EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 27 January 2006  
at the request of the Central Bank of Cyprus 
on a draft law amending the Central Bank of Cyprus Laws of 2002 and 2003 
(CON/2006/4) 
 
On 30 November 2005 the European Central Bank (ECB) received a request from the Central Bank of 
Cyprus (CBC) for an opinion on a draft law amendi ng the Central Bank of Cyprus Laws of 2002 and 
2003 (hereinafter the ‘draft law’).  
The ECB’s competence to deliver an opinion is based on the first, third, fourth and fifth 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 provisions1, as the draft law relates to currency 
matters, a national central bank (NCB), the collection of  statistics and payment and settlement systems. In 
accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central 
Bank, the Governing Council has adopted this opinion. 
 1  General remarks  
1.1 The ECB welcomes the draft law, the main objec tive of which is to make the Central Bank of 
Cyprus Laws of 2002 and 2003 (hereinafter the ‘CBC Law’) compatible with the Treaty 
establishing the European Community and the Statut e of the European System of Central Banks 
and of the European Central Bank, thereby laying a firm foundation for the legal integration of the 
CBC into the Eurosystem when Cyprus adopts the euro. 
 2 Audit Office and Auditor General 2.1 Section 52 of the draft law amends Section 60( 1) of the CBC Law (‘Audit of the annual financial 
statements’) to provide that ‘[t]he annual financ ial statements of the Bank shall be audited by 
independent external auditors, in accordance with  the provisions of Article 27 of the Statute’. 
Article 27 of the Statute provides that the accounts of NCBs of the Member States that have adopted the euro (hereinafter the ‘Eurosystem NCBs’) shall be aud ited by auditors that are: (i) 
independent; and (ii) external. Th ese requirements mean that the auditors must be independent 
                                                     
 
1  OJ L 189, 3.7.1998, p. 42.  
2 from and external to: (i) the ECB; and (ii) th e NCBs and their shareholders. The established 
practice is to appoint private auditors or firms of auditors as external auditors for Eurosystem 
NCBs with a specific independent audit mandate for a certain period of time. 
2.2 The ECB understands that the CBC’s annual financ ial statements are currently audited by the 
Cypriot Auditor General and that, in accordance wi th Article 116(4) of th e Cypriot Constitution, 
the Auditor General’s annual report on the exercise of his functions and duties is submitted to the 
Cypriot President, who causes it to be laid be fore the House of Representatives. The ECB notes 
that under Article 115 of the Cypriot Constitution,  the Audit Office is an independent public 
authority, and the Auditor General is not to retir e or to be removed from office except on the same 
grounds and in the same manner as a judge of the S upreme Court. Pursuant to Article 116(1) of the 
Cypriot Constitution, the Auditor Ge neral’s task is to control, on behalf of the Republic , ‘all 
disbursements and receipts and audit and in spect all accounts of moneys and other assets 
administered, and of liabilities incurred, by or under the authority of the Republic...’. It follows that 
notwithstanding the Auditor General’s independence as enshrined in the Cypriot Constitution, the 
Audit Office is not an external auditor within the meaning of Article 27.1 of the Statute, but rather 
an independent Cypriot public authority. 
2.3 In the light of the above, a party other than th e Audit Office will need to be appointed as the CBC’s 
external auditor in the future. However, this will not prevent the Audit Office from continuing to 
perform a control function, provided that its auditi ng activities: (i) do not interfere with the review 
of European System of Central Banks (ESCB) re lated tasks of the CBC to be undertaken by the 
CBC’s independent external auditors to be appr oved by the Council of the European Union in 
accordance with Article 27 of the Statute; a nd (ii) do not jeopardise the CBC’s independence2. The 
ECB notes in this regard that certain Eurosystem  NCBs are currently subject to such additional 
external auditing outside the scope of Article 27 of the Statute. 
 3 Application of minimum reserve requirem ents to cooperative credit societies 
3.1 The draft law amends Section 2 of the CBC Law (‘Interpretation’) by, inter alia , inserting a new 
definition of the term ‘credit institution’ that  includes cooperative credit societies, banks and 
electronic money institutions. The ECB welcomes th is extended definition of ‘credit institution’ 
which is consistent with a number of recent ECB opinions
3, and is designed to already at this time 
allow for the future incorporation of Cypriot coope rative credit societies, wh ich have been granted 
                                                      
