Opinion of the European Central Bank of 6 November 2012 on government guarantees for credit institutions (CON/2012/85)
Date: 2012-11-06
Institutions: European Central Bank
Subjects: Cyprus, State aid, bond, credit institution, financial stability, guarantee, loan, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 6 November 2012 

on government guarantees for credit institutions 

(CON/2012/85) 

Introduction and legal basis 

On 17 October 2012, the European Central Bank (ECB) received a request from the Cypriot Ministry of 

Finance for an opinion on a draft law establishing a scheme for the granting of government guarantees to 

Cypriot  credit  institutions  (hereinafter  the  ‘draft  law’)  and  an  accompanying  draft  decree  in  the  same 

matter (hereinafter the ‘draft decree’ and, jointly, ‘the draft legal acts’). 

The ECB’s 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 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 provisions,1 as the draft law relates 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 legal acts  

1.1   According  to  the  explanatory  memorandum  to  the  draft  law,  its  purpose  is  to  establish  a 

government guarantee scheme for loans and bonds issued by credit institutions, thereby enhancing 

their  access  to  liquidity  and  helping  them  overcome  the  impact  of  the  ongoing  economic  crisis. 

Credit  institutions  have  six  months  from  the  entry  into  force  of  the  draft  decree  within  which  to 

request support in the form of a government guarantee. Government guarantees are to be granted 

for a term of no less than three months and no more than five years. The scheme’s total budget is 

EUR 6 billion, which the Cypriot authorities consider sufficient to cover the needs of the Cypriot 

banking  sector.  Government  guarantees  are  to  be  provided  against:  (a)  the  payment  of  an 

appropriate  commission  by  the  requesting  credit  institution;  and  (b)  adequate  collateral  for  the 

benefit  of  the  Cypriot  Government,  except  in  extraordinary  cases,  and  based  on  the  reasoned 

opinion of the Central Bank of Cyprus. 

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
                                                      
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1.2  The  draft  decree  lays  down  rules  for  the  scheme,  the  terms  for  the  granting  of  government 

guarantees and their pricing, the type and adequacy of eligible collateral, the criteria concerning the 

allocation of the government guarantees and compliance  monitoring and coordination procedures 

relevant to the draft law.     

2. 

General observations  

2.1  The ECB welcomes the draft legal acts as a means of enhancing financial stability in Cyprus.  

2.2  The ECB reminds the consulting authority that government guarantees for bank debt should, when 

implemented:  (a)  address  the  funding  problems  of  liquidity-constrained  solvent  banks  by 

improving  the  functioning  of  the  market  for  bank  debt  of  longer-term  maturity;  (b)  preserve  the 

level  playing  field  among  financial  institutions  and  avoid  market  distortions;  and  (c)  ensure 
consistency in the management of Eurosystem liquidity2. With the above general considerations in 

mind, the ECB has the following specific observations to make on the draft legal acts. 

3.  

Interaction with other legislation 

3.1  

Interaction with the Law on the management of financial crises 

In  a  previous  opinion,  the  ECB  commented  on  certain  draft  legislative  provisions,  which  are 
similar to those set out in the draft legal acts3. The provisions in question have since been enacted 
in the Law on the management of financial crises (hereinafter the ‘Law’)4. It follows from Section 

4(1) of the Law that the Ministerial Council may, following a recommendation of the Central Bank 

of Cyprus, take any of a number of support measures in relation to troubled financial institutions, 

including  granting  government  guarantees  for  loans  to  be  taken  by  financial  institutions  and/or 

government guarantees for bonds to be issued by financial institutions, at an appropriate price. In 

the interests of legal certainty, and with a view to avoiding legislative duplication, the consulting 

authority may wish to carefully consider the interaction between the Law and the draft legal acts. 

3.2  

Interaction with forthcoming legislation 

The  ECB  notes  that  the  choice  of  the  type  and  eligibility  criteria  of  collateral,  as  well  as  the 

haircuts  applied,  may  influence  the  restructuring  activities  envisaged  by  troubled  Cypriot  credit 

institutions, in particular as regards any decision to dispose of certain assets or wind down certain 

activities. In light of the long duration of guarantees issued under the draft law and the prospective 

restructuring of banks in receipt of state aid, the consulting authority may therefore wish to ensure 

2  

3  
4  

In  this  regard  see  most  recently  Opinion  CON/2012/4,  paragraph  3.  All  ECB  Opinions  are  published  on  the  ECB’s 
website at www.ecb.europa.eu  
See Opinions CON/2009/12 and CON/2011/93. 
Law 200(I)/2011. 

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that the draft decree would not interfere with the aims of any forthcoming legislation designed to 

facilitate the restructuring of credit institutions and the wider banking system. 

4. 

Eligible credit institutions and scope of guarantees 

4.1  The ECB understands that, with the exception of branches of credit institutions registered outside 

Cyprus, which are ineligible to benefit from government guarantees, the draft law applies to credit 

institutions  incorporated  in  Cyprus  and  licensed  by  the  Central  Bank  of  Cyprus  or  the 
Commissioner5, including the Cyprus-based subsidiaries of foreign credit institutions6. In addition, 

the  ECB  understands  that  the  government  guarantees  will  be  allocated  on  the  basis  of  domestic 

deposits and loans (excluding interbank deposits and loans) irrespective of the nationality or place 
of  residence  of  the  depositors  or  borrowers7.  The  ECB  welcomes  the  non-discriminatory 

application of the draft law, which is conducive to maintaining a level playing field in the treatment 

of domestic and foreign financial institutions in Cyprus. The draft law is, in this respect, also in line 
with the Commission’s guidance on the eligibility criteria for beneficiary institutions8. 

4.2  Moreover, the ECB understands that guarantees can only be issued to cover loans made to Cypriot 

credit  institutions  and  bonds  issued  by  those  credit  institutions,  to  the  exclusion  of  interbank 
deposits,  as  well  as  subordinated  or  collateralised  liabilities  (such  as  covered  bonds)9.  The  ECB 

reiterates  its  view  that  State  guarantees  should  not  cover  interbank  deposits,  since  this  could:  (a) 

entail a  substantial distortion in the various national segments of the euro area  money  market by 

potentially increasing, across Member States, short-term debt issuance activity, to the detriment of 

the  implementation  of  the  single  monetary  policy;  and  (b)  affect  the  transmission  of  monetary 

policy,  making  it  difficult  to  maintain  the  necessary  level  playing  field  between  financial 
institutions that benefit from State guarantees and those that do not10. 

5  

Pricing of guarantees 

The  ECB  welcomes  that  Article  8  of  the  draft  law  explicitly  provides  that  guarantee  fees  applied  to 

financial institutions benefiting from the State guarantees are to be in line with the criteria established by 

the  Commission,  which  incorporate  the  pricing  formula  recommended  by  the  ECB’s  Governing 

5  
6  
7  
8  

9  
10  

Commissioner of the Authority for the Supervision and Development of Cooperative Societies. 
See Article 3 of the draft law. 
See Article 5.4 and 5.10 of the draft decree. 
See paragraph 18 of the Communication from the Commission on the application of State aid rules to measures taken in 
relation to financial institutions in the context of the current global financial crisis  (OJ C270, 25.10.2008, p. 8),  
See Article 3 of the draft law. 
In this regard see, most recently, paragraph 3 of Opinion 2012/4. 

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Council11. The pricing formula in the Annex to the draft decree corresponds to the one established by the 

Commission. 

6  

Temporary nature of guarantees 

In  line  with  the  Commission’s  criteria12,  the  ECB  notes  the  need  for  national  support  measures  to  be 

temporary in nature, and reiterates the views expressed in its previous opinions that coordination of the 

duration of national financial support schemes across the Union is of crucial importance in order to ensure 
a level playing field13. The financing to be covered by the guarantee scheme established under the draft 
law may only be requested within six months from the entry into force of the draft decree14 and granted 
for a term not exceeding five years15. Thus, the guarantee scheme established under the draft law can be 

considered to be of a temporary nature. The consulting authority may nevertheless want to clarify what 

the date appearing in Article 4 of the draft decree relates to, as the date in question does not appear to be 

consistent  either  with  the  duration  of  the  government  guarantees  nor  with  the  duration  of  their  offer  to 

eligible credit institutions.  

7.  

Interaction with the monetary policy of the euro area 

The ECB also reiterates that granting government guarantees for bank debt with a maturity of less than 
three months should be avoided to the extent possible16. The ECB welcomes that the draft law does not 
allow  government  guarantees  for  bank  debt  with  a  maturity  of  less  than  three  months17.  Moreover,  the 

ECB stresses that it is of the utmost importance that support operations conducted by national authorities 
do not in any way affect the conduct and the implementation of monetary policy in the euro area18.  

8.   Role of the Central Bank of Cyprus 

8.1  The ECB notes that, under the draft law, the Minister consults the Governor of the Central Bank of 

Cyprus  prior  to  deciding  whether  or  not  to  issue  a  state  guarantee  for  the  benefit  of  an  eligible 

credit institution. The Governor’s advice is also sought in respect of the type and eligibility criteria 

for  the  collateral  covering  the  amount  of  government  guarantees  granted  to  eligible  credit 

institutions  and  for  any  dispensations  from  the  duty  to  provide  adequate  eligible  collateral  to  the 

11  

12  

13  
14  
15  
16  
17  
18  

See the Recommendations of the Governing Council of the European Central Bank on government guarantees for bank 
debt, 20 October 2008, available on the ECB’s website at www.ecb.europa.eu.  
See paragraphs 15 and 20 of the Communication from the Commission, on the application, from 1 January 2012, of State 
aid rules to support measures in favour of banks in the context of the financial crisis  (OJ C356, 6.12.2011, p. 7). 
In this regard see, most recently, paragraph 3.2 of Opinion CON/2011/88. 
See Article 5 of the draft law. 
See Article 4 of the draft law. 
In this regard see, most recently, paragraph 3 of Opinion  CON/2012/4. 
See Article 4 of the draft law. 
In this regard see, most recently,, paragraph 3 of Opinion CON/2012/4. 

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Government.  The  ECB  notes,  however,  that  the  Minister  does  not  seek  the  Governor’  advice 
regarding the extent of collateral haircuts to apply19. While appreciating the draft law’s recognition 

of the expertise of the Central Bank of Cyprus, the ECB also expects its involvement in the scheme 

not to extend beyond the provision of advice and to otherwise comply fully with the prohibition on 

monetary  financing  laid  down  in  Article  123(1)  of  the  Treaty,  read  in  conjunction  with  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 Treaty20. In particular, the ECB expects 

that the guarantees envisaged by the draft law will be exclusively financed from the State budget 

and  that,  to  the  extent  that  their  funding  may  require  State  borrowing,  this  will  not  include  pre-
financing or refinancing of the State budget by the Central Bank of Cyprus21.  

8.2  The ECB also expects that the Minister will use the powers under the draft law in a manner fully 

compatible  with  the  institutional  and  financial  independence  