Former Governor of the Central Bank of Cyprus, Panicos Demetriades, was interviewed by Central Banking in relation to the Cyprus banking crisis and the need for EU-wide AML oversight.
This interview was published in Central Banking, 18 September 2018, and can be found here.
Demetriades on political pressures on central banks and their governors
“Cypriot banks pre-crisis offered high levels of interest on deposits, and then embarked on risky overseas expansion, and invested in property developments and high-risk Greek government bonds – their holdings were larger than Cypriot government bonds. Did you find out why banking supervisors permitted such large investments in risky Greek government bonds?
I tried to find out how that happened. According to Basel rules, you could switch from German bonds to Greek government bonds, and you didn’t really need to hold more capital – so it was regulatory arbitrage. The central bank did try to ask the banks to hold more capital, but it didn’t go as far as to stop them, to say: “No, you can’t have 100% of your own capital in Greek government bonds.”
Which, with hindsight, is what they should have done. But no-one knew at the time that this [80% haircut on Greek bonds] was going to happen. My predecessor has gone on the record saying that he wasn’t expecting the Greek debt writedown, the Greek PSI (private-sector involvement), to happen. So that must be the reason.”