EN ECB -PUBLIC 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK  
of 2 Ju ly 2012 
on the recapitalisation of the Cyprus Popular Bank  
(CON/2012/ 50) 
 
Introduction and legal basis  
On 30 May 2012, the European Central Bank (ECB) received a request from the Cypriot Ministry of 
Finance for a n opinion on a Ministerial Decree regarding the recapitalisation of the Cyprus Popular Bank 
Public Co. Ltd. (hereinafter, the ‘Ministerial Decree ’).  
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 indent 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 provisions1, as the draft decre e relate s to a national central bank and to rules 
applicable to financial institutions, insofar as they materially influence the stability of financial 
institutions and markets . In accordance with the first sentence of Article 17.5 of the Rules of Procedur e of 
the European Central Bank, the Governing Council has adopted this opinion.  
 
1.  Purpose and contents of the Ministerial Decree  
1.1 The Ministerial Decree lays down a scheme for the recapitalisation of the Cyprus Popular Bank 
(CPB) , with the involvement of the Government of the Republic of Cyprus. The legal basis for the 
Ministerial Decree is Article 4 of the Management of Financial Crises Law s of 2011 to 2012 
(No.2)2, read in conjunction with Article s 6, 7 and 14 thereof.  
1.2 More specifically, Article s 3 and 4 of the Ministerial Decree provide  that t he Government of the 
Republic is to underwrite  the full amount of a rights issue to be launched by the CPB. The issue is 
to be  open to existing shareholders and new investors  alike  and will be  up to an amount of EUR 1 
800 m illion . The Republic is to acquire any non- subscribed  rights in consideration for the provision 
of zero-coupon government bonds  with a one -year maturity  which are to be automatically renewed 
upon maturity. The government bonds are to be l isted on the Cyprus Stock Exchange and are stated 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2  Law Ν. 200(Ι)/ 2011  Episimi Efimerida tis Dimokratias  No 4314, 30.12.2011 , p. 1678 , as amended by Law 40(Ι)/2012 , 
Episimi Efimerida tis Dimokratias  4330, 27.4.2012 , p. 371. The ECB was previously  consulted on the Financial Crises 
Law and issued Opinion CON/2011/93 in res ponse . 
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2 to be traded without restrictions3. The rights are issued at a price of EUR 0.10 per share4. To 
facilitate the Government’s exit strategy, freely transferable, non -listed share warrants are to be 
issued to the Republic5, with any shares acquired by the Republic being eligible to be repurchased 
within five years, either by  the CPB’s shareholders  through exercise of their share warrants , by the 
CPB itself or by third parties6. The Republic reserves its right t o exchange at any time, in whole or 
in part, the government bonds through which it has subscribed to the rights issue with cash7. 
 
2. General observations on the Ministerial Decree  
 The ECB understands that the Ministerial Decree is a follow -up to the Euro pean Banking 
Authority ’s (EBA)  publication of a formal Recommendation and final figures  relating  to the 
recapitalisation needs of European banks  on 8 December 2011. The EBA’s Recommendation and 
figures were part of the broader European package agreed by th e European Council on 26 October  
2011 and confirmed during the ECOFIN Council on 30 November  2011. This package aims to 
address the current situation in the Union  by restoring stability and confidence in the markets . The 
ECB stresses the importance of bank  recapitalisation as an essential  condition for financial and 
systemic stability, as well as a condition precedent to the preservation , by Eurosystem 
count erparties,  of their eligible counterparty st atus, within the meaning of Section  2.1 of Annex I to 
the Guideline ECB/2011/14 of 20 September 2011 on monetary policy instruments and procedures  
of the Eurosystem8.  
 
3.  Specific observations  on the draft law on financial crisis management   
 While t he ECB welcomes the initiative of the Cypriot authorities to recapitalise the CPB, it has the 
following observations to make on the particular recapitalisation scheme proposed in the 
Ministerial Decree.  
3.1 Recapitalisation needs of  the CPB  
 The Ministerial Decree estimates that the total recapitalisation need s of the CPB will not exceed 
EUR 1 800 million. In the event that  the CPB’s rights issue fails  to attract sufficient private sector 
participation, the Government w ould need t o provide the necessary capital up to the amount of 
EUR 1 800 million9. Should the need  for a government capital injection prove to be higher than the 
                                                 
