Sources familiar with the matter told CNA the Central Bank of Cyprus (CBC) has taken measures to mitigate the impact on the Cyprus Deposit Guarantee Scheme (DGS) and to safeguard the depositors who placed money with the branches of Lebanese banks, believed to be facing one of the top three worst recessions in the past 150 years, according to the World Bank.

The CBC has been closely monitoring the situation in Lebanon since 2019 when financial challenges became more severe. In March 2020 Lebanon defaulted on its foreign debt payments.

According to the same sources, the CBC, as an initial precautionary measure, curtailed the inflow of deposits in the Lebanese branches in Cyprus. A total of nine branches were operating in Cyprus at that time, of which two had already announced their closure. The limit to deposits was aimed at protecting the Cyprus banking system and the Cyprus DGS which would be triggered in case the branches could not pay the guaranteed deposits below €100,000.

In March 2020, the CBC also decided to instruct the branches to transfer to the Cypriot Central Bank equivalent liquidity to cover their guaranteed deposits. The move was made to ensure the Lebanese branches, in case of problems, would have the reserves to pay the guaranteed deposits, reducing the risks on the Cyprus DGS and consequently, the island’s banking system.

According to financial accounts, the Lebanese banks were transferring deposits as “due to headquarters”, that is, owed by their banking groups in Lebanon. The same sources explained that since the banks in Lebanon were facing mounting problems, there was a great risk these liabilities would not be paid by their parent banks.

According to the same sources, these moves resulted in a decrease in deposits in Lebanese branches, declining to around €400 million from €650 million, by the end of 2020.

In March 2021, the CBC also instructed the Lebanese branches to transfer into Cyprus additional liquidity amounting to 50% of the deposits over €100,000, in a move believed to further protect depositors.

Furthermore, in July 2021 the CBC pushed for the amendment to the law on the Deposits Guarantee Scheme and the resolution of credit and other institutions, enabling the regulator to take control of reserves in order to pay the depositors the guarantee in case of solvency problems in any banking institution licensed in Cyprus.

These moves aimed to protect the Cyprus banking system from the problems faced in Lebanon. In case the DGS was triggered to pay guaranteed deposits held with the Lebanese branches, the Central Bank of Cyprus would be forced to replenish the DGS liquid funds by requesting additional contributions from the Cypriot banks, with the Cypriot lenders facing challenges in profitability. The Cyprus DGS must maintain liquidity amounting to 0.8% of the banking system's insured deposits.

Furthermore, a potential failure of Lebanon’s banking system would have no impact on Cyprus’ banking system, as the Lebanese branches' loans and deposits concerned non-resident clients.

According to the latest available data, the Lebanese branches’ deposits and loans amounted to approximately 1% of total deposits and loans in the Cyprus banking system.

Source: Knews