Opinion of the European Central Bank of 4 April 2011 on a special tax on banks and on the setting up of an independent financial stability fund (CON/2011/29)
Date: 2011-04-04
Institutions: European Central Bank
Subjects: Cyprus, bank, cooperative, financial stability, national law, sovereign wealth fund, tax

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 4 April 2011 

on a special tax on banks and on the setting up of an independent financial stability fund 

(CON/2011/29) 

Introduction and legal basis 

On 11 March 2011, the Cypriot Ministry of Finance forwarded to the European Central Bank (ECB), for 

information,  two  draft  laws  under  consideration  by  the  House  of  Representatives,  one  relating  to  the 

imposition of a special tax on banks (hereinafter the ‘draft law on a special tax on banks’) and another on 

a  fund  to  support  the  financial  system  (hereinafter  the  ‘draft  law  on  a  fund  to  support  the  financial 

system’). On 24 March 2011, the Ministry of Finance replaced the draft law on a special tax on banks and 

the draft law on a fund to support the financial system with a new draft law on the imposition of a special 

tax on credit institutions, covering both topics (hereinafter the ‘draft law’). 

The  ECB  is  competent  to  deliver  an  opinion  on  the  draft  law.  Its  competence  to  deliver  an  opinion  is 

based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and on the 

third and sixth 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 

laws relate to the Central Bank of Cyprus 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 of the draft law 

1.1  The ECB understands that, under Part I of the draft law, a temporary ad hoc tax is to be levied for 

2011  and  2012  on  all  banks  and  cooperative  credit  societies  operating  in  Cyprus,  equivalent  to 

0.095% of the deposits of their domestic and foreign depositors, with the exception of inter-bank 

deposits.  The  special  tax  in  question  is  intended  to  contribute  to  the  Government’s  short-term 

budgetary targets; it may not exceed 20% of the total taxable profits of the taxable institutions for 

2011  and  2012.  Part  of  the  revenue  to  be  collected  through  this  ad  hoc  tax  will  finance  the 

‘Independent Financial Stability Fund’ (hereinafter the ‘bank resolution fund’). The draft law will 

on the one hand address fiscal imbalances in Cyprus, by generating an estimated EUR 60 million 

1  

OJ L 189, 3.7.1998, p. 42. 

 
 
 
 
                                                 
annually  in  tax  revenue;  and  on  the  other  hand,  finance  the  establishment  of  the  bank  resolution 

fund.  

1.2  Part II of the draft law establishes a financial stability fund, by providing a fiscal buffer for banking 

sector  risks.  The  setting  up,  management,  governance,  resolution  measures,  the  amount  of 

contributions to the Fund and its operation are to be governed by regulations to be drafted by the 

Central Bank of Cyprus and adopted by the Council of Ministers. 

2.   Remarks on Part I of the draft law 

2.1  As the ECB has stated in an earlier opinion2, taxes on financial institutions should be considered in 

relation  to  the  dual  objective  of  ensuring  a  more  equitable  distribution  of  the  costs  arising  from 

their  potential  failure  between  taxpayers  and  the  financial  sector  and  of  addressing  the  risks  that 

they  pose.  Using  the  proceeds  of  any  ad  hoc  taxes  imposed  on  banks  for  general  budgetary 

purposes would be undesirable, to the extent that such taxes would place undue burdens on banks, 

hampering  the  provision  of  credit,  with  a  knock-on  effect  on  growth  in  the  real  economy.  This 

might result in extra charges for their customers and may also induce certain banks to cut back on 

their activities, leading to a reduction in the availability of credit and creating uncertainty for banks, 

with a detrimental effect on the banking sector’s long term growth.  

2.2 

In  the  light  of  the  above,  the  ECB  recommends  a  comprehensive  impact  assessment  of  the 

proposed measure, to ensure that the public benefit from its imposition will outweigh any potential 

negative implications for banks, their customers and the economy.  

2.3  The ECB notes that while an institution’s liabilities represent one of the most reliable indicators of 

the amounts necessary for a bank resolution, the choice of an institution’s deposits as the basis for 

calculating  the  special  tax  to  be  levied  from  it,  in  conjunction  with  the  20%  profits-linked  cap, 

could  unduly  penalise  profitable  institutions  with  a  deeper  retail  deposit  base  compared  to  their 

competitors. This would unduly reward risk-taking that is not backed by a solid retail deposit base.  

