Banking Crisis and the Future of Banking
Author: Gikas A. Hardouvelis
Venue: Multinational Finance Society Symposium, Spring 2014, Round table Discussion on “The Future of Banking and Cyprus,” with P. Florides, A. Michaelides and St. Zenios, Larnaca, Cyprus
April 4, 2014
Abstract:
* Cypriot banking is large relative to other European countries and kept growing until 2009
* Private debt is also very high in Cyprus, revealing a vulnerable financial sector
* The international crisis was a financial crisis, hence European financials were hit very
hard, with the price of bank credit risk still remaining very high today
* The EMU crisis was more than a financial crisis, as it was caused by additional
imbalances in the fiscal sector and the external sector
* All three legs of the EMU crisis (Banking, real economy, fiscal) are present in Cyprus
* Cypriot imbalances in the current account date way back, but the fiscal imbalances started in 2009
* The bail-in was tried on Cyprus for the first time in March 2013 and caused an
immediate crisis
* A plethora of European policies to resolve the crisis, especially in the financial sector
* A banking union is slowly forming in EMU
* Cyprus needs to stabilize its financial system and remove capital controls before it can
hope to escape the recession
