Central Bank of Cyprus calls in external investigators

The Central Bank of Cyprus today (August 24) announced it had commissioned professional services firm Alvarez and Marsal to conduct an independent investigation into why two Cypriot banks ended up requiring state support.

The investigation began immediately and the central bank said the hope was that the conclusions would provide "clarity and comprehension" about the current financial stress in the country as well as guide remediation efforts to strengthen the stability of the banking sector.

It was in June this year that the central bank backed the country's government in the decision to request a bail-out from the European Financial Stability Facility. However, problems were clear well before then. In May, the governor of the central bank, Panicos Demetriades, warned about the deep-rooted problems in the economy shortly after he took over the leadership of the institution. Speaking at a conference held by the trade union for Cypriot bank workers, Demetriades said austerity measures alone would not be enough to remedy the situation.

The close ties between the Greek and Cypriot economies and banking sectors was, and continues to be, the core problem. The Popular Bank and the Bank of Cyprus both experienced significant capital shortfalls, which led to a need for state funding to meet regulatory requirements, and in turn contributed to the need for emergency European funds. Now Alvarez and Marsal is tasked with finding out how the situation came about.