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1 Introduction
The North Cyprus economy has experienced two banking sector distress periods. The first took place in 1994 and the second took place between the years 2000 and 2002. In 1994, the economic fundamentals in Turkey were deteriorating. Particularly, there was a continuing devaluation of the Turkish Lira (TL), which resulted in a serious currency crisis[1] . As there is a close monetary and economic link between Turkey and North Cyprus, as a consequence of the financial distress experienced in Turkey in 1994, banks in North Cyprus were also affected. In 1994 two banks (namely: Everest Bank Ltd and Mediterranean Guarantee Bank Ltd) were placed under the control of the Turkish Republic of Northern Cyprus (TRNC) Ministry of Finance. Later, these banks had to be bailed out by the government. Mediterranean Guarantee Bank Ltd became a public bank and the Everest Bank Ltd was taken over by a private owner.
In Turkey the International Monetary Fund supported the pegged exchange rate base anti-inflation programme implemented in December 1999. However, after 14 months, the programme had to be abandoned, with the collapse of the TL. In 2000, five banks, namely: the Cyprus Credit Bank Ltd, Cyprus Liberal Bank Ltd, Everest Bank Ltd, Kibris Yurtbank Ltd, and Cyprus Finance Bank Ltd, were put under the Saving Deposit Insurance Fund (SDIF), and then these banks were closed in the year 2001. The bankruptcy of these five banks started a serious banking crisis in North Cyprus. Criminal investigations have been conducted to investigate the management, and the total loss of these five troubled banks was reported to be around 112 trillion TL. Another four banks, namely: Cyprus Commercial Bank Ltd, Yasa Bank Ltd, Tilmo Bank Ltd, and Asia Bank Ltd, were put under the SDIF in 2001, and Cyprus Industrial Bank Ltd was put under SDIF in 2002. Furthermore, Finba Ltd was taken over by Artam Bank Ltd in 2000 and Med Bank Ltd and Hamza Bank Ltd were taken over by Seker Bank Ltd in the years 2001 and 2002, respectively. During the period of 2000-2002 ten financial banks were forced by the Government of North Cyprus to suspend their operation. During 1999 there were 37 surviving banks in North Cyprus. However, towards the end of...