Opinion of the European Central Bank of 10 October 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 (CON/2005/35)
Date: 2005-10-10
Institutions: European Central Bank
Subjects: Cyprus, foreign-exchange reserves, monetary policy, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 10 October 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  

(CON/2005/35) 

Introduction 

1. 

On 8 August 2005 the European Central Bank (ECB) received a request from the Central Bank of 

Cyprus (CBC) for an opinion on a draft directive on the maintenance of minimum reserves with the 

Central Bank of Cyprus (hereinafter the ‘draft directive’).  

2. 

The  ECB’s  competence 

to  deliver  an  opinion 

is  based  on  Article  2(2)  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 directive relates to an instrument of 

monetary policy, i.e. minimum reserves, of a non-participating Member State. 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.  

3. 

The purpose of the draft directive is to amend the CBC’s minimum reserve regime with a view to 

the  future  application  of  the  ECB’s  minimum  reserve  requirements  in  Cyprus  on  adoption of  the 

euro. The draft directive lays down detailed rules on, inter alia, (a) the scope of application of the 

obligation to hold minimum reserves with the CBC, including exemptions from that obligation; and 

(b)  the  reserve  base,  the  reserve  ratios  and  the  procedure  for  calculating  minimum  reserves  and 

notifying  banks  and  designated  financial  institutions  thereof;  and  (c)  the  periods  over  which 

compliance  with  reserve  requirements  will  be  calculated;  and  (d)  the  remuneration  to  be  paid  on 

minimum  reserves  held  by  banks  and  designated  financial  institutions  with  the  CBC;  and  (e)  the 

infringement  procedure  and  sanctions  to  be  imposed  for  breach  of  the  CBC’s  minimum  reserve 

requirements.  

Legal framework and general observations 

4. 

The  legal  framework  underlying  the  Eurosystem’s  minimum  reserve  regime  is  laid  down  in 

(i) Article  19  of  the  Statute  of  the  European  System  of  Central  Banks  and  the  European  Central 

Bank; (ii) Council Regulation (EC) No 2531/98 of 23 November 1998 concerning the application 

1  

OJ L 189, 3.7.1998, p. 42. 

 
 
 
                                                      
of  minimum  reserves  by  the  European  Central  Bank2;  and  (iii)  Regulation  ECB/2003/9  of 
12 September 2003 on the application of minimum reserves3. The purpose of this legal framework, 

which  is  directly  applicable  to  and  binding  on  euro  area  credit  institutions,  is  to  ensure  that  the 

terms  and  conditions  of  the  Eurosystem’s  minimum  reserve  regime  are  uniformly  applied 

throughout the euro area.  

5. 

First, in the course of preparing for the introduction of the euro in Cyprus, the CBC will need to 

examine  whether  the  Eurosystem’s  minimum  reserve  requirements  can  be  effectively  fulfilled  in 

Cyprus  and  whether  all  necessary  measures  have  been  adopted  to  ensure  that  the  competent 

authorities  have  the  legal  power  to  assist  and  cooperate  with  the  ECB  on  the  collection  and 

verification of the information necessary for the operation of the Eurosystem’s  minimum reserve 

regime. The ECB understands that the CBC is currently reviewing its Statutes to inter alia ensure 

that it will be in a position to meet the Eurosystem’s requirements, also with regard to minimum 

reserves.   

6. 

Second, because the Eurosystem’s minimum reserve regime is highly dependent for its data on the 

Eurosystem’s  statistical  reporting  regime  and  because  any  changes  to  this  regime  would  have 

implications for minimum reserve holdings, the CBC is advised that a key element for achieving 

consistency  between  the  Cypriot  minimum  reserve  regime  and  that  of  the  Eurosystem  is  the 

incorporation  into  Cypriot  law  of  statistical  reporting  requirements  corresponding  to  those  of  the 

Eurosystem  and  their  correct  application.  A  recent  general  assessment  by  the  ECB  of  the  CBC’s 

statistical  preparedeness  suggests  a  convergence  between  the  CBC’s  statistical  reporting 
requirements and those of the ECB4. 

7. 

Third,  the  ECB  may  have  to  consider  introducing  certain  transitional  arrangements  for  the 

application  of  the  Eurosystem’s  minimum  reserve  regime  on  the  introduction  of  the  euro  in 
Cyprus5  such  as,  for  instance,  a  transitional  maintenance  period  for  credit  institutions  located  in 

Cyprus to meet the ECB’s minimum reserve requirements.  

8.  Without prejudice to these general observations, the ECB welcomes the CBC’s initiative to review 

the  Cypriot  minimum  reserve  regime  with  a  view  to  bringing  it  into  line  with  that  of  the 

Eurosystem. Although non-participating Member States retain their powers in the field of monetary 

policy,  it  is  nevertheless  beneficial  for  them  gradually  to  achieve  consistency  with  Eurosystem 

standards so that credit institutions operating in their territory can already prepare for the minimum 

reserve requirements that will apply once the euro has been introduced.  

2  
3  
4  

5  

OJ L 318, 27.11.1998, p. 1. 
OJ L 250, 2.10.2003, p. 10. 
See ECB Opinion CON/2005/13 of 30 May 2005 at the request of the Central Bank of Cyprus on a draft directive on the 
reporting by monetary financial institutions of their monthly balance sheets. 
As in the case of Regulation ECB/2000/11 of 2 November 2000 concerning transitional provisions for the application of 
minimum reserves by the European Central Bank following the introduction of the euro in Greece (OJ L 291, 18.11.2000, 
p. 28).  

2 

 
                                                      
Technical comments 

9. 

Section 13 of Part V of the draft directive effectively restricts a credit institution’s ability to revise 

its  data  on  the  reserve  base  or  on  the  required  reserves,  by  only  allowing  one  business  day  for 

revisions  to  be  communicated  to  the  CBC.  Noting  the  role  of  timely  revisions  in  improving  the 

quality  of  minimum  reserve  related  data,  the  ECB  invites  the  CBC  to  consider  extending  the 

deadline in Section 13, Part V of the draft directive for the communication by credit institutions to 

the CBC of data revisions. 

10.  The second sentence of Section 8 of Part III of the draft directive appears to be misleading. This 

sentence  concerns  the  standard  deduction  applicable  in  cases  where  the  actual  amount  of  debt 

securities  issued  with  an  agreed  maturity  of  up  to  two  years  and  held  by  other  Cypriot  credit 

institutions  cannot  be  proved.  It  should  be  noted  that  the  standard  deduction  mentioned  in  this 

section is not applicable to the whole of the reserve base (deposits and debt securities issued) but 

only  to  the  total  outstanding  amount  of  debt  securities  issued  with  an  agreed  maturity  of  up  two 

years.  

11.  Finally,  the  ECB  notes  that  the  definition  of  winding-up  proceedings  in  Section  2  of  the  draft 
directive appears to disregard the fact that Part XIII of the Cypriot Banking Law6 (hereinafter the 

‘Banking Law’) specifically regulates such proceedings in the case of banks and electronic money 

institutions. The CBC is therefore invited to reconsider the draft directive’s definition of winding-
up  proceedings,  which  currently  refers  to  the  Cypriot  Companies  Law7  instead  of  referring,  as  it 

should, to the lex specialis provisions of Part XIII of the Banking Law.  

12.  Without  prejudice  to  the  preceding  observations,  the  ECB  considers  that  the  draft  directive  is 

otherwise generally consistent with Regulation ECB/2003/9. 

Applicability of minimum reserve requirements to cooperative credit societies  

13.  The  ECB  notes  that  the  draft  directive  applies  the  CBC’s  minimum  reserve  requirements  to  all 

credit  institutions  operating  in  Cyprus  except  for  cooperative  credit  institutions  (hereinafter 

‘cooperatives’)  which,  unlike  other  credit  institutions  operating  in  Cyprus,  are  not  supervised  by 

the CBC. Moreover, the ECB notes that the explanatory memorandum to the draft directive states 

that cooperatives ‘may be incorporated in the CBC’s minimum reserve system at a later stage’.  

14.  Concerning  the  applicability  of  the  Eurosystem’s  minimum  reserve  requirements  to  cooperatives 

on 

the 

introduction  of 

the  euro 

in  Cyprus, 

the  ECB  notes 

that  Article  2(1)  of 

Regulation ECB/2003/9  provides  that  the  following  categories  of  institutions  are  subject  to 

minimum  reserve  requirements  (a)  credit  institutions,  as  defined  in  the  first  subparagraph  of 

Article 1(1)  of  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  institutions8 

6  
7  
8  

N.66(I)/1997, Ar.3168, 18.7.97, as amended. 
Cap.113, as amended. 
OJ L 126, 26.5.2000, p. 1. 

3 

 
                                                      
(hereinafter the ‘Consolidated Banking Directive’), other than participating national central banks 

(NCBs);  and  (b)  branches  of  credit  institutions,  as  defined  in  Article  1(3)  thereof,  other  than 

participating NCBs. The first subparagraph of Article 1(1) of the Consolidated Banking Directive 

defines  a  credit  institution  as  ‘an  undertaking  whose  business  is  to  receive  deposits  or  other 

repayable  funds  from  the  public  and  to  grant  credits  for  its  own  account’.  Article  2(3)  of  the 

Consolidated  Banking  Directive  exempts  certain  institutions  from  its  scope  of  application 

including, in particular, NCBs, post office giro institutions and specific national institutions.  

15.  The ECB notes that cooperatives have been granted a derogation from the scope of application of 
the Consolidated Banking Directive until 31 December 20079. However, this temporary derogation 

does  not  automatically  entail  their  exemption  from  the  Eurosystem’s  minimum  reserve 

requirements that were established for monetary policy purposes. Indeed, the ECB considers that, 

for  the  purposes  of  deciding  on  the  applicability  of  the  Eurosystem’s  minimum  reserve 

requirements to an institution or group of institutions, it is necessary to test whether that institution 

or  institutions  fulfil  the  criteria  laid  down  in  the  first  subparagraph  of  Article  1(1)  of  the 

Consolidated  Banking  Directive,  i.e.  whether  their  business  is  to  (i)  receive  deposits  or  other 

repayable funds from the public; and (ii) grant credits for their own account. Furthermore, the ECB 

notes that cooperatives are treated as credit institutions for the purposes of Cypriot law, although 

they are not subject to the provisions of the Banking Law. Therefore, the ECB supports the CBC’s 

intention,  as  indicated  in  the  explanatory  memorandum  to  the  draft  directive,  to  already  consider 

incorporating cooperatives into the CBC’s minimum reserve regime, as this would smoothen their 

transition to the Eurosystem’s minimum reserve framework.  

16.  This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 10 October 2005. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

9  

Annex VII to the Act of Accession (entitled’ List referred to in Article 24 of the Act of Accession: Cyprus’), 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 Societies, 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  Commission  at  the  beginning  of  each  year  about  the  number  of  non-conforming  Cooperative  Credit  and 
Savings Societies which continue to be excluded, as well as the market share that they represent.’ 

4