EN ECB-P UBLIC  
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 15 November 2011 
on the management of financial crises and the set ting up of an independent financial stability fund 
(CON/2011/93) 
 
Introduction and legal basis  
On 20 October 2011, the European Central Bank (ECB) received a request from the Cypriot Ministry of 
Finance for an opinion on two draft laws. The first relates to the management  of financial crises 
(hereinafter the ‘draft law on financial crisis ma nagement’) and the second es tablishes an independent 
financial stability fund to support the stability of the fi nancial system (hereinafter the ‘draft financial 
stability fund law’). On 9 November 2011, the Cypriot Ministry of Finance submitted revised versions of 
the two draft laws. 
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the third and sixth indents of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities 
regarding draft legislative provisions
1, as the draft laws relate to the Central Bank of Cyprus and to rules 
applicable to financial institutions, insofar as they  materially influence the stability of financial 
institutions and markets. In accordance with the first sen tence of Article 17.5 of the Rules of Procedure of 
the European Central Bank, the Governing Council has adopted this opinion. 
 1.  Purpose of the draft laws 1.1 The draft law on financial crisis management aims at enabling the Cypriot Ministerial Council, 
following a proposal of the Central Bank of Cyprus and taking into account the opinion of the relevant supervisory authority, to take, at tim es of financial crisis, measures addressing liquidity 
and/or solvency problems in the financial system  and/or to enhance the capital base and/or the 
balance sheet of financial institutions in Cyprus, in a manner consistent with Union State aid rules 
and the Laws of 2001 to 2009 on State aid control
2. These include (i) government loans to financial 
institutions; (ii) government guarantees for loans to be taken by financial institutions and/or bonds 
issued by financial institutions for an appropriate  price; (iii) the provision of capital to financial 
                                                 
1  OJ L 189, 3.7.1998, p. 42. 
2  Law 30(I)/2001, Episimi Efimerida tis Dimokratias  No 3481, 16.3.2001. The Laws on St ate aid control transposed the 
State aid acquis , entrusting the Office of the Commissioner for State aid control with monitoring its correct 
implementation in Cyprus. 
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2 institutions in return for a corresponding participa tion in their ownership structure; (iv) government 
loans or guarantees for an appropriate price and/ or a grant for the Deposit Protection Schemes to 
cover any deficit that may arise in the pay-outs to  depositors, in the event of their activation; (v) 
government loans or guarantees for an appropriate price and/or a grant for the Financial Stability 
Fund to assist it in fulfilling its mission. 
1.2 The draft financial stability fund law aims at establishing an independent, self-financing fund (‘the 
Fund’) to enhance the current crisis manage ment and resolution framework in Cyprus and 
contribute to financial stability. The objectives of the Fund are to (i) support and fund the resolution of ailing credit institutions, avoiding th e use of public funds, and (ii) maintain public 
confidence in the financial system while minimising moral hazard in case of the Fund’s intervention. 
 2. General observations on the draft law on financial crisis management  2.1 Member States have alread y consulted the ECB on numerous national measures adopted in 
response to the global financial crisis. Given the broad scope of the support measures envisaged in 
the draft law, the consulting authority is invited to take into account the ECB’s opinions on similar 
draft legislative provisions in other Member States
3. 
2.2 The ECB stresses that it is of the utmost importance that support operations conducted by the 
national authorities do not interfere with the conduc t of the single monetary policy and/or with the 
Eurosystem’s refinancing operations4. Given the interdependencies of the Member States’ policy 
responses to the financial crisis, previous E CB opinions have also drawn attention to the 
importance of a concerted approach throughout th e Union to restore confidence in the financial 
markets5.  
 3.  General observations on the draft financial stability fund law 3.1 The setting up of bank resolution funds, fina nced by levies, has already been addressed by the 
European Council’s Conclusions
6 and by the European Commission, which proposes that all 
Member States set up ex ante resolution funds as pa rt of the planned Union crisis management and 
resolution framework7. 
                                                 
