EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 4 April 2011 
on a special tax on banks and on the setting up of an independent financial stability fund 
(CON/2011/29) 
 Introduction and legal basis
 
On 11 March 2011, the Cypriot Ministry of Finance forwarded to the European Central Bank (ECB), for 
information, two draft laws under consideration by  the House of Representatives, one relating to the 
imposition of a special tax on banks (h ereinafter the ‘draft law on a speci al tax on banks’) and another on 
a fund to support the financial system (hereinafter  the ‘draft law on a fund to support the financial 
system’). On 24 March 2011, the Ministry of Finance replaced the draft law on a special tax on banks and 
the draft law on a fund to support the financial system  with a new draft law on the imposition of a special 
tax on credit institutions, covering both t opics (hereinafter the ‘draft law’). 
The ECB is competent to deliver an opinion on the draft law. Its comp etence to deliver an opinion is 
based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and on 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 aut horities regarding draft legislative provisions1, 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 ins titutions and markets. 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.  Purpose of the draft law 1.1 The ECB understands that, under Part I of the draft law, a temporary ad hoc tax is to be levied for 
2011 and 2012 on all banks and cooperative credit societies operating in Cyprus, equivalent to 
0.095% of the deposits of their domestic and fore ign depositors, with the exception of inter-bank 
deposits. The special tax in question is intended to contribute to the Government’s short-term 
budgetary targets; it may not exceed 20% of the tota l taxable profits of the taxable institutions for 
2011 and 2012. Part of the revenue to  be collected through this ad hoc  tax will finance the 
‘Independent Financial Stability Fund ’ (hereinafter the ‘bank resolution fund’). The draft law will 
on the one hand address fiscal imbalances in Cypr us, by generating an estimated EUR 60 million 
                                                 
1  OJ L 189, 3.7.1998, p. 42. 
2 annually in tax revenue; and on the other hand, fi nance the establishment of the bank resolution 
fund.  
1.2 Part II of the draft law establishes a financial stability fund, by providing a fiscal buffer for banking 
sector risks. The setting up, management, govern ance, resolution measures, the amount of 
contributions to the Fund and its operation are to be  governed by regulations to be drafted by the 
Central Bank of Cyprus and adopted by the Council of Ministers. 
 2.  Remarks on Part I of the draft law 2.1 As the ECB has stated in an earlier opinion
2, taxes on financial institutions  should be considered in 
relation to the dual objective of ensuring a more equitable distribution of the costs arising from their potential failure between taxpayers and the fi nancial sector and of addressing the risks that 
they pose. Using the proceeds of any ad hoc  taxes imposed on banks for general budgetary 
purposes would be undesirable, to the extent th at such taxes would place undue burdens on banks, 
hampering the provision of credit, with a knock-on effect on growth in the real economy. This 
might result in extra charges for their customers a nd may also induce certain banks to cut back on 
their activities, leading to a reduction in the availa bility of credit and creating uncertainty for banks, 
with a detrimental effect on the ba nking sector’s long term growth.  
2.2 In the light of the above, the ECB recomme nds a comprehensive impact assessment of the 
proposed measure, to ensure that the public benef it from its imposition w ill outweigh any potential 
negative implications for banks, their customers and the economy.  
2.3 The ECB notes that while an in stitution’s liabilities represent one of the most reliable indicators of 
the amounts necessary for a bank reso lution, the choice of an institu tion’s deposits as the basis for 
calculating the special tax to be levied from it,  in conjunction with the 20% profits-linked cap, 
could unduly penalise profitable in stitutions with a deeper retail deposit base compared to their 
competitors. This would unduly reward risk-taking th at is not backed by a solid retail deposit base.  
 3.  Remarks on Part II of the draft law  3.1 According to the European Council’s conclusions
3, Member States should introduce systems of 
levies and taxes on financial institutions to ensu re fair burden-sharing and to set incentives to 
contain systemic risk. Such levies or taxes shoul d be part of a credible resolution framework.  More 
specifically, setting up bank resolution funds, financ ed by levies, has alread y been addressed by the 
European Commission, which proposed that all Me mber States should set up ex ante resolution 
funds as part of the planned EU cris is management and resolution framework4. The ECB supports 
                                                 
2   See Opinion CON/2010/62, paragraph 3.2. 
3  See conclusions of the European Council of 17 June 2010. 
4  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 
3 the Commission’s proposal and considers that re solution funds could provide a useful means to 
support bank resolution, based on clear, stri ngent and properly co mmunicated conditions. 
3.2 In particular, the primary purpose of resolution funds should be to mitigate the effects of a bank 
failure for the different stakeholders, including customers, the real economy and taxpayers. In 
particular, this implies that resolution funds should not  be used for any form of bailout or to avoid a 
bank’s insolvency. The existence of resoluti on funds may, nonetheless, raise moral hazard 
concerns. Therefore, stringent conditions for their use need to be defined, including no automatic 
correspondence between the pay-in - that is, the contribution to the fund - and the pay-out, and decisions about the use of the funds should r eside with independent and accountable public 
authorities. Failure to establish dedicated resolu tion funds may result in increasing the dependence 
of the financial sector on public funds in times of stress and also further reinforce the risk of moral hazard.  
3.3. When adopting resolution tools for financia l institutions – as in the present case in setting up a 
bank resolution fund – Member States should act in a coordinated manner to avoid significant 
differences having counterproductive effects. The ECB therefore welcomes the consulting 
authority’s intention of ensuring that Union law, the European Commission’s recommendations 
and the best practices of other Member States ar e to be taken into account when drafting the 
regulations referred to in draft Article 12(4)(b)
5. While the ECB cannot appraise the bank 
resolution fund before the regulations have been  drafted and submitted to it for its assessment, it 
can nevertheless provide some general comment s concerning their scope and structure.  
3.4. The regulations should explicitly set out the different measures that the bank resolution fund will 
cover. In particular, the regulations should speci fy how the funds collected are to be held and 
managed and under which conditions they are to be used. Furthermore, the regulations should 
address the objectives of the proposed bank resoluti on fund, which, as already stated above, should 
be to mitigate the effects of a failure on different  stakeholders by trying to maximize the value of 
remaining assets and to facilitate, if possible, a quick return to their productive use. To avoid 
creating incentives for moral hazard, the regulati ons should expressly stipulate that any monies 
paid out of the bank resolution fund should not be used for any form of bailout or to avoid a bankruptcy.  
3.5 Concerning the issue of the bank resolution fund’ s governance structure, th e ECB stresses the need 
for the authorities in Cyprus to ensure that th e proposed bank resolution fund’s management is 
entrusted to those national authorities that would be de jure  or de facto  responsible for resolving 
ailing financial entities, for its management comm ittee to operate as an independent executive body 
and for the fund’s functional independence from th e Government to be statutorily enshrined. 
                                                                                                                                                             
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.  
5  Article 12(4)(c)(i) of the draft law. 
4 3.6 Finally, the regulations should cater for replenishing the resolution fund where part or all of its 
funds are used to support an ailing bank’s liabiliti es. They should also cater specifically for the 
fund’s winding up. 
 This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 4 April 2011. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET