EN ECB -PUBLIC 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK  
of 1 February  2013 
on a resolution framework  for credit and other institutions  
(CON/20 13/10) 
 
Introduction and legal basis  
On 1 1 January 2013,  the European Central Bank (ECB) received a request from the Cypriot Ministr y of 
Finance for an opinion on a series of draft laws  establishing a draft resolution framework for credit and 
other institutions operating in Cyprus  (hereinafter the ‘draft la ws’). 
The ECB’s competence to deliver an opinion is based on Article s 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union  and on 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 legisla tive provisions1, as the draft laws relate to the Central Bank of Cyprus  (CBC)  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 Procedure of 
the European Central Bank, the Governing Council has adopted this opinion.  
 
1. Purpose and main features of the draft laws   
1.1  The draft l aws are intended to establish  a comprehensive framework for the recovery, restructuring 
and resolution of credit and other institutions , with a view to safeguarding the smooth operation of 
the financial system and serving the public interest. The resolution framework is to consist of 
proposed amendments to (i) the Banking La ws of 1997 to 20092, (ii) the Co -operative Societies 
Laws of 1985 to 20123, (iii) the Fina ncial Crises Management Law s of 2011 to 20124, and (iv) the 
Special Tax on Credit Institutions Law s of 2011 to 20125, as well as of (v) a draft law and 
accompanying R egulations on the Establishment and Operation of a Deposit Protection and 
Resolution of Credit and Other Institutions Scheme  (hereinafter the ‘Scheme’),  and finally (v i) a 
draft law on the resolution of credit and other institutions  (hereinafter the ‘draft  law on resolution’) . 
                                                      
1  OJ L 189, 3.7.1998, p. 42.  
2  Law 66(I)/1997,  Episimi Efimerida tis Dimokratias  No 3168, 18.7.1997.  
3  Law 22/1985,  Episimi Efimerida tis Dimokratias  No 2043, 29.3. 1985.  
4  Law 200(I)/2011,  Episimi Efimerida tis Dimokratias  No 4313, 30.12.2011.  
5  Law 84(I)/2011,  Episimi Efimerida tis Dimokratias  No 4282, 29.4.2011.  
ECB -PUBLIC 
2 1.2 In particular, the amendments to the Banking Laws reinforce the powers of the CBC to (i) collect 
information from banks, including its powers of entry and inspection, (ii) interven e early, in terms 
of new powers to mandate (a) an  increase of the share capital of the bank , without strict compliance 
with company law rules , (b) t he submission of recovery plans  and information for the Central Bank 
of Cyprus to draw up resolution plans  in its capacity as r esolution authority , and (c) the imposition 
of limits on dividend payments and the remuneration of the officials, executive officers and 
directors of a bank . Finally, the amendments to the Banking Laws introduce a new special 
liquidation procedure , which includes the appointment of a special liquidator , where (a) the bank’s 
licence has been withdrawn, (b) the bank holds  deposits covered by the Deposit Protection Fund,  
and (c) the special liquidation of the bank is in the public interest.  
1.3 The amendments to the Co -operative Societies L aws are intended to bring its text in line with the 
draft law on resolution. In particular, the amendments to the Co- operative Societies Laws empower 
the Co -operative Societies Commissioner to demand (i) an  increase of the share capital of a co-
operative credit institution (CCI), (ii) the submission of recovery plans  and information to the 
resolution authority for the development of resolution plans , and (iii) limits on the payment of 
dividends and the remuneration of the officials and directors of CCIs. The proposed amendments also insert into the Co -operative Societies Laws provisions relevant to the special liquidation of 
CCIs, and the appointment of a special liquidator in cases where ( a) the licence of a CCI has been 
withdrawn, (b) the CCI holds  deposit s covered by the Deposit Protection Fund, and (c) the special 
liquidation of the Co- Operative is in the public interest.  
1.4 The draft law and accompanying Regulations on the Establishment and Operation of a Deposit Protection and Resolution of Credit and Other Institutions Scheme abolish (i) the Deposit 
Protection Fund established under Section 34 of the  Banking  Laws, and (ii) the Financial Stability 
Fund, established under Section 3(1) of the F inancial Stability Fund Law
6, and replace  them with a 
separate legal entity, comprised of two separate funds, namely (a) a deposit protection fund, and 
(b) a resolution fund ( hereinafter collectively referred to as the ‘Funds’). The Funds are to be kept 
separate through two distinct accounts, one for each of the F unds7. The Scheme appli es to banks 
and bra nches of banks established in Cyprus, banks operating on a cross -border basis and the 
Housing Finance Corporation ( hereinafter collectively referred to as the ‘covered credit 
institutions’). The Scheme will: (i) compe nsate depositors from the Deposit Protection Fund, in the 
event a covered credit institution is unable to repay depositors, or a receivership or liquidation 
order has been issued in relation to a covered credit institution, and (ii) fund the resolution 
measures provided for in the draft law on resolution. All covered credit institutions, unless 
                                                      