3  All ECB Opinions are available on the ECB’s website at www.ecb.europa.eu. 
4   See, for instance, paragrap h 3.4 of ECB Opinion CON/2008/52. 
5  See paragraph 3.7 of ECB Opinion CON/2008/81.  
6  See Conclusions of the Eur opean Council of 17 June 2010. 
7  See European Commission, Communication from the Commi ssion to the European Parliament, the Council, the 
European Economic and Social Committee and the European  Central Bank, ‘Bank Resolution Funds’, COM(2010) 254 
final, 26.5.2010 and European Commi ssion Communication from the Commission to the European Parliament, the 
Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank 
‘An EU Framework for Crisis Mana gement In the Financial Sector’,  COM(2010) 579 final, 20.10.2010.  
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3 3.2 In line with Opinion CON/2011/29, the ECB reiter ates that the primary purpose of resolution funds 
is to mitigate the effects of a bank failure for th e different stakeholders, including customers, the 
real economy and taxpayers. In particular, this imp lies that resolution funds should not be used for 
any form of bailout or to avoid a bank’s insolven cy. As the existence of resolution funds may raise 
moral hazard concerns, stringent conditions for their use need to be defined, including no automatic 
correspondence between the pay-in and pay-out to the fund, with decisions about the use of the 
funds taken by independent and ac countable public authorities. The ECB also reiterates that, when 
adopting resolution tools for financial instituti ons, Member States should act in a coordinated 
manner to avoid significant differences across the Union.  
 4.  Specific observations  on the draft law on financial crisis management  
4.1 Underlying principles and triggers for the ac tivation of the national support measures  
4.1.1 Section 5 of the draft law on financial crisis  management defines the general principles underlying 
the measures in Section 4 to be taken by th e Cypriot Ministerial Council. Following Opinion 
CON/2009/12, the consulting authority has (i) expressly provided that any government support measures will be of limited duration and the draft la w itself is of temporary duration, (ii) expressly 
excluded inter-bank deposits, subordinated loans and collateralised liabilities from the scope of 
application of the government gua rantees provided for in the draft law, (iii) covered the pricing of 
government guarantees consistently with reco mmendations by the ECB’s Governing Council
8, (iv) 
stipulated that government guarantees for loans to be taken by financial in stitutions and/or bonds 
issued by them are to be consistent with the mone tary policy of the Eurosystem, and (v) stated that 
the proposed arrangements comply with Union State aid rules.  
4.1.2 Under Section 4(1)(a)(ii) of the draft law, the Cypriot Ministerial Council may issue government 
guarantees for loans taken out by banks, while, under Section 5(b), government support measures 
may also be taken vis-à-vis financial institutions facing or likely to face ‘insolvency problems’. The 
ECB reminds the consulting authority that the ai ms of government guarantees of bank debt should 
be to: (i) address the funding problems of liquidity-constrained but solvent banks by improving the functioning of the market for bank debt of longer te rm maturity; (ii) preserve the level-playing field 
amongst financial institutions by avoiding market di stortions; and (iii) ensure  consistency with the 
management of liquidity by the Central Bank of Cyprus.  
4.1.3 Second, the ECB reminds the consulting authorit y that it is important to ensure that financial 
institutions benefiting from government support me asures do not profit from the undue use of their 
guaranteed status to engage in a heightened leve l of activities, distorting the market and facilitating 
abnormal balance sheet growth. In this regard, the ECB reiterates the importance of establishing 
appropriate safeguards such as limits on the marke ting of financial products or on the expansion of 
                                                 
