Opinion of the European Central Bank of 23 August 2006 at the request of the Cypriot Cooperative Societies’ 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)
Date: 2006-08-23
Institutions: European Central Bank
Subjects: Cyprus, approximation of laws, cooperative, financial legislation, financial stability, financial supervision, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 23 August 2006  

at the request of the Cypriot Cooperative Societies’ 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 (hereinafter the ‘YEASE’) for an opinion on a draft 

regulatory decision on the terms and conditions for the affiliation of cooperative credit institutions with 

the Cooperative Central Bank (hereinafter 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  consultation  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 European 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 Directive on the taking up and pursuit of the business 

institutions2  (the  ‘recast  Banking  Directive’), 

of  credit 
to  CCIs  from 
1 January 20083. The ECB notes that, whilst the recast Banking Directive does not elaborate on the 

that  will  apply 

1  
2  

3  

OJ L 189, 3.7.1998, p. 42. 
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). 
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 adjustments to the Treaties on which 

 
 
 
 
                                                      
procedure for the affiliation of cooperative societies 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  Cooperative  Societies’  Law, 

CCIs  will  be  entitled  to  pursue  their  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  terminating  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  engaging providing core banking services to their 

members and specialising in mortgage lending and small retail loans. According to the information 

provided by the consulting authority, CCIs represent a quantitatively important component of the 

domestic financial system, jointly accounting for about 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  parallel  regulatory  and  supervisory  regime  for  CCIs, 

based  on  the  Law  on  Cooperative  Societies,  the  YEASE  being  the  independent  authority 

responsible for the authorisation, prudential supervision and regulation 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  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’. 
Under Article 3 of the recast Banking Directive, credit institutions 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. Moreover such affiliated credit institutions 
may also be exempted from the provisions of Articles 9 and 10 and also Title V, Chapter 2, Sections 2 to 6 and Chapter 3 
of the Directive provided that, without prejudice to the application of those provisions to the central body, the whole as 
constituted  by  the  central  body  together  with  its  affiliated  institutions  is  subject  to  those  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. 
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 fulfilled. 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  affiliated  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  institutions  are  monitored  as  a  whole  on  the  basis  of  consolidated  accounts;  and 
(3) the  management  of  the  central  body  is  empowered  to  issue  instructions  to  the  management  of  the  affiliated 
institutions.  
The framework underlying such affiliation has already been defined by the Cooperative 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. 

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5  

6  

2 

 
                                                                                                                                                                           
currently  undergoing  a  consolidation  process  to  help  the  merged  entities  improve  their  efficiency 

and the quality of their services.  

2.2  The ECB welcomes the draft decision as a further 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  all  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  recital  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  SKT’s  intervention  in  any  CCI  and  in  general  to 
support  all  the  SKT’s  activities8.  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  established,  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 appropriate involvement of the Central Bank of Cyprus 

(CBC) in decisions on the SKT’s support of CCIs might 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  providing  for  an  adequate  exchange  of  information 

mechanism between the CBC and the YEASE. 

3.3  As stated above, 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  all  off-balance-sheet  liabilities  and 

commitments  excluding,  subject  to  conditions,  liabilities  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  legal  certainty,  the  relationship  between  these  two 

provisions should be clarified. 

7  

8  

9  

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 reserve regime on which the ECB adopted Opinion CON/2006/4 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. 
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. 
The Deposit Protection Fund established under the terms of the Cooperative Societies’ (Establishment and Operation of 
the Deposit Protection Scheme) Rules of 2000 and 2004. 

3 

 
 
                                                      
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  and  2003  and  of  the  Laws  on  banking  of  1997  to 

(No 2) 2004. Some further clarification 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 

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