Opinion of the European Central Bank of 27 January 2006 at the request of the Central Bank of Cyprus on a draft law amending the Central Bank of Cyprus Laws of 2002 and 2003 (CON/2006/4)
Date: 2006-01-27
Institutions: European Central Bank
Subjects: Cyprus, audit, central bank, closing of accounts, foreign-exchange reserves, institutional activity, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 27 January 2006  

at the request of the Central Bank of Cyprus 

on a draft law amending the Central Bank of Cyprus Laws of 2002 and 2003 

(CON/2006/4) 

On 30 November 2005 the European Central Bank (ECB) received a request from the Central Bank of 

Cyprus  (CBC)  for  an  opinion  on  a  draft  law  amending  the  Central  Bank  of  Cyprus  Laws  of  2002  and 

2003 (hereinafter the ‘draft law’).  

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  the  first,  third,  fourth  and  fifth  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  authorities  regarding  draft  legislative  provisions1,  as  the  draft  law  relates  to  currency 

matters, a national central bank (NCB), the collection of statistics and payment and settlement systems. 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  

General remarks  

1.1  The  ECB  welcomes  the  draft  law,  the  main  objective  of  which  is  to  make  the  Central  Bank  of 

Cyprus  Laws  of  2002  and  2003  (hereinafter  the  ‘CBC  Law’)  compatible  with  the  Treaty 

establishing  the  European  Community  and  the  Statute  of  the  European  System  of  Central  Banks 

and of the European Central Bank, thereby laying a firm foundation for the legal integration of the 

CBC into the Eurosystem when Cyprus adopts the euro. 

2 

Audit Office and Auditor General 

2.1  Section 52 of the draft law amends Section 60(1) of the CBC Law (‘Audit of the annual financial 

statements’)  to  provide  that  ‘[t]he  annual  financial  statements  of  the  Bank  shall  be  audited  by 

independent  external  auditors,  in  accordance  with  the  provisions  of  Article  27  of  the  Statute’. 

Article  27  of  the  Statute  provides  that  the  accounts  of  NCBs  of  the  Member  States  that  have 

adopted  the  euro  (hereinafter  the  ‘Eurosystem  NCBs’)  shall  be  audited  by  auditors  that  are:  (i) 

independent;  and  (ii)  external.  These  requirements  mean  that  the  auditors  must  be  independent 

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
 
                                                      
from  and  external  to:  (i)  the  ECB;  and  (ii)  the  NCBs  and  their  shareholders.  The  established 

practice  is  to  appoint  private  auditors  or  firms  of  auditors  as  external  auditors  for  Eurosystem 

NCBs with a specific independent audit mandate for a certain period of time. 

2.2  The  ECB  understands  that  the  CBC’s  annual  financial  statements  are  currently  audited  by  the 

Cypriot  Auditor  General  and  that,  in  accordance  with  Article  116(4)  of  the  Cypriot  Constitution, 

the Auditor General’s annual report on the exercise of his functions and duties is submitted to the 

Cypriot  President,  who  causes  it  to  be  laid  before  the  House  of  Representatives.  The  ECB  notes 

that  under  Article  115  of  the  Cypriot  Constitution,  the  Audit  Office  is  an  independent  public 

authority, and the Auditor General is not to retire or to be removed from office except on the same 

grounds and in the same manner as a judge of the Supreme Court. Pursuant to Article 116(1) of the 

Cypriot  Constitution,  the  Auditor  General’s  task  is  to  control,  on  behalf  of  the  Republic,  ‘all 

disbursements  and  receipts  and  audit  and  inspect  all  accounts  of  moneys  and  other  assets 

administered, and of liabilities incurred, by or under the authority of the Republic...’. It follows that 

notwithstanding the Auditor General’s independence as enshrined in the Cypriot Constitution, the 

Audit Office is not an external auditor within the meaning of Article 27.1 of the Statute, but rather 

an independent Cypriot public authority. 