6  Law 201(I)/2011, Episimi Efimerida tis Dimokratias  No 4313, 30.12.2011.  
7  The Deposit Protection F und is to be funded by the resources of the existing fund, the future contributions of covered 
credit institutions, the transfer and liquidation of assets, the proceeds of sanctions imposed by the Scheme’s Committee, 
and loans which the Scheme may secure, backed by guarantees of the covered credit institutions. The Resolution Fund is 
to be funded by the resources of the existing fund in the form of levies collected on banks by virtue of the Special Tax on 
Credit Institutions Law s, future contributions, the transfer and liquidation of assets, the proceeds of sanctions imposed by 
the Scheme’s Committee, and loans.  
ECB -PUBLIC 
3 exempted by the Committee of the Scheme, are to pay contributions to the Deposit Protection 
Fund, as per the accompanying Regulations. Branches of banks established in another Member 
State may be exempted if covered by deposit protection schemes in their home Member States. The affairs of the Scheme are to be managed by an independent c ommittee, chaired by the Governor o f 
the CBC.  
1.5 The amendments to the Financial C rises Management Law s aim to inter alia  (a) broaden the scope 
of that law through a delegation to the Council of Ministers of powers for the a doption of support 
measures, on a recommendation of the CBC, subject to certain conditions ,
8 (b) make  the granting  
of government support to any of the Funds  conditional on the ir management commi ttees having 
exhausted every possibility to obtain additional resources either from the covered institutions or through borrowing, (c) require  an evaluation of the long- term vi ability of the applicant financial 
institution  prior to a recommendation by the Council of Ministers to adopt support measures , 
(d) remove references to the existence of a ‘financial crisis’ as a precondition for the adoption of 
support measures, and (e) i ntroduce  provisions on the management , by the Council of Ministers, on 
a recommendation of the CBC, of hybrid capital and subordinated liabilities of financial 
institutions that have received or have applied for support.  
1.6 Finally, the draft law on resol ution establishes a framework for intervention in, and the 
implementation of , resolution measures in relation to credit institutions where (a) the affected 
institution is  not, or is likely to no longer be , viable, or (b)  in the absence of such measures, th e 
institution will be unable to observe its capital adequacy and/or liquidity requirements, or (c) resolution measures are necessary to safeguard the public benefit or serve the public interest. 
The main objectives of the draft resolution l aw are to (i) en sure continuity of banking and financial 
services, (ii) avert adverse effects on the financial system, (iii) safeguard the stability and smooth 
operation of the financial system , and (iv)  protect public funds and depositors. Intervention is 
based, inter al ia, on the following principles: (a) shareholders and stakeholders are to be the first to 
bear losses, (b)  creditors are to absorb losses after shareholders and creditors of the same rank are 
to be treated equally, (c) no creditor is to be worse off than i f the affected institution had been 
liquidated as part of an insolvency procedure , (d) the senior management of a n affected institution  
is to be replaced and be liable for any breaches of their dut ies, (e) any interference with property 
rights is to comply  with the Constitution of the Republic of Cyprus and the European Convention 
on Human Rights, and not be in conflict with the acquis communautaire . The CBC will act as 
resolution authority, with the power to issue, on consultation with the Minister  for Finance, 
relevant orders for the implementation of the following  resolution measures : (i) an increase of 
the share capital of  an affected institution, (ii) the sale of the business of an affected institution, 
including the transfer of some or all of its asset s and liabilities, ( iii) the transfer of assets or 
liabilities to a bridge bank or to a n asset  management company  and (iv ) bail-in. The CBC will also 
                                                      
8  See paragraph 4 of this O pinion.  
ECB -PUBLIC 
4 have , as resolution authority, the power to appoint s pecial administrators to take over the 
management of the CI under re solution.  
1.7 The ECB understands that the proposed adoption of a comprehensive framework for the recovery, 
restructuring and resolution of credit and other institutions is motivated by a possible financial 
support programme for Cyprus in response to the impact  of the sovereign debt crisis on the Cypriot 
banking sector and economy.    
 
