EN ECB-PUBLIC  
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 6 November 2012 
on government guarantees for credit institutions 
(CON/2012/85) 
 
Introduction and legal basis 
On 17 October 2012, the European Central Bank (ECB) received a request from the Cypriot Ministry of 
Finance for an opinion on a draft law establishing a scheme for the granting of government guarantees to 
Cypriot credit institutions (hereinafter the ‘draft law’) and an accompanying draft decree in the same 
matter (hereinafter the ‘draft decree’ a nd, jointly, ‘the draft legal acts’). 
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 on the 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 provisions,
1 as the draft law relates 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 and main features of the draft legal acts  
1.1  According to the explanatory memorandum to  the draft law, its purpose is to establish a 
government guarantee scheme for loans and bonds issu ed by credit institutions, thereby enhancing 
their access to liquidity and helping them ove rcome the impact of the ongoing economic crisis. 
Credit institutions have six months from the entry into force of the draft decree within which to 
request support in the form of a government guara ntee. Government guarantees are to be granted 
for a term of no less than three months and no more  than five years. The scheme’s total budget is 
EUR 6 billion, which the Cypriot authorities consider  sufficient to cover the needs of the Cypriot 
banking sector. Government guarantees are to be  provided against: (a) the payment of an 
appropriate commission by the requesting credit ins titution; and (b) adequate collateral for the 
benefit of the Cypriot Government, except in  extraordinary cases, and based on the reasoned 
opinion of the Central Bank of Cyprus. 
                                                      
1  OJ L 189, 3.7.1998, p. 42.  
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2 1.2 The draft decree lays down rules for the sch eme, the terms for the granting of government 
guarantees and their pricing, the type and adequacy of eligible collateral, the criteria concerning the 
allocation of the government guarantees and comp liance monitoring and coordination procedures 
relevant to the draft law.    
 2. General observations  2.1 The ECB welcomes the draft legal acts as a means of enhancing financial stability in Cyprus.  2.2 The ECB reminds the consulting authority that government guara ntees for bank debt should, when 
implemented: (a) address the funding problems of liquidity-constrained solvent banks by 
improving the functioning of the market for bank debt of longer-term maturity; (b) preserve the level playing field among financial institutions and avoid market distortions; and (c) ensure 
consistency in the management of Eurosystem liquidity
2. With the above general considerations in 
mind, the ECB has the following specific obser vations to make on the draft legal acts. 
 3.  Interaction with other legislation 3.1  Interaction with the Law on th e management of financial crises  
 In a previous opinion, the ECB commented on certain draft legislative provisions, which are 
similar to those set out in the draft legal acts
3. The provisions in question have since been enacted 
in the Law on the management of financial crises (hereinafter the ‘Law’)4. It follows from Section 
4(1) of the Law that the Ministerial Council may,  following a recommendation of the Central Bank 
of Cyprus, take any of a number of support measur es in relation to troubl ed financial institutions, 
including granting government guarantees for loans to  be taken by financial institutions and/or 
government guarantees for bonds to be issued by fina ncial institutions, at an appropriate price. In 
the interests of legal certainty, and with a view to avoiding legislative duplication, the consulting 
authority may wish to carefully consider the inte raction between the Law and the draft legal acts. 
3.2  Interaction with forthcoming legislation  
 The ECB notes that the choice of the type and eligibility criteria of collateral, as well as the 
haircuts applied, may influence the restructuri ng activities envisaged by troubled Cypriot credit 
institutions, in particular as regards any decision to dispose of certain assets or wind down certain 
activities. In light of the long duration of guarant ees issued under the draft law and the prospective 
restructuring of banks in receipt of state aid, th e consulting authority may th erefore wish to ensure 
                                                      
2  In this regard see most recently Opinion CON/2012/4, paragraph 3. All ECB Opinions are published on the ECB’s 
website at www.ecb.europa.eu  
3  See Opinions CON/2009/12 and CON/2011/93. 
4  Law 200(I)/2011. 
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3 that the draft decree would not interfere with th e aims of any forthcoming legislation designed to 
facilitate the restructuring of credit in stitutions and the wider banking system. 
 4. Eligible credit institutions and scope of guarantees 4.1 The ECB understands that, with the exception of branches of credit institutions registered outside 
Cyprus, which are ineligible to benefit from gove rnment guarantees, the draft law applies to credit 
institutions incorporated in Cyprus and licen sed by the Central Bank of Cyprus or the 
Commissioner
5, including the Cyprus-based subsidiaries of foreign credit institutions6. In addition, 
the ECB understands that the government guarant ees will be allocated on the basis of domestic 
deposits and loans (excluding interb ank deposits and loans) irrespec tive of the nationality or place 
of residence of the depositors or borrowers7. The ECB welcomes the non-discriminatory 
application of the draft law, whic h is conducive to maintaining a le vel playing field in the treatment 
of domestic and foreign financial in stitutions in Cyprus. The draft law is, in this respect, also in line 
with the Commission’s guidance on the eligib ility criteria for beneficiary institutions8. 
4.2 Moreover, the ECB understands th at guarantees can only be issued to cover loans made to Cypriot 
credit institutions and bonds issued by those cr edit institutions, to the exclusion of interbank 
deposits, as well as subordinated or colla teralised liabilities (such as covered bonds)9. The ECB 
reiterates its view that State guarantees should no t cover interbank deposits, since this could: (a) 
entail a substantial distortion in the various nati onal segments of the euro area money market by 
potentially increasing, across Member States, short-te rm debt issuance activity, to the detriment of 
the implementation of the single monetary policy;  and (b) affect the transmission of monetary 
policy, making it difficult to maintain the n ecessary level playing field between financial 
institutions that benefit from State guarantees and those that do not10. 
 5  Pricing of guarantees The ECB welcomes that Article 8 of the draft law e xplicitly provides that guarantee fees applied to 
financial institutions benefi ting from the State guarantees are to be in  line with the criteria established by 
the Commission, which incorporate the prici ng formula recommended by the ECB’s Governing 
                                                      
