European Central Bank Executive Board member Jorg Asmussen said Wednesday that short-term risks faced by Cyprus remained high with deep recession expected to take a toll on the banks' balance sheets.
In an introductory statement before the European Parliament's Economic and Monetary Affairs Committee in Brussels, Asmussen warned that the banking sector has not yet been stabilized, despite the unprecedented steps taken by the authorities so far.
"The burden sharing arrangement negatively affected depositor confidence and required the introduction of temporary and proportionate capital controls and restrictions on deposit withdrawals," he said.
Asmussen also cautioned that the reliance of the country's largest bank on ECB's Emergency Liquidity Assistance (ELA) remained "exceptionally high." He called for firm steps to complete the financial sector reform so as "to rebuild confidence in the viability of the banking system."
The Cyprus banking crisis has shown that the speedy entry into force and implementation of the single supervisory mechanism (SSM) is essential, while it also demonstrated the need for a European framework for the resolution of financial institutions.
Further, it has revealed the pressing need to establish a single resolution mechanism, the policymaker said.
Cyprus' two largest banks, which account for half of the domestic banking sector, had prospective capital needs of close to EUR 8 billion or 44 percent of GDP, Asmussen noted.
He pointed out that if the sovereign had shouldered these massive recapitalization needs, debt would have risen to 145 percent of GDP, "critically endangered public debt sustainability."
Also, he said there was limited scope of burden sharing by the private sector bank creditors, given little junior debt outstanding in banks.
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