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