2.3 

In the light of the above, a party other than the Audit Office will need to be appointed as the CBC’s 

external auditor in the future. However, this will not prevent the Audit Office from continuing to 

perform a control function, provided that its auditing activities: (i) do not interfere with the review 

of  European  System  of  Central  Banks  (ESCB)  related  tasks  of  the  CBC  to  be  undertaken  by  the 

CBC’s  independent  external  auditors  to  be  approved  by  the  Council  of  the  European  Union  in 
accordance with Article 27 of the Statute; and (ii) do not jeopardise the CBC’s independence2. The 

ECB  notes  in  this  regard  that  certain  Eurosystem  NCBs  are  currently  subject  to  such  additional 

external auditing outside the scope of Article 27 of the Statute. 

3 

Application of minimum reserve requirements to cooperative credit societies 

3.1  The draft law amends Section 2 of the CBC Law (‘Interpretation’) by, inter alia, inserting a new 

definition  of  the  term  ‘credit  institution’  that  includes  cooperative  credit  societies,  banks  and 

electronic  money  institutions.  The  ECB  welcomes  this  extended  definition  of  ‘credit  institution’ 
which is consistent with a number of recent ECB opinions3, and is designed to already at this time 

allow for the future incorporation of Cypriot cooperative credit societies, which have been granted 

2  

3  

Cf.  paragraphs  5  to  7  of  ECB  Opinion  CON/2002/22  of  2  September  2002  at  the  request  of  the  Swedish  Ministry  of 
Finance on a draft legislative proposal establishing the National Audit, including proposed amendments to the Sveriges 
Riksbank Act (1988:1385) .  
Cf. paragraph 15 of ECB Opinion CON/2005/35 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  and  paragraphs  10  to  14  of 
ECB Opinion CON/2005/8 of 1 April 2005 at the request of Lietuvos bankas on certain draft rules on minimum reserve 
requirements for credit institutions. 

2 

 
                                                      
a derogation from the application of the Consolidated Banking Directive4 until 31 December 20075, 

into the CBC’s minimum reserve regime. This amendment is also reflected in the proposed revision 

of Section 41(1) of the CBC Law. The incorporation of cooperative credit societies into the CBC’s 

minimum  reserve  regime  would  smoothen  their  transition  to  the  Eurosystem’s  minimum  reserve 

framework. 

4  Monetary financing safeguards 

4.1  Section 46(3) of the CBC Law (‘Deposits’) provides that the CBC is entitled to grant advances or 

loans to banks against adequate collateral for fixed periods and for purposes which the CBC may 

designate. The ECB understands that the purpose of this provision is to provide for the possibility 

of emergency liquidity assistance. The ECB notes that, while similar provisions can be found in the 

statutes of several NCBs, a proviso should be added to Section 46(3) that such advances or loans 

should  be  provided  without  prejudice  to  the  requirements  derived  from  the  participation  of  the 

CBC in the ESCB. Besides, compliance with the prohibition on monetary financing laid down in 

Article 101 of the Treaty must be ensured. 

4.2  Section  49(1)  of  the  CBC  Law  (‘Prohibition of  credit  facilities  to the  Government’) provides  for 

the  prohibition  on  monetary  financing,  without,  however,  referring  to  the  relevant  provisions  of 

Community  law.  The  CBC  Law  should  state  that  the  prohibition  on  monetary  financing  derives 

from  Article  101  of  the  Treaty  and  that  the  definitions  for  the  application  of  this  prohibition  are 
specified by the Council of the European Union in accordance with the Treaty6. Alternatively, this 

Section could be deleted, since the relevant provisions of Community law, namely Article 101 of 

the Treaty and Regulation (EC) No 3603/93, are directly applicable in the Member States. 

5 

Technical comments 

5.1 

Statistical reporting requirements 

The  draft  law  amends  Section  64  of  the  CBC  Law  (‘Obligation  to  report  data  for  the purpose  of 

balance of payments’) by, inter alia, inserting a proviso recognising the priority to be accorded to 

4  

5  

6  

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 institutions, OJ L 126, 26.5.2000. Directive as last amended by Directive 2004/39/EC 
(OJ L 145, 30.4.2004, p. 1.) 
Cf.  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 adjustments to the Treaties on which 
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 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.’  
See Article 103(2) of the Treaty and Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions 
for the application of the prohibitions referred to in Articles 104 and 104b(1) of the Treaty, OJ L 332, 31.12.1993, p. 1. 

