EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 23 August 2006  
at the request of the Cypriot Cooperative So cieties’ Supervision and Development Authority 
on a draft regulatory decision on the terms and conditions of affiliation of cooperative credit 
institutions with the Cooperative Central Bank 
(CON/2006/42) 
 Introduction and legal basis
 
On 19 July 2006 the European Central Bank (ECB) received a request from the Cypriot Cooperative 
Societies’ Supervision and Development Authority (h ereinafter the ‘YEASE’) for an opinion on a draft 
regulatory decision on the terms and conditions for th e affiliation of cooperative credit institutions with 
the Cooperative Central Bank (hereina fter the ‘draft decision’).  
The ECB’s competence to deliver an opinion is based on the sixth indent of Article 2(1) of Council 
Decision 98/415/EC of 29 June 1998 on the consulta tion of the European Central Bank by national 
authorities regarding draft legislative provisions1, as the rules contained in the draft decision materially 
influence the stability of financial institutions and markets. In accordance with  the first sentence of 
Article 17.5 of the Rules of Procedure of the Europ ean Central Bank, the Governing Council has adopted 
this opinion. 
 1. Purpose of the draft decision 
1.1 The purpose of the draft decision, adopted by the YEASE in accordance with Section 41Z of the 
Cooperative Societies Law of 1985 to ( Νο 3) 2005 (hereinafter the ‘Cooperative Societies Law’), is 
to harmonise the domestic legal framework governing the establishment and operation of 
cooperative credit institutions (CCIs) with the Dir ective on the taking up and pursuit of the business 
of credit institutions
2 (the ‘recast Banking Directive’), that will apply to CCIs from 
1 January 20083. The ECB notes that, whilst the recast Banking Directive does not elaborate on the 
                                                      
1  OJ L 189, 3.7.1998, p. 42. 
2  Directive 2001/12/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, p. 1), recently recast as Directive 2006/48/EC 
(OJ L 177, 30.6.2006, p. 1). 
3  See Annex VII to the Act concerning the conditions of accession 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 Slovak Republic and the adjustme nts to the Treaties on which 
2 procedure for the affiliation of cooperative societie s with their respective central bodies, Article 3 
of the recast Banking Directive exempts, subject to  certain conditions, credit institutions affiliated 
to a central body from some of their Community banking law obligations4. In accordance with 
Article 3(1) of the recast Banking Directive as implemented by the Coope rative Societies’ Law, 
CCIs will be entitled to pursue thei r business either on a stand-alone  basis or through affiliation 
with the Cooperative Central Bank (hereinafter the ‘SKT’)5 as the central body.  
1.2 In line with its stated purpose, the draft decision inter alia  lays down (i) the procedure for the 
affiliation of CCIs with the SKT6; and (ii) the implications of such affiliation; and (iii) the 
conditions and procedures for te rminating the affiliation of CCIs to the SKT; and (iv) the 
framework for the the SKT to instruct its affiliated CCIs. 
 2. General observations  2.1  CCIs are autonomous, mutually owned entities e ngaging providing core banking services to their 
members and specialising in mortgage lending and sm all retail loans. Accord ing to the information 
provided by the consulting authority, CCIs represent a quantitatively important component of the domestic financial system, jointly accounting for abou t one third of the total loans and deposits in 
local currency. The subdivision of the domestic banking sector into a commercial banking and a 
cooperative credit sub-sector resulted in a paralle l regulatory and supervisory regime for CCIs, 
based on the Law on Cooperative Societies, th e YEASE being the independent authority 
responsible for the authorisation, prudential supervision and regulati on of CCIs. The CCIs’ sector is 
                                                                                                                                                                          