3.   Remarks on Part II of the draft law  

3.1  According  to  the  European  Council’s  conclusions3,  Member  States  should  introduce  systems  of 

levies  and  taxes  on  financial  institutions  to  ensure  fair  burden-sharing  and  to  set  incentives  to 

contain systemic risk. Such levies or taxes should be part of a credible resolution framework. More 

specifically, setting up bank resolution funds, financed by levies, has already been addressed by the 

European  Commission,  which  proposed  that  all  Member  States  should  set  up  ex  ante  resolution 
funds as part of the planned EU crisis management and resolution framework4. The ECB supports 

2   
3  
4  

See Opinion CON/2010/62, paragraph 3.2. 
See conclusions of the European Council of 17 June 2010. 
See  European  Commission,  Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the 
European Economic and Social Committee and the European Central Bank, ‘Bank Resolution Funds’, COM(2010) 254 

2 

 
 
                                                 
the  Commission’s  proposal  and  considers  that  resolution  funds  could  provide  a  useful  means  to 

support bank resolution, based on clear, stringent and properly communicated conditions. 

3.2 

In  particular,  the  primary  purpose  of  resolution  funds  should be  to  mitigate  the  effects  of  a  bank 

failure  for  the  different  stakeholders,  including  customers,  the  real  economy  and  taxpayers.  In 

particular, this implies that resolution funds should not be used for any form of bailout or to avoid a 

bank’s  insolvency.  The  existence  of  resolution  funds  may,  nonetheless,  raise  moral  hazard 

concerns. Therefore, stringent conditions for their use need to be defined, including no automatic 

correspondence  between  the  pay-in  -  that  is,  the  contribution  to  the  fund  -  and  the  pay-out,  and 

decisions  about  the  use  of  the  funds  should  reside  with  independent  and  accountable  public 

authorities. Failure to establish dedicated resolution funds may result in increasing the dependence 

of the financial sector on public funds in times of stress and also further reinforce the risk of moral 

hazard.  

3.3.  When  adopting  resolution  tools  for  financial  institutions  –  as  in  the  present  case  in  setting  up  a 

bank  resolution  fund  –  Member  States  should  act  in  a  coordinated  manner  to  avoid  significant 

differences  having  counterproductive  effects.  The  ECB  therefore  welcomes  the  consulting 

authority’s  intention  of  ensuring  that  Union  law,  the  European  Commission’s  recommendations 

and  the  best  practices  of  other  Member  States  are  to  be  taken  into  account  when  drafting  the 
regulations  referred  to  in  draft  Article  12(4)(b)5.  While  the  ECB  cannot  appraise  the  bank 

resolution fund before the regulations have been drafted and submitted to it for its assessment, it 

can nevertheless provide some general comments concerning their scope and structure.  

3.4.  The regulations should explicitly set out the different measures that the bank resolution fund will 

cover.  In  particular,  the  regulations  should  specify  how  the  funds  collected  are  to  be  held  and 

managed  and  under  which  conditions  they  are  to  be  used.  Furthermore,  the  regulations  should 

address the objectives of the proposed bank resolution fund, which, as already stated above, should 

be to mitigate the effects of a failure on different stakeholders by trying to maximize the value of 

remaining  assets  and  to  facilitate,  if  possible,  a  quick  return  to  their  productive  use.  To  avoid 

creating  incentives  for  moral  hazard,  the  regulations  should  expressly  stipulate  that  any  monies 

paid  out  of  the  bank  resolution  fund  should  not  be  used  for  any  form  of  bailout  or  to  avoid  a 

bankruptcy.  

3.5  Concerning the issue of the bank resolution fund’s governance structure, the ECB stresses the need 

for  the  authorities  in  Cyprus  to  ensure  that  the  proposed  bank  resolution  fund’s  management  is 

entrusted to those national authorities that would be de jure or de facto responsible for resolving 

ailing financial entities, for its management committee to operate as an independent executive body 

and for the fund’s functional independence from the Government to be statutorily enshrined. 

final,  26.5.2010  and  European  Commission  Communication  from  the  Commission  to  the  European  Parliament,  the 
Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank 
‘An EU Framework for Crisis Management In the Financial Sector’, COM(2010) 579 final, 20.10.2010.  
Article 12(4)(c)(i) of the draft law. 

5  

3 

                                                                                                                                                             
3.6  Finally,  the  regulations  should  cater  for  replenishing  the  resolution  fund  where  part  or  all  of  its 

funds  are  used  to  support  an  ailing  bank’s  liabilities.  They  should  also  cater  specifically  for  the 

fund’s winding up. 

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

Done at Frankfurt am Main, 4 April 2011. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

4