8  See the Recommendations of the Governing Council of th e European Central Bank on the pricing of recapitalisations, 
20 November 2008 (hereinafter the ‘ECB’s recommendations’). 
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4 their activities on the basis of government guara ntees. The ECB recommends amending the draft 
law on financial crisis management  to include such safeguards. 
4.1.4 Third, as regards government recapitalisation measures, the ECB draws the consulting authority’s 
attention to the ECB’s recommendations. The aim of recapitalisation measures should be to strengthen the capital position of fundamenta lly sound financial institutions. The ECB’s 
recommendations stress that the pricing conditions  for recapitalisation measures should be risk-
based and market-oriented, taking into consid eration the specific risk of both the specific 
instrument chosen for injecting capital and the institution concerned. Specific features of the 
instruments for capital injections should be approp riately chosen so that, while being consistent 
with capital adequacy requirements and encouragi ng an early end to the State’s capital support of 
banks, these do not result in an excessive increas e in the cost of capital. The ECB draws the 
consulting authority’s attention to the need to ensure that the Stat e’s shareholder role as a result of 
a possible future recapitalisation under the draft la w is limited in time. In this respect, and in 
accordance with the ECB’ s recommendations, the Cypriot authorities should consider setting out 
terms for the redemption or conversion of the instru ments, either on the basis of a fixed period of 
time or depending on market cond itions, to preserve the temporary nature of the State’s 
involvement and to discourage financial instituti ons from relying on such involvement for an 
extensive period of time. 
4.1.5 Fourth, regarding the triggers for the activ ation of the government support measures, the ECB 
understands that these are to be deduced from a comb ination of the definition of the term ‘financial 
crisis’ in Section 2 of the draft law, and Section 4(2) and Section 5 on the general principles for the 
support measures. The ECB recommends amending the draft law to specify that access by financial institutions to that framework is activated in emergency cases only.  
4.2  Beneficiary financial institutions 
Pursuant to Section 2 of the draft law on financial crisis management, its provisions are to apply to 
the ‘financial institutions’ referred to in it, provided that these have  been established and licensed in 
Cyprus. The ECB understands that, with the excep tion of branches of banks  and other financial 
institutions registered outside Cyprus, the draft la w applies to all financial institutions in Cyprus, 
including the Cyprus-based subsidiaries of fore ign financial institutions. The ECB welcomes the 
non-discriminatory application of the draft law, which is conducive to the equal treatment of 
domestic and foreign financial institutions, and in line with the Commission’s guidance on the 
eligibility criteria for beneficiary institutions
9. 
4.3  Central bank involvement in the support measures 
4.3.1 The ECB notes that, pursuant to Section 4 of the draft law, the Cypriot Ministerial Council will 
decide following a recommendation by the Central Bank of Cyprus whether to support a domestic 
                                                 
