager told us that the Bank took action prior to
the USG rescue package for AIG being announced and had been
waiting to reverse the decision "until things became more
clear."


2. (SBU) We understand from speaking with the Central Bank
and commercial bank officials that bank relationships with US
and UK counterparts are being reviewed with a view to reduce
Cypriot exposure. While Cypriot bank credit lines with their
US correspondent banks are limited primarily to trade finance
and overnight loans, even these relatively low-risk lines
will have their limits reduced. Cypriot institutions have
always had a low tolerance for risk and are slow to take up
new financial products: Loan securitization is not legal and
banks maintain high loan/deposit ratios (about 85-90 percent).


3. (SBU) On September 22, the Finance Minister met with the
various financial sector regulators to review Cyprus'
exposure to problematic loans and counterparties. The
conclusion was that among all local banks, insurance and
investment companies and pension funds, there is only about
Euro17 million total exposure with the Cyprus
Telecommunications Authority pension fund having the single
largest amount at risk; Euro1.7 million face value in
securities issued by Lehman Brothers.


4. (SBU) Comment: There is a touch of schadenfreude when
Cypriots talk about the upheaval in the US financial markets;
although the realization is slowly dawning that Cyprus will
not escape all the effects. The Finance Minister noted to the
Ambassador that, when he was CEO of Bank of Cyprus, he was
frequently visited by "salesmen" offering the structured
products now causing so much trouble, but he refused to buy
"because I didn't understand them." The minister also noted
that he holds a Harvard MBA. Similarly, the chief economist
at Cyprus' second largest bank told us that US and UK banks
had let "greed overwhelm them," contrasting their behavior to
Cyprus' "faith in the historic role of banks." The good news
is that when we pointed out to officials the potential
negative effect from blacklisting AIG, they acted quickly and
positively.
Urbancic