 
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 a pply 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 th e Commission at the beginning of each year about the number 
of non-conforming Cooperative Credit and Savi ngs Societies which continue to be excluded, as well as the market share 
that they represent’. 
4  Under Article 3 of the recast Banking Directive, credit inst itutions situated in the same Member State and permanently 
affiliated to a central body which supervises them and which is established in that same Member State may be exempted 
from the requirements of Articles 7 and 11(1)  of the recast Banking Directive. More over such affiliated credit institutions 
may also be exempted from the provisions of Articles 9 and 10 and also Title V, Ch apter 2, Sections 2 to 6 and Chapter 3 
of the Directive provided that, without prejudice to the appli cation of those provisions to th e central body, the whole as 
constituted by the central body together with its affiliated in stitutions is subject to thos e provisions on a consolidated 
basis. In case of exemption, Articles 16,  23 to 25, Article 26(1) to (3), and Articles 28 to 37 apply to the whole as 
constituted by the central body together  with its affiliated institutions. 
5  To enjoy certain exceptions from the recast Banking Directive several cumulative conditions of permanent affiliation of 
the credit institution to its central body need to be fulfille d. First, both the central body and affiliated credit institution  
supervised by that body are to be placed in the same Member State. Second, the national law of that Member State must 
provide that (1) the commitments of the central body and affi liated institutions are joint and several liabilities or the 
commitments of its affiliated institutions  are entirely guaranteed by the central body; (2) the solvency and liquidity of the 
central body and of all the affiliated in stitutions are monitored as a whole on th e basis of consolidated accounts; and 
(3) the management of the central body is empowered to issue instructions to the management of the affiliated 
institutions.   
6  The framework underlying such affiliat ion has already been defined by the Coop erative Societies’ (Amending) Rules of 
2004 (Regulatory Act No 874/2004, Episimi Efimerida tis Dimokratias No 3940, 31.12.2004), adopted pursuant to 
Section 53 of the Cooperative Societies Law. 
3 currently undergoing a consolidation process to he lp the merged entities improve their efficiency 
and the quality of their services.  
2.2 The ECB welcomes the draft decision as a furthe r step towards full conformity between the regime 
governing the establishment and operation of CCIs and the harmonised framework for the pursuit 
of the business of credit institutions, noting that the Cypriot authorities have already addressed 
other aspects of the on-going harmonisation of CCIs with Community law7. 
 3. Specific observations  3.1 Section 6.2 of the draft decision provides that the SKT must guarantee in full the repayment of all 
liabilities of its affiliated CCIs, including a ll off-balance-sheet liabilities and commitments 
excluding, subject to conditions, liabilities secured by charges on a CCI’s assets. The draft decision 
regulates in detail the scope and limits of such  guarantee, which will be activated at the 
Commissioner’s initiative. Moreover, the fifth recita l to the draft decision and Section 6.8(a) and 
(b) thereof refer to the parallel establishment, by  a YEASE regulatory decision, and operation of a 
‘solidarity’ or ‘support fund’ to supplement the SK T’s intervention in any CCI and in general to 
support all the SKT’s activities
8. Furthermore, the draft decision provides that the Deposit 
Protection Fund9 may be also activated for the protection of deposits with CCIs and the SKT. 
3.2 First, the ECB understands that, when establishe d, the solidarity fund would be made up of 
contributions from the CCIs only, thus avoiding any cross-sector subsidisation by other credit 
institutions that are not CCIs. Second, an appropr iate involvement of the Central Bank of Cyprus 
(CBC) in decisions on the SKT’s support of CCIs mi ght be warranted, considering both its role as 
the SKT’s supervisory authority and the need to assess the possible financial stability implications 
of any intervention. This would require providi ng for an adequate exchange of information 
mechanism between the CBC and the YEASE. 
3.3 As stated above, Section 6.2 of the draft deci sion provides that the SKT must guarantee in full the 
repayment of all liabilities of its affiliated CCIs, including all off-balance-sheet liabilities and 
commitments excluding, subject to conditions, lia bilities secured by charges on a CCI’s assets. 
Section 11.1 of the draft decision provides that the operation of the SKT guarantee shall be no substitute for the company law obligations of  the affiliated CCIs’ committee, secretary, 
management and staff. In the interests of lega l certainty, the relationship between these two 
provisions should be clarified. 
                                                     
 
7  See draft law amending the Law on the Central Bank of Cyprus of 2002 to 2003 inter alia  providing for the incorporation 
of CCIs into the Central Bank of Cyprus’ minimum reserv e regime on which the ECB adopted Opinion CON/2006/4 of 
27 January 2006 at the request of the Central Bank of Cypr us on a draft law amending the Central Bank of Cyprus Laws 
of 2002 and 2003. 
8  See Section 6.3 of the draft decision, read in conjunction with proviso (1) to Section 6.8(b)(iii) thereof, where the 
solidarity fund is expressly mentioned. 
9  The Deposit Protection Fund established under the terms of the Cooperative Societies’ (E stablishment and Operation of 
the Deposit Protection Scheme) Rules of 2000 and 2004. 
4 3.4 Sections 6.8(a) and (b)(ii) of the draft decision inter alia  provide that the SKT shall provide 
affiliated CCIs services, facilities and support, in its capacity as ‘central banker and lender of last 
resort of all CCIs’. The ECB understands that the SKT’s role and powers under Sections 6.8(a) and 
(b)(ii) are without prejudice to the role and powers  of the CBC in this regard, under the terms of the 
Laws on the Central Bank of Cyprus of 2002 a nd 2003 and of the Laws on banking of 1997 to 
(No 2) 2004. Some further clarificati on in this regard is thus warranted. 
 This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 23 August 2006. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET