Paper on the framework for resolution of credit and other institutions

Monday, 15 April 2013

In response to media reports with regard to a paper by the European Central Bank (ECB), in relation to the recovery and resolution of banks, the CBC would like to clarify the following:

(1) The paper, entitled “Opinion of the European Central Bank of 29 November 2012 on a proposal for a directive establishing a framework for recovery and resolution of credit institutions and investment firms”, has been posted for several months on the ECB’s website. It does not refer to Cyprus, but instead it is the June 2012 proposal of the European Commission for the drafting of a directive within the context of measures taken to address the financial crisis.

(2) The paper presented recently to the media in Cyprus is based on the ECB’s opinion following the request of the Ministry of Finance regarding the framework for resolution of credit and other institutions (CON/2013/10). This included a series of laws, including the Resolution of Credit and Other Institutions Law.

(3) The Resolution of Credit and Other Institutions Law, 2013 (the 'Law') was included in the provisions of the draft Memorandum of Understanding (paragraph 1.19) for the financial sector agreed with the Troika in November 2012 and which set 31 January 2013 as the final date for its adoption.

(4) The provisions and resolution measures included in the Law are based on international standards, and in particular on a report of the Financial Stability Board published in October 2011 and entitled “Key Attributes of Effective Resolution Regimes for Financial Institutions”, as well as on the proposal of the European Commission referred to above.

(5) The Resolution of Credit and Other Institutions Law has been prepared in collaboration between the CBC and the Ministry of Finance within the time limit set in the preliminary Memorandum of Understanding and has been checked by the Law Office of the Republic of Cyprus. It was ready to be taken to Parliament after the latter resumed work, following the presidential elections in February 2013. However, with its return to Cyprus in early March, the Troika asked for modifications to the Law, which were completed on 19 March 2013. The final version of the Law was taken to Cabinet on 21 March, following a proposal by the Ministry of Finance, and on 22 March it was passed into a law.

(6) Article 7 of the Law sets out five resolution measures which can be adopted either in isolation or together when a bank becomes or may become non-viable. These measures are as follows:

- increasing the share capital from private sources;

- selling operations;

- transferring assets, rights or liabilities to a bridge bank;

- transferring assets and rights in an asset management company, and

- rescuing with its own resources – ‘bail-in’ (restructuring debts and liabilities of the institution subject to consolidation).

It should be noted that the ‘bail-in’ measure, which may include converting deposits into shares, applies only in cases where there are no funds from other sources or from public funding.

The political decisions taken on 25 March 2013 provided for, inter alia, the resolution of Laiki Bank and its separation into a 'good' and 'bad' bank, with the transfer of insured deposits and assets of the former to the Bank of Cyprus, and the recapitalisation of the latter by the conversion of part of uninsured deposits into shares.

The Eurogroup’s decision to finance the resolution and recapitalisation of both banks from their own resources was the only alternative which did not require funding from public resources.

The CBC applied, as it was obliged to do, the aforementioned policy decisions without having any involvement in their making. As is already known, the CBC does not participate in the meetings of the Eurogroup.