Cyprus and Iceland, so different from Luxembourg
On the same day that the Cyprus media announced legal charges were being pressed against Cypriot bankers (Laiki and Bank of Cyprus) for their investments in Greek bonds, the Financial Times featured a story on judicial proceedings in Iceland against managers involved in that nation’s financial crisis.
Both Cyprus and Iceland are small countries which have suffered from the 2008 financial crisis and in both cases banks were closely involved. Another similarity is the fact that Iceland’s banking related problems, like those in Cyprus, centered about three major banks which accounted for assets ten times that countries GDP.
The analogy is one which may well hold lessons for us. Markets work best when there are many competitors. The mistakes or transgressions of the few are then less likely to effect the entire system.
That is essentially the Luxembourg model, the richest country in the EU with a population smaller than that of Cyprus.
Despite a banking sector several times bigger than our own, Luxembourg has not had our problems. Luxembourg’s banking industry is much less concentrated with over 140 banks.
The largest Luxembourg bank accounts for only 13% of total bank assets, compared to a figure of some 27% for the Bank of Cyprus and even more in previous years. In thinking of the future direction of banking here, it would be well to keep in mind that small countries, those with 1 million population or less, have demonstrated only three roads to prosperity: tourism, oil and international banking plus other financial services. Of the three, only the latter can provide both the quantity and quality of jobs that Cyprus needs for its highly educated youth.
Dr. Jim Leontiades Cyprus International Institute of Management, Nicosia