5  Commissioner of the Authority for the Supervis ion and Development of Cooperative Societies. 
6  See Article 3 of the draft law. 
7  See Article 5.4 and 5. 10 of the draft decree. 
8  See paragraph 18 of the Communication from the Commission on the application of State aid rules to measures taken in 
relation to financial institutions in the context of the curr ent global financial crisis  (OJ C270, 25.10.2008, p. 8),  
9  See Article 3 of the draft law. 
10  In this regard see, most rece ntly, paragraph 3 of Opinion 2012/4. 
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4 Council11. The pricing formula in the Annex to the draf t decree corresponds to the one established by the 
Commission. 
 6  Temporary nature of guarantees In line with the Commission’s criteria
12, the ECB notes the need for national support measures to be 
temporary in nature, and reiterates the views expressed  in its previous opinions that coordination of the 
duration of national financial support schemes across the Un ion is of crucial importance in order to ensure 
a level playing field13. The financing to be covered by the gua rantee scheme established under the draft 
law may only be requested within six months from the entry into force of the draft decree14 and granted 
for a term not exceeding five years15. Thus, the guarantee scheme estab lished under the draft law can be 
considered to be of a temporary nature. The consulting au thority may nevertheless want to clarify what 
the date appearing in Article 4 of the draft decree rela tes to, as the date in question does not appear to be 
consistent either with the duration of the government  guarantees nor with the duration of their offer to 
eligible credit institutions.  
 7.  Interaction with the mone tary policy of the euro area 
The ECB also reiterates that granting government guara ntees for bank debt with a maturity of less than 
three months should be avoided to the extent possible
16. The ECB welcomes that the draft law does not 
allow government guarantees for bank debt with  a maturity of less than three months17. Moreover, the 
ECB stresses that it is of the utmost importance th at support operations conduc ted by national authorities 
do not in any way affect the conduct and the implementation of monetary policy in the euro area18.  
 8.  Role of the Central Bank of Cyprus 8.1 The ECB notes that, under the draft law, the Minist er consults the Governor of the Central Bank of 
Cyprus prior to deciding whether or not to issu e a state guarantee for the benefit of an eligible 
credit institution. The Governor’s advice is also s ought in respect of the type and eligibility criteria 
for the collateral covering the amount of gove rnment guarantees granted to eligible credit 
institutions and for any dispensations from the duty to provide adequate eligible collateral to the 
                                                      
11  See the Recommendations of the Governing Council of th e European Central Bank on government guarantees for bank 
debt, 20 October 2008, available on the ECB’s website at www.ecb.europa.eu.  
12  See paragraphs 15 and 20 of the Communication from the Co mmission, on the application, from 1 January 2012, of State 
aid rules to support measures in favour of banks in the co ntext of the financial crisis  (OJ C356, 6.12.2011, p. 7). 
13  In this regard see, most recent ly, paragraph 3.2 of Opinion CON/2011/88. 
14  See Article 5 of the draft law. 
15  See Article 4 of the draft law. 
16  In this regard see, most recently , paragraph 3 of Opinion  CON/2012/4. 
17  See Article 4 of the draft law. 
18  In this regard see, most recent ly,, paragraph 3 of Opinion CON/2012/4. 
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5 Government. The ECB notes, however, that the Minister does not seek the Governor’ advice 
regarding the extent of collateral haircuts to apply19. While appreciating the draft law’s recognition 
of the expertise of the Central Bank of Cyprus, th e ECB also expects its involvement in the scheme 
not to extend beyond the provision of advice and to otherwise comply fully with the prohibition on monetary financing laid down in Article 123(1) of the Treaty, read in conjunction with Council 
Regulation (EC) No 3603/93 of 13 December 1993 sp ecifying definitions for the application of the 
prohibitions referred to in Articles 104 and 104b(1) of the Treaty
20. In particular, the ECB expects 
that the guarantees envisaged by the draft law w ill be exclusively financed from the State budget 
and that, to the extent that their funding may require State borrowing, this will not include pre-
financing or refinancing of the State budget by the Central Bank of Cyprus21.  
8.2 The ECB also expects that the Minister will use the powers under the draft law in a manner fully 
compatible with the institutional and financia l independence of the Central Bank of Cyprus, 
thereby safeguarding the proper performance of its  tasks under the Treaty and the Statute of the 
European System of Central Banks a nd of the European Central Bank.  
 9.  Lending to the real economy and monitoring mechanism 9.1 The ECB is of the view that the guarantee schem e should clearly state that one of its legislative 
objectives is to foster Cypriot banks’ lending to the real economy. The consulting authority may therefore consider it beneficial to include this objective, for instance in the draft decree, providing 
for the terms of conduct for credit institutions benefiting from government guarantees. This would 
facilitate the monitoring of the lending-behaviour of banks by the Committe e set up under Article 7 
of the draft decree. 
9.2 The ECB notes that the draft decree does not prov ide for any follow-up to the monitoring activity. 
Efficient monitoring should allow for control of the beneficiary credit institutions’ compliance with 
the guarantee-scheme and the ECB would welcome more clarity in this respect. 
 
                                                      
19  See Article 5(13)(e) of the draft decree. 
20  OJ L 332, 31.12.1993, p. 1. 
21  In this regard see, most recently ,, paragraph 3.5 of Opinion CON/2009/12,.  
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6 This opinion will be published on the ECB’s website. 
  Done at Frankfurt am Main, 6 November 2012. 
 
[signed] 
 
The President of the ECB 
Mario DRAGHI