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NICOSIA (Reuters) - Cyprus's banking sector, hammered by an international bailout this year, faces more trouble unless it can successfully tighten supervision, escape political meddling and change its culture of overt risk-taking, international experts said on Thursday.
The Independent Commission on the Future of the Cyprus Banking Sector, comprised of four senior academic and banking sector figures from around Europe, is studying the sector for the Cypriot central bank as it bids to launch reform.
Its interim report 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.
Cyprus saw years of lax budget control and its banks gorged on Greek government bonds before its financial system fell into turmoil last March, forcing a raid on bank savings as part of a 10 billion euro bailout of the Mediterranean island.
"Certainly in terms of the size of the crisis and in terms of the remedies that have been put in place to deal with it, it is the worst that I have personally witnessed," David Lascelles, the body's head and a senior fellow of London-based think tank Centre for the Study of Financial Innovation, told Reuters.
Deposits exceeding the EU-wide insurance ceiling of 100,000 euros in Cypriot banks Bank of Cyprus and Laiki were seized, offering the European Union a template to build upon in how to deal with troubled banks elsewhere in the bloc.
Laiki has since been wound down, with some of its assets transferred to Bank of Cyprus, where depositors have seen large chunks of their uninsured savings forcibly turned into equity to recapitalize the bank.
Looking forward, Lascelles said, Cyprus should have to make do with a leaner banking sector with less appetite for overseas expansion, tighter supervision on all levels, streamline a now-fragmented system of regulation into one regulator under central bank control, and convert Co-Op banks into commercial businesses.
"What we don't want to see is the aggressive expansion seen in the past five years. Its imprudent and expensive," he said.
The interim report, commissioned by the island's central bank and published on Thursday, argues risk-taking by banks was overlooked, there were few checks and balances by directors, lending was based on personal relationships and there was poor supervision at all levels.
Political influence also played out in several ways, either with political appointments to the board of the Central Bank, politically-affiliated individuals on boards of commercial banks and strong influence also in Co-Operative Banks, Lascelles said.
"There is a direct political influence in the way the banking system was run in this country, and it's one of our fundamental recommendations that Cyprus strive to get rid of that."
"Otherwise you are never going to have a healthy banking system," he said.
(Reporting By Michele Kambas; editing by Patrick Graham)