3  Ministerial Decree, Article 4(4).  
4  Ministerial Decree, Article 5 . 
5  Ministerial Decree, Articles 4(2) and 6 . 
6  Ministerial Decree, Article 9(1) . 
7  Ministerial Decree, Articles 4(4) (iii) . 
8  OJ L 331, 14.12.2011, p.  1. 
9  Taking into account  that the rights issue will be exercised at EUR  0.10 a share against the current share price of 
EUR  0.08, the private sector participation in the rights issue is expected to be very modest.  
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3 amount currently envisaged in the Ministerial Decree, this would not provide an adequate legal 
basis for government capital injections in excess of EUR 1 800 million.  
3.2 Monetary financing considerations   
3.2.1  The monetary financing prohibition in Article 123 of the Treaty  prevent s central banks from 
providing overdraft facilities or any other type of credit facility to the public sector, including  any 
financing of the public sector’s obliga tions vis-à-vis third parties10. The ECB has repeatedly stated 
that the financing of credit institutions by a national central bank  (NCB ), granted independently and 
at its full discretion, other than in connection with central banking tasks (such as monetar y policy, 
payment systems or temporary  liquidity support operations) is incompatible with the monetary 
financing prohibition11. This applies , in particular , to the support of insolvent credit institutions . 
The rationale behind the ECB’s stance is that, by f inancing an insolvent credit institution, an NCB 
would be assuming a s tate task. The same concerns apply to the Eurosystem financing of a credit 
institution  which ha s been  recapitalised  to restore its solvency  by way of direct placement of  state-
issued  debt instruments where  no alternative market- based funding sources exist (hereinafter the 
‘recapitalisation bonds ’), and where such bonds are to be used as collateral . Against this 
background, the ECB notes that , in such a case of  a state recapitalisation of a  credit institution by 
way of  direct placement of recapitalisation bonds , the subsequent use of the recapitalisation bonds  
as collateral in central bank liquidity operations  raise s monetary financing concerns .  
3.2.2  Furthermore , Article 123 of the Treaty prohibits central banks from purchasing  debt instruments 
issued by Member States directly from Member States. Thus,  debt instruments issued by central 
governments may be purchased on the secondary market only and such purchases made on the 
secondary market may not be used to circumvent the objective of Article 123 of the Treaty12. In this 
respect, t he ECB notes that, in the absence of any alternative market -based funding sources  for 
recapitalisation bonds , and to the extent that such bonds have been acquire d by the credit institution 
in the context of a direct placement, the acceptance of the bonds used for the recapitalisation as 
collateral could amount to a circumvention of the prohibition on direct purchases of debt 
instruments from central governments by  the central bank . 
3.2.3  In view of the legal constraints under t he monetary financing prohibition , a case- by-case 
assessment of the existence of alternative market -based funding sources  will be required for  credit 
institutions  receiving central bank financing , where they have been  recapitalised  to restore their 
solvency by way of direct placement of recapitalisation bonds  which  are to be used as collateral .  
                                                 
10  See Article 1(1)(b)(ii) of Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions for the 
application of the prohibitions referred to in Articles 104 and 104b(1) of the Treaty (OJ L 332 , 31.12.1993, p. 1).  
11  See, for example, the ECB’s  Convergence Report May 2012, p p. 29-30. 
12  See the seventh recital of Council Regulation (EC) No 3603/93.  
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4 3.3  Fiscal  considerations  
 The use of recapitalisation bonds  entails a number of fiscal drawbacks which are  linked to their 
non-funded nature . Recapitalisation bonds have to be booked by the recipient bank at book value, 
meaning that  they cannot be issued at a substantial discount to serve recapitali sation purposes. 
Moreover, as the total amount of government bonds to be issued for recapitalisation  purposes 
depends on the prevailing market rates, their issuance could have adverse implications on the 
government balance for years to come. Besides, the increased government debt burden can reduce a  
governm ent’s options for  raising funds from the private market increasing  the likelihood  that the 
issuing government ha s to turn to international or foreign parties for financial support. Finally, in 
those cases where recapitalisation bonds  bear interest, the unf unded character of their issuance 
increases the government’s debt service payments.    
3.4 Recapitalisation v ersus r esolution  
In view of the fact that the support measures under the Ministerial Decree13 aim to address 
solvency problems at a financial insti tution, the ECB considers that  the objectives pursued by the 
support measures may be better achieved through bank resolution tools. A fully -fledged bank 
resolution regime, comprising tools such as bridge banks, asset separation and transfers of business would offer legally sound means of resolving institutions on the brink of insolvency , safeguarding  
financial stability, whilst addressing stakeholder rights
14.   
3.5 Financial stability considerations  
With respect to  the choice of recapitalisation instruments, the recapitalisation of banks with funded 
or, a fortiori , unfunded government bonds has a number of drawbacks from a financial stability 
perspective. More specifically, market participants may not regard the injection of unfunded recapitalisation bonds  as a credible recapitalisation technique, as it does not result in the provision 
of fresh cash to the banks, and thus may not help restore market access. Despite the fact that it can serve as a means of meeting the capital adequacy ratio, recapitalisation t hrough the injection of 
such unfunded recapitalisation bonds  can only change the risk absorption capacity of the bank 
gradually over time, as cash flows associated with these bonds are accumulated. Also, recapitalisations through government bonds forming part of the bank’s assets can reinforce the 
feedback loop between the s tate and the bank . This is to be avoided.  
3.6  Central bank involvement  
The ECB notes that  the Ministerial Decree caters for the involvement of the Central Bank of 
Cyprus (CBC) at vario us stages of the recapitalisation process envisaged in the Ministerial Decree.  
                                                 
13   Ministerial Decree, Article 4 (1)  
14  In this context see the Commission’s Proposal for a D irective of  the European Parliament and of the Council  establishing 
a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 
77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC 
and Regulati on (EU) No 1093/2010 (COM(2012) 280/3).    
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5 These stages include (a) the approval of the repurchase of own shares by the CPB, (b) the 
appointment to the CPB of an Independent Advisor  who is  responsible , inter alia , for pr eparing a 
restructuring plan, and (c) the appointment of up to five members of the CPB’s Board of 
Directors15. When considering the CBC’s supervisory tasks, and the powers conferred upon it 
under the Management of Financ ial Crises Laws of 2011 to 2012, the ECB is satisfied that the 
CBC’s involvement at various stages of the recapitalisation process does not raise concerns 
relevant to the CBC’s independent exercise of its Eurosystem tasks, in line with the Treaty and the 
Statute  of the European System of Cent ral Banks and of the European Central Bank . 
 
This opinion will be published on the ECB’s website 6  months after its adop tion. 
  Done at Frankfurt am Main,  2 July 2012.  
 
[signed]  
 
The President of the ECB  
Mario DRAGHI  
                                                 
15  Ministerial Decree, Articles 9(2), 10(1) and 11(1).