The Myth of Cypriot Bank Resolution ‘Success’: A Plea for a More Holistic and Less Costly Supervision & Resolution Approach

Abstract

This paper advocates for actively minimising the price of bank resolution at each part of the new regulatory banking structure. It does so by examining how the banking resolution costs were increased due to decisions taken at different stages of the regime during the experience of Cyprus with bank supervision, early intervention, resolution and liquidation. The paper then moves on to argue that increasing instead of decreasing the lingering bank resolution costs in Cyprus tainted the picture of bank resolution success for which the Cypriot experience has become somewhat of a posterchild. It argues that if the success of bank resolution is evaluated after a series of bad supervisory decisions, it is more than likely to conclude that resolution was successful because it resolved a very detrimental situation. Simply put, the success of the Cypriot bank resolution might as well equate to a gigantic failure of bank supervision. As such, while acknowledging the benefits and successes of the new regime, this paper tries to showcase that the application of the supervisory and resolution regime in Cyprus hides a lot of elements that are very far from successful, but which can nevertheless form constructive lessons for the practical application of the regime in the future.