2  Cf. paragraphs 5 to 7 of ECB Opinion CON/2002/22 of 2 September 2002 at the request of the Swedish Ministry of 
Finance on a draft legislative proposal es tablishing the National Aud it, including proposed ame ndments to the Sveriges 
Riksbank Act (1988:1385) .  
3  Cf. paragraph 15 of ECB Opinion CON/2005/35 of 10 Octobe r 2005 at the request of the Central Bank of Cyprus on a 
draft directive on the maintenance of minimum reserves with  the Central Bank of Cyprus and paragraphs 10 to 14 of 
ECB Opinion CON/2005/8 of 1 April 2005 at the request of Lietuvos bankas on certain draf t rules on minimum reserve 
requirements for credit institutions.  
3 a derogation from the application of  the Consolidated Banking Directive4 until 31 December 20075, 
into the CBC’s minimum reserve regime. This amendment is also reflected in the proposed revision of Section 41(1) of the CBC Law. The incorpora tion of cooperative credit societies into the CBC’s 
minimum reserve regime would smoothen their transition to the Eurosystem’s minimum reserve framework. 
 4 Monetary financing safeguards 4.1 Section 46(3) of the CBC Law (‘Deposits’) provid es that the CBC is entitled to grant advances or 
loans to banks against adequate collateral for fixed periods and for purposes which the CBC may 
designate. The ECB understands that the purpose of th is provision is to provide for the possibility 
of emergency liquidity assistance. The ECB notes that, while similar provisions can be found in the statutes of several NCBs, a proviso should be adde d to Section 46(3) that such advances or loans 
should be provided without prejudice to the requi rements derived from the participation of the 
CBC in the ESCB. Besides, complia nce with the prohibition on mone tary financing laid down in 
Article 101 of the Treaty must be ensured. 
4.2 Section 49(1) of the CBC Law (‘Prohibition of cr edit facilities to the Government’) provides for 
the prohibition on monetary financing, without, how ever, referring to the relevant provisions of 
Community law. The CBC Law should state that the prohibition on monetary financing derives from Article 101 of the Treaty and that the definiti ons for the application of this prohibition are 
specified by the Council of the European Union in accordance with the Treaty
6. Alternatively, this 
Section could be deleted, since the relevant pr ovisions of Community law, namely Article 101 of 
the Treaty and Regulation (EC) No 3603/93, are directly applicable in the Member States. 
 5 Technical comments 5.1 Statistical reporting requirements 
 The draft law amends Section 64 of the CBC Law (‘Obligation to report data for the purpose of 
balance of payments’) by, inter alia , inserting a proviso recognising the priority to be accorded to 
                                                     