9  See paragraph 18 of Communication from the Commission - The application of State aid rules to measures taken in 
relation to financial institutions in the context of the cu rrent global financial crisis (OJ C 270, 25.10.2008, p. 8). 
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5 financial institution or to exercise any of the ot her powers conferred on it. The ECB expects that 
the involvement of the Central Bank of Cyprus  would not extend beyond such a recommendation 
and to otherwise comply fully with the monetary financing prohibition laid down in Article 123(1) 
of the Treaty. In particular, the ECB expects th at the support measures envisaged in the draft law 
will be exclusively financed from the State budget a nd that, to the extent that their funding may 
require State borrowing, this will not include pre-financing or refi nancing of the State budget by 
the Central Bank of Cyprus.  
4.3.2 The ECB also expects that the Cypriot Minist erial Council will use its powers in connection with 
State support measures in a manner fully compa tible with the institutional and financial 
independence of the Central Bank of Cyprus, th ereby safeguarding the proper performance of its 
tasks under the Treaty and the Statute of the European System of Central Banks and of the European Central Bank. The reference in Section 16(a) of the draft law to the Laws of 2002 to 
2007 on the Central Bank of Cyprus is welcome.  
4.4 Additional measures in Sections 7 to 10 of the draft law  on financial crisis management 
 Sections 7 to 10 of the draft law on financial crisis management  provide for a number of powers 
vested in the Cypriot Minister for Finance to be exercised when the measures laid down in 
Section 4(1)(a) are taken, and by way of der ogation from the Law on Companies and the Law on 
cooperative credit institutions. These powers include (i ) restrictions in the exercise of the voting 
rights attaching to shares or the voting rights po ssessed by the shareholders of the beneficiary 
financial institution; (ii) appointment of the majority of the members of the Board of Directors of the beneficiary financial institu tion; and (iii) increase of the share capital of the beneficiary 
financial institution. The ECB notes that, unlike the measures set out in Section 4 of the draft law, the above measures may be ‘recovery and resolu tion measures’, to be taken by the resolution 
authority in the context of a comprehensive bank recovery and resolution regime. The ECB 
understands that the inclusion of these measures in the draft law is temporary, until such time as an 
operational recovery and resolution framework ha s been established in Cyprus, and that the 
consulting authority will reconsider in the future their interplay with the recovery and resolution 
framework that is to apply, in the future, to fi nancial institutions operati ng in Cyprus, and on which 
the ECB expects to be consulted.  
4.5 Section 15 of the draft law on financial crisis management  provides for a number of deviations in 
its application to cooperative credit institutions . The ECB notes that, without prejudice to the 
separate supervisory regime to which cooperative credit institutions are subject in Cyprus, these 
qualify as fully-fledged credit institutions for the pur poses of the banking legislation. Moreover, the 
risks to which they are exposed, or those to wh ich they may expose the domestic financial system, 
are not qualitatively different from those of non- cooperative credit institutions. It follows that 
cooperative credit institutions should be treated, also  for the purposes of the draft law, in a manner 
that guarantees a level playing field for them  and non-cooperative credit institutions (banks) 
operating in Cyprus. The ECB recommends amending the draft law accordingly. 
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6  
5. Specific observations  on the draft financial stability fund law  
5.1 Section 4(2) of the draft financial stability f und law, on the Fund’s purposes, should be amended to 
include, among its objectives, the maximisation of the value of the good assets of an ailing or failed 
credit institution and the facilitation of the quickest possible return to their productive use, as part 
of its mitigation of the effects of a bank failure on different stakeholders.  
5.2  Section 16(1) of the draft financial stability fund law, on the use of the Fund’s resources, does not 
specify the different resolution measures that the Fund will cover. The ECB understands that this is 
because a dedicated recovery and resolution frame work for financial institutions operating in 
Cyprus has yet to be established. Besides, the cond itions subject to which the funds collected are to 
be used are not clearly specified except by an im plicit reference in Sections 16(1) and (2) to the 
Management Committee’s discretion to decide wh ether to make disbursements on a case-by-case 
basis. 
5.3 Several of the provisions of the draft law c onfer on the Fund’s Management Committee public law 
decision-making powers that are neither necessarily  consistent with its management tasks, under 
Section 23 of the draft financial stability fund law,  nor with its responsibilities. For instance, the 
Management Committee may exempt credit institu tions from making contributions to the Fund 
(Section 5 of the draft law), impose sanctions on anyone breaching the provisions of the draft law 
independently  from the competent supervisory authority (Section 18(3) of the draft law), and, as 
mentioned above, take discretionary decisions as to  whether or not to make disbursements to a 
credit institution (Section 16 of the draft law). The ECB notes that such decisions should be taken by the appropriate resolution authority, rather than by the Management Committee, and invites the 
consulting authority to reconsider the scope of th e powers conferred on it, some of which are more 
appropriate for a resolution authority. 
5.4 Section 22 of the draft financial stability fu nd law addresses the issue of the Fund’s governance 
structure. The ECB is satisfied that the draft la w provides sufficient guarantees for the Management 
Committee to operate as an independent body and fo r the statutory enshrinement of its functional 
independence from the Government. However, the ECB continues to stress the need for the 
authorities in Cyprus to ensure that the proposed bank resolution fund’s mana gement is entrusted to 
those national authorities that would be de jure  or de facto  responsible for resolving ailing financial 
entities.  
5.5 Finally, the ECB continues to stress the need fo r the draft financial stability fund law to provide for 
(i) replenishing the Fund, where part or all of  its funds are used to support an ailing bank’s 
liabilities, and (ii) the Fund’s winding-up. 
 
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7 This opinion will be published on the ECB’s website. 
  Done at Frankfurt am Main, 15 November 2011. 
 
[signed] 
 
The President of the ECB 
Mario DRAGHI