The ministry is currently in consultation with the banks on the bill, drafted by the Central Bank of Cyprus (CBC). Under the current legislation, a bank may unilaterally change at any time its profit margin set at the signing of the contract without the consent of the borrower. With the new bill, while the base rate (such as euribor), which is not determined by the bank, could still change, the profit margin of the bank would remain the same throughout the duration of the contract. With this bill, the Central Bank is attempting to end the banks’ practice of raising interest rates at will. The new legislation is not retroactive but would apply to new loans or for restructured loans for which the banks and the customers have signed new contracts.

The head of the Cyprus Banks Association Michalis Kammas confirmed to the Mail that the association has received the bill and is studying it. The association received the draft bill a month ago, he said. To his knowledge, there is no fixed timetable for the banks to get back to the ministry with their remarks.

The bill comes in the wake of reports that banks have been charging ever-higher interest rates when restructuring loans with borrowers whose debt is seen as risky. Also banks here in recent months have been raising their profit margin on loans, to compensate for falling euribor rates.

It was not immediately clear whether or how the bill addresses the possibility that lenders may simply opt to up their profit margin in advance, that is, at the beginning of contracts, to compensate for not being allowed to vary their profit margin subsequent to the bill’s enactment. “It’s unlikely the banks, already facing criticism for their practices, would go that way,” CBC sources said.

The same sources said that under the bill, the borrower and the lender must beforehand agree on a bank’s profit margin. For restructured loans for which new contracts are to be signed, if the two parties disagree on the new profit margin proposed by the bank then the previous profit margin applies.

Meanwhile under a CBC directive that enters into force today (Friday), a cap is placed on bank executives’ bonuses. The cap is set at 50% of a person’s fixed remuneration. The relevant EU directive sets the bonus ceiling at 100%. However Cypriot banks may in certain cases raise execs’ bonuses to 100% of their salary (compared to 200% allowed under the same EU directive) provided this is approved by shareholders. The directive, which encompasses other banking issues such as corporate governance, was agreed after consultations between the CBC, commercial lenders and the troika.

Source: Cyprus Mail