 
4  Directive 2000/12/EC of the European Parliament and of  the Council of 20 March 2000 relating to the taking up and 
pursuit of the business of credit institutions, OJ L 126, 26. 5.2000. Directive as last amended by Directive 2004/39/EC 
(OJ L 145, 30.4.2004, p. 1.) 
5  Cf. Annex VII to the Act concerning the conditions of acce ssion of the Czech Republic the Republic of Estonia, the 
Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, The Republic of Hungary, the Republic of Malta, 
the Republic of Poland, the Republic of Slovenia and the Sl ovak Republic and the adjustment s to the Treaties on which 
the European Union is founded (OJ L 236, 23.9.2003, p. 819) entitled ‘List referred to in Article 24 of the Act of 
Accession: Cyprus’, which provides under Title 2 (Freedom to Provide Services ) as follows: ‘In Cyprus, Directive 
2000/12/EC shall not apply to the Cooperative Credit and Savings So cieties, in so far as they are not in conformity with 
the provisions of this Directive, until 31 December 2007. As from the date of accession and until the end of the above 
period the Cypriot authorities shall inform the Commissi on at the beginning of each year about the number of non-
conforming Cooperative Credit a nd Savings Societies which continue to be ex cluded, as well as the market share that 
they represent.’  
6  See Article 103(2) of the Treaty and 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.  
4 the ECB’s statistical reporting requirements under Artic le 5 of the Statute. The ECB takes the view 
that this general proviso may instead be inserte d into Section 63 of the CBC Law (‘Obligation to 
report data to the Bank’), as the priority for E CB statistical reporting requirements relates not only 
to balance of payment statistics and to the fi nancial accounts of the individual sectors of the 
economy, but also to the entire range of statistical  information in which the ECB has an interest 
and which is covered by Section 63 of the CB C Law. For the rest, the ECB agrees with the 
proposed changes to the CBC’s statistical reporting requirements.  
  5.2 Payment and settlement systems  
5.2.1 The ECB notes that although the draft law abo lishes the Cypriot Monetary Policy Committee and 
provides that the CBC’s Governor has the exclus ive competence to carry out the tasks and to 
exercise the powers conferred upon the CBC by the Treaty and the Statute, it does not expressly provide where the Monetary Poli cy Committee’s current powers with regard to the oversight of 
payment and settlement systems will vest when C yprus adopts the euro. In the interests of 
transparency and legal certainty, the ECB would therefore invite the CBC to consider expressly 
vesting the power to oversee payment and settlement  systems in the CBC’s Governor or its Board 
of Directors. 
5.2.2 The draft law amends Section 6(2)(g) of the CBC Law to state that one of the CBC’s main tasks is 
the promotion, regulation and oversight of th e smooth functioning of payment and settlement 
systems. For reasons of clarity, the ECB suggest s that this provision should refer to clearing 
systems in addition to payment and settlement systems. 
 5.3 Monetary policy instruments  
5.3.1 The draft law inserts a new Section 42 into the CBC Law providing that ‘[t]he Bank may issue 
securities for the purpose of intervening in the mone y market’. The ECB notes that the issuance of 
debt instruments for monetary policy purposes by individual NCBs after  their Member States have 
adopted the euro is subject to the Eurosystem’s rules on monetary policy instruments and procedures, something which the CBC Law should clearly reflect. 
5.3.2 Regarding Section 41 of the CBC Law (‘Requirement  of banks to maintain assets with the Bank’), 
as amended by the draft law, the ECB would invi te the CBC to consider: (i) referring only to 
‘minimum reserves’ in the proposed new text in th e interests of consistency and legal certainty, as 
Section 35 of the draft law currently uses the term s ‘minimum reserves’ and ‘mandatory reserves’ 
interchangeably; and (ii) inserting a reference to Article 19 of the Statute or otherwise amending 
the wording of the new Section 41 of the CBC Law in the interests of legal certainty, as the proposed wording of Section 36 of the draft law is too generic and does not specify the source of the rules to which it refers. 
5  
5.4 References to the Cyprus pound  
 The draft law amends Section 28 of the CBC La w to replace references in the CBC Law to the 
Cyprus pound with references to the ‘euro’. Th e ECB considers that th is provision is unnecessary 
as all references in Cypriot legal acts and other le gal instruments to the Cypriot national currency 
will automatically be understood as references to  the single currency from the date that Cyprus 
adopts the euro in accordance with Article 3 of  Council Regulation (EC) No 974/98 of 3 May 1998 
on the introduction of the euro7. 
This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 27 January 2006. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
                                                     
 
7  OJ L 139, 11.5.1998, p. 1. Regulation as amended by Regulation (EC) No 2596/2000 (OJ L 300, 29.11.2000, p. 2). This 
conclusion is also reinforced by the wording of recita l 7 to Council Regulation (EC) No 1103/97 of 17 June 1997 on 
certain provisions relating to the introduction of the euro , OJ L 162, 19.6.1997, p. 1.  Regulation as amended by 
Regulation  (EC) No 2595/2000 (OJ L 300, 29.11.2000, p. 1).