There is a need to enable the banks to help the Cyprus economy by making loans to businesses and people. Banks basically grease the wheels of the economy: No loans means that there is not much movement in the economy. This is the first goal.
The second goal is to make loans more affordable. Simply put, interest rates need to be lowered in order to entice businesses to take on loans. Even if banks have available cash, but interest rates are high, then there will little demand for loans.
In order for banks to make loans, they will need cash infusions. These cash infusions will come from Troika.
Troika will though require that certain conditions be met in order to provide the loans to the banks such as:
- Reduction in Operating Expenses which may involve the merge of Bank of Cyprus and Laiki. When these two banks combine, there will be less need for building such as branches but also less human resources are required. So layoffs will follow.
- Salary and benefits reductions.
One would argue that both measures above are necessary in order to pay back the loans the banks take from Troika but also to lower interest rates banks charge their customers. Lowering loan interests practically means that it will reduce the profitability of banks.
Lower bank profitability will be followed by:
- Lower Deposit Interests. If a bank charges 5% for a loan, then it is obvious that it will offer between 1% – 2% interest on deposits.
- Banks will try to make up for the drop in profitability by increasing their fees, such as cost of maintaining a checking account.
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