3 

 
 
 
                                                      
the ECB’s statistical reporting requirements under Article 5 of the Statute. The ECB takes the view 

that this general proviso may instead be inserted into Section 63 of the CBC Law (‘Obligation to 

report data to the Bank’), as the priority for ECB statistical reporting requirements relates not only 

to  balance  of  payment  statistics  and  to  the  financial  accounts  of  the  individual  sectors  of  the 

economy,  but  also  to  the  entire  range  of  statistical  information  in  which  the  ECB  has  an  interest 

and  which  is  covered  by  Section  63  of  the  CBC  Law.  For  the  rest,  the  ECB  agrees  with  the 

proposed changes to the CBC’s statistical reporting requirements.  

5.2  Payment and settlement systems 

5.2.1  The ECB notes that although the draft law abolishes the Cypriot Monetary Policy Committee and 

provides  that  the  CBC’s  Governor  has  the  exclusive  competence  to  carry  out  the  tasks  and  to 

exercise the powers conferred upon the CBC by the Treaty and the Statute, it does not expressly 

provide  where  the  Monetary  Policy  Committee’s  current  powers  with  regard  to  the  oversight  of 

payment  and  settlement  systems  will  vest  when  Cyprus  adopts  the  euro.  In  the  interests  of 

transparency  and  legal  certainty,  the  ECB  would  therefore  invite  the  CBC  to  consider  expressly 

vesting the power to oversee payment and settlement systems in the CBC’s Governor or its Board 

of Directors. 

5.2.2  The draft law amends Section 6(2)(g) of the CBC Law to state that one of the CBC’s main tasks is 

the  promotion,  regulation  and  oversight  of  the  smooth  functioning  of  payment  and  settlement 

systems.  For  reasons  of  clarity,  the  ECB  suggests  that  this  provision  should  refer  to  clearing 

systems in addition to payment and settlement systems. 

5.3  Monetary policy instruments 

5.3.1  The  draft  law  inserts  a  new  Section  42  into  the  CBC  Law  providing  that  ‘[t]he  Bank  may  issue 

securities for the purpose of intervening in the money market’. The ECB notes that the issuance of 

debt instruments for monetary policy purposes by individual NCBs after their Member States have 

adopted  the  euro  is  subject  to  the  Eurosystem’s  rules  on  monetary  policy  instruments  and 

procedures, something which the CBC Law should clearly reflect. 

5.3.2  Regarding Section 41 of the CBC Law (‘Requirement of banks to maintain assets with the Bank’), 

as  amended  by  the  draft  law,  the  ECB  would  invite  the  CBC  to  consider:  (i)  referring  only  to 

‘minimum reserves’ in the proposed new text in the interests of consistency and legal certainty, as 

Section 35 of the draft law currently uses the terms ‘minimum reserves’ and ‘mandatory reserves’ 

interchangeably; and (ii) inserting a reference to Article 19 of the Statute or otherwise amending 

the  wording  of  the  new  Section  41  of  the  CBC  Law  in  the  interests  of  legal  certainty,  as  the 

proposed wording of Section 36 of the draft law is too generic and does not specify the source of 

the rules to which it refers. 

4 

  
 
5.4  References to the Cyprus pound 

The  draft  law  amends  Section  28  of  the  CBC  Law  to  replace  references  in  the  CBC  Law  to  the 

Cyprus pound with references to the ‘euro’. The ECB considers that this provision is unnecessary 

as all references in Cypriot legal acts and other legal instruments to the Cypriot national currency 

will  automatically  be  understood  as  references  to  the  single  currency  from  the  date  that  Cyprus 

adopts the euro in accordance with Article 3 of Council Regulation (EC) No 974/98 of 3 May 1998 

on the introduction of the euro7. 

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

Done at Frankfurt am Main, 27 January 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

7  

OJ L 139, 11.5.1998, p. 1. Regulation as amended by Regulation (EC) No 2596/2000 (OJ L 300, 29.11.2000, p. 2). This 
conclusion  is  also  reinforced  by  the  wording  of  recital  7  to  Council  Regulation  (EC)  No  1103/97  of  17  June  1997  on 
certain  provisions  relating  to  the  introduction  of  the  euro,  OJ  L  162,  19.6.1997,  p.  1.  Regulation  as  amended  by 
Regulation (EC) No 2595/2000 (OJ L 300, 29.11.2000, p. 1). 

5