2. General observations  
2.1 Subject to its remarks in the remainder of this opinion, the ECB welcomes the draft laws  as a 
means of enhancing financial stabili ty in Cyprus. The ECB has previously been consulted on 
previous  legislation on these subjects9.  
2.2 The ECB reminds the consulting authority that according to Article 4 of Decision 98/415/EC, the 
ECB must be consulted ‘at an appropriate stage’ in the legi slative process. This implies that the 
consultation should take place at a point in the legislative process that affords the ECB sufficient 
time to examine the draft legislative provisions and adopt its opinion.   
 
3.  The draft law on resolution  
3.1 The ECB notes that , in keeping with other  national resolution frameworks  recently su bject to ECB 
consultation , Section  4 of the draft law on resolution provides for the priority of claims in the event 
of the liquidation of an institution under resolution. In particular, Section  4(3) will rank  the claims 
of uninsured depositors in liquidation ah ead of those of other general unsecured creditors . This 
appears to be motivated by financial stability and practical considerations specific to Cyprus and its 
banking sec tor. However, the ECB points out  that the pari passu status of uninsured creditors has 
been adopted in recent resolution laws in other euro area countries , including Spain and Ireland. 
Views on the impact of granting preferential ranking to depositors are highly divergent, as such 
preferential ranking may have an impact on the funding costs of banks given the greater efforts 
likely to be made by other creditors to secure their claims. T his impact c ould be somewhat 
mitigated if priority claims were only exte nded  to guaranteed deposits. G ranting priority status to 
insured  deposits is warranted , as this reduces potential losses to insured depositors of a liquidated 
institution and, as a result, the risk of bank runs as well as any excessive depletion of the dep osit 
guarantee scheme10.  
3.2 Furthermore, Section  5(6) of the draft l aw on resolution will require the CBC , in exercising its 
powers as r esolution authority, to take  all measures necessary to ensure the effective separation 
                                                      
9  See Opinions CON/2011/29 and CON/2011/93. All ECB opinions are published on the ECB’s website at 
www.ecb.europa.eu .   
10  See Opinion CON/2013/3, paragraph 4 and Opinion CON/2012/99, paragraph 8.2.  
ECB -PUBLIC 
5 between its supervisory tasks pursuant to the Central Bank of Cyprus Laws of 2002 to 200711, and 
its resolutio n tasks, as provided for in the  draft law on resolution. The ECB expects the same 
degree of separation to apply to the CBC’s monetary policy tasks, in line with the Treaty and the  
Statute of the European System of Central Banks and of the European Central Bank .  
3.3 Further , the ECB refers to the principle of financial independence which requires Member States 
not to put their NCBs in a position where they have insufficient financi al resources to carry out all 
their tasks12. The ECB expects that the new tasks assigned to the CBC under the draft l aw on 
resolution will not affect the resources it currently allocates to supervision a nd to the performance 
of its monetary policy tasks.   
3.4  Moreover, Section  6(1) of the draft l aw on resolution, entitled ‘ Conditions for the adoption of 
resolution measures ’, provides that the resolution authority may only take resolution measures in 
relation to institution s which , based on the assessment  of the CBC, as resolution authority, are no 
longer viable or are likely to no longer be viable, thereby giving rise to a credible risk that the 
institution may no longer meet its obligations and/or continue to operate as a going concern.  The 
ECB welcomes the  application , under the draft l aw on resolution, of resolution measures to non-
viable entities only, both for conceptual reasons , and for reasons of consistency with the 
Commission proposal of 6 June 2012 f or a Union  framework for bank recovery and resolut ion13. 
3.5 The ECB notes that Section 12 of the draft l aw does not exclude guaranteed deposits from the 
scope of bail -in measures. At the same time, the general principles of the draft l aw14 point to the 
conclusion that, in the event of a bail -in, guaranteed deposits would not be affected. For reasons of 
clarity, the ECB would invite the consulting authority to consider an explicit reference in 
Section  12 of the draft law to the exclusion of guaranteed deposits from the scope of an eventual 
bail-in. 
3.6 Final ly, the ECB notes that the draft law on r esolution authorises the CBC, as resolution authority, 
to issue directives or to adopt decrees , so as to give effect to its decisions.15 The draft law on 
resolution may require further provisions for the enforcement of the directives or decrees issued by 
the CBC, as resolution authority, as well as other measures envisaged to enforce the draft resolution law. In this respect, the consulting authority may also wish to insert a provision in the 
draft law on resolution, requiri ng third parties, including governmental  authorities , to recognise, 
enforce and observe the terms of such directives or decrees.  
                                                      
11  Law 138(I)/2002,  Episimi Efimerida tis Dimokratias No  3624, 19 July 2002.  
12  See ECB Convergence Report 2012, p. 25.  
13  Proposal for a directive 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 20 11/35/EC and Regulation (EU) 
No 1093/2010  (COM(2012) 280 final ). 
14  Section 3(1)(e) on the protection of depositors and Section 4(3) on the priority of guaranteed deposit claims, in conjunction with the ‘no cre ditor worse off than in insolvency’ principle set out in Section 3(2)(d).  
15  See, for instance, S ection 8(1) of the draft law on resolution.  
ECB -PUBLIC 
6  
4.  Amendme nts to the Financial C rises Management  Law  
According to Section  4 of the draft law amending the Financial C rises M anagement Law (hereinafter, ‘the 
draft c rises law’), the Cypriot Council of Ministers is to activate the Financial Crises Management L aw 
on an application from a  financial institution ‘in order to safeguard its long -term viability’. This will be 
subject to a recommendation from  the CBC, if the latter  consider s it probable that resolving the applicant 
may have more serious repercussions on the stability of the financial system and/or may result in higher 
public spending than the application of support measures under the draft c rises law. Section 4 might be 
understood as being compatible with the provision of financial support to viable and non- viable financial 
institutions  alike16. As pointed out earlier in this opinion , non-viable financial institutions  fall within the 
remit of the draft law on resolution. While the ECB agrees that the competent national authorities should 
have a margin of discretion when deciding to which institutions t o grant  State support, the interaction of 
State support schemes with  national resolution frameworks requires careful consideration to avoid legal 
ambiguities and practical implementation uncertainties at times of crisis. The ECB is of the view that the 
restructuring of a non -viable entity as a going concern (‘open bank sce nario’) instead of it s resolution as a 
gone concern (‘closed bank scenario’) should only be considered under exceptional circumstances, where 
the orderly resolution of a credit institution would have seriously damaging effects on the stability of the 
finan cial system, with heightened risk s of cross border contagion17. 
 
5.  Amendments to  the Cooperative S ocieties Laws  
Section 4 of the draft law amending the C ooperative Societies Laws inserts a new Section  49BA on the 
special liquidation of CCIs. The ECB notes  that CCIs  currently benefit from a cross -guarantee extended 
to them from the Cooperative Central Bank18. Although not explicitly stated in the draft law, the ECB 
understands that the liquidation of individual CCIs would only be possible on the assumption t hat the 
cross -guarantee c ould be lifted, al beit only temporarily  and on an individual basis .  
 
6.  The establishment and o peration of a deposit protection and resolution of credit and other 
institutions s cheme   
As explained earlier in this opinion, t he proposed Deposit Protection Fund will compensat e depositors , 
while the proposed Resolution Fund will fund resolution measures. The ECB notes with satisfaction that 
                                                      
16  Section 4 provides that support measures are conditional on (a) a financial institution applying for support to safeguard its 
long-term viability, and (b) an assessment by the CBC that the resolution of the financial institution in question, under the 
law on resolution, may have more serious repercussions on the stability of the financial system or result in higher public 
spending than the application of support measures under the Financial Crises Management Law.  
17  See Opinion CON/2013/3, paragraph 6 and Opinion CON/2012/99, paragraphs 1 and 6.2.  
18  The liabilities of the Cooperative Central Bank are, in turn, guar anteed by CCIs, as shareholders of the Cooperative 
Central Bank.  
ECB -PUBLIC 
7 whilst the Deposit Protection Fund m ay borrow from the Resolution Fund, the Resolution Fund m ay not 
borrow from the Deposit Protection Fund if the funds available to it prove insufficient for its ta sks19. The 
clear separation between the two Funds in terms of their lending capabilities is also in line with the draft 
law on resolution , according to wh ich the financing of the implementation of resolution measures falls 
within the remit of the Resolution Fund, with the Deposit Protection Fund only paying an amount equal to 
the value of the covered deposits20.  
 
7.  Amendme nts to the Special T ax on C redit I nstitutions  Law  
The draft law amending the Law on the s pecial tax on credit institutions reflect s the replacement of the 
Financial Stability Fund by a Resolution Fund and will transfer  the 25/60 of the total revenues levied 
through the imposition of the special tax, to financ e the Resolution Fund, f rom 1 January 2017 to a  
dedicated account held at the CBC. In this regard, the ECB draw s the attention of the consulting authority 
to Opinion CON/2011/2921. 
 
This opinion will be published on the ECB’s website.  
 
 
Done at Frankfurt am Main,  1 February  2013.  
 
[signed]  
 
The President of the ECB  
Mario DRAGHI  
 
                                                      
19  See Section 10(1) of the draft law on the establishment and operation of a deposit protection and resolution of credit and 
other institutions.  
20  See Sections 9(6) and 10(7) of the draft l aw on resolution.  
21  See, in particular, paragraph 2.