First, there are limitations to what one can learn from market intelligence, whether it is done with a survey, through analytical modeling, or market monitoring. The Federal Reserve’s market intelligence-gathering is among the best there is when it comes to breadth, detail, and rigor. For example, we are the only central bank that conducts market surveys directly on balance sheet policy. That said, the 2013 taper tantrum would not have been anticipated based on market surveys conducted at the time, as the median surveyed market participants’ projection for the end of asset purchases was similar to the plan Chairman Bernanke outlined in his announcement.20 In his book “The Courage to Act: A Memoir of the Crisis and Its Aftermath,” Bernanke attributed the failure of surveys to anticipate the taper tantrum to the fact that, at the time, they reached only primary dealer economists, a homogenous and insular group that he felt was unrepresentative of investors generally.21 I think there is truth to this, but I wonder if there is more to the story. We now survey a broad community of investors in addition to the primary dealers in a bid to gather a more diverse and inclusive perspective, partly in response to this concern. While this makes our surveys more robust, since we started doing this we haven’t observed large differences in median responses between the dealers and the buy-side community.
In all options, the Bank of Cyprus will need to create an organisation to manage nonperforming loans. The bank is already moving in this direction, and should it remain as a single entity it is likely that there will still be a dedicated focus on managing the workout of troubled loans. Splitting the Bank of Cyprus into a commercial bank and an asset management/development bank would create a legal and management separation. This – as any other option – has a number of merits and challenges. Two institutions would provide specialisation. The asset management/Development Bank could focus on maximising value through the restructuring of the loan book with no immediate time pressures. It could also act as a specialist bank focussed on real estate and development related activities. The remaining commercial bank could focus on serving the domestic economy. However, a split could be operationally disruptive in the immediate term, even if it was beneficial over time. Substantial progress in the restructuring of the banking system has been made. This has not been easy, and market conditions remain fragile. In determining the way forward any solution should look to meet four objectives; Restoration of Confidence – It is essential that any solution furthers the restoration of confidence. Customers must have confidence in the future of the Bank of Cyprus whether it is one bank or two. As confidence is re-established we can further ease and ultimately lift capital controls. Funded Balance Sheet – The Bank of Cyprus’s reliance on emergency support is well known.