Cyprus banking crisis caused by lack of control

Cyprus' unwieldy banking sector came crashing down to earth because there was no coherent policy to restrain the booming industry, said an independent report released on Thursday.

"Cyprus suffered its banking crisis because it had no coherent national policy to handle its booming banking sector," said the report.

It said the authorities "failed to restrain the banks because they seemed to be 'doing a good job.'"

The 100-page Independent Commission on the Future of the Cyprus Banking Sector report was compiled by experts appointed by the central bank.

It said a policy of complacency, oversight, cultural rigidity to change, weak bank governance and foot-dragging on reforms was partly to blame for the downfall of the sector, coupled with its heavy exposure to debt-crippled Greece.

In a deal struck in March with international lenders the cost of Cyprus' bailout ballooned to 23 billion euros ($30 billion) included an unprecedented bail-in from uninsured depositors as the large banking sector was cut down to size.

Its overriding conclusion is that the banks suffered from weak control and gung-ho executives.

"A culture of deference rather than challenge prevailed in the face of domineering chief executives who increasingly ignored boards and bypassed what controls did exist," said the report.

It also argued that central bank's supervisory role needs to upgraded and tightened.

"The supervision function in the CBC should be subject to independent audit to improve its accountability. It needs to be more strongly resourced."

The report also calls for a new culture of independence and openness, saying changes would deliver "better governance, better banks, better supervision and greater trust internationally".

Commission chairman David Lascelles said while the 40-odd recommendations seemed daunting "it is in Cyprus' power to address them".

He said the future of the Cypriot banking system would have to remain "modest for a few years, but there is no reason why it should not flourish again".

Cyprus was forced to wind up failed second lender Laiki, transferring its healthy assets to market leader Bank of Cyprus, whose depositors were hit with a massive levy.

BoC customers with deposits of more than 100,000 euros could lose up to 60 percent of those holdings.

Those in defunct Laiki will have to wait years to see any of their money over 100,000 euros, after it was split into a good bank and bad bank.

The unprecedented eurozone "haircut" on deposits forced the government to close all the island's banks for nearly two weeks in March and impose draconian controls when they reopened.

Critics say Laiki overreached itself when it merged with Greece's Marfin Egnatia bank in 2006, triggering overly ambitious expansion in Greece, Russia and the Balkans.

At its peak, the banking sector was nearly eight times the island's 17 billion euro ($22 billion) economy. Following the bailout deal it has been downsized to around 3.5 times GDP.