(1)

Paragraph 5 is replaced by the following: ‘5. With a view to restoring the soundness of its financial sector, Cyprus shall continue to implement the restructuring of the banking and cooperative credit institution sectors; continue to strengthen the supervision and regulation; undertake a reform of the debt restructuring framework; and gradually lift capital restrictions in line with its roadmap, while safeguarding financial stability. The programme shall provide for the following measures and outcomes: (a) ensuring that the liquidity situation of the banking sector shall be closely monitored. Temporary restrictions on the free movement of capital (inter alia, limits on cash withdrawals, payments and transfers) shall be closely monitored. The goal is that controls shall remain in place only for as long as is strictly necessary to mitigate serious risks for the stability of the financial system. The implementation of the roadmap for the gradual relaxation of restrictive measures shall continue, also taking into account the credit institutions’ liquidity situation. A well-targeted communication strategy shall be designed aiming to communicate regularly information regarding that roadmap and the progress made in the implementation of banking sector strategy. The funding and capital plans of domestic banks relying on central bank funding or receiving State aid shall realistically reflect the anticipated deleveraging in the banking sector and the gradual easing of restrictive measures, and shall reduce dependency on borrowing from the central bank, while avoiding asset fire-sales and a credit crunch; (b) adapting the minimum capital requirements, taking into account the parameters of the balance sheet assessment and the Union-wide stress test; (c) ensuring that any restructuring plans shall be formally approved under State aid rules, before any state aid is provided. Banks with a capital shortfall may, if other measures do not suffice, ask for recapitalisation aid from the State in accordance with State aid procedures. Banks with restructuring plans shall report the progress in their implementation of the plans; (d) ensuring that a credit register is created and operational, that the current regulatory framework on asset impairment and provisioning, and on the treatment of collateral in provisioning is amended, as necessary, and that the Union rules on capital requirements and non-performing loans are implemented in a timely fashion; (e) easing constraints on the seizure of collateral. This shall accompany the preparation of legislation on the basis of a comprehensive reform framework establishing appropriate corporate and personal insolvency procedures, as well as ensuring the smooth and effective functioning of the revised foreclosure and insolvency frameworks. In addition, once reformed, the new private sector debt restructuring legal framework shall be reviewed and additional measures shall be defined as needed; (f) implementing the strategy for the future structure, functioning, and viability of the cooperative credit institution sector, as designed by the Central Bank of Cyprus in consultation with the Commission, the ECB and the IMF; (g) enhancing the monitoring of the indebtedness of the corporate and household sectors and establishing a framework for targeted private sector debt restructuring to facilitate new lending and diminish credit constraints. The banks’ arrears management policies and practices shall be reviewed and the Directive on Arrears Management and the Code of Conduct shall be amended, as needed. Administrative measures that interfere with the setting of bank lending rates shall not be introduced; (h) continuing to further strengthen the anti-money-laundering framework and implementing an action plan ensuring the application of improved practices with regard to customer due diligence and entity transparency, in line with best practices; (i) integrating stress-testing into regular off-site bank supervision; (j) introducing mandatory disclosure requirements to ensure that banks regularly communicate to the authorities and the markets, their progress in restructuring their operations; (k) ensuring the implementation of the restructuring measures that shall enhance the viability of the cooperative credit sector, following the establishment of the legal framework for the new governance structure for the management of the State’s stake in the sector; and (l) ensuring the revision of the governance directive, which will specify, among other matters, the interaction between banks’ internal audit units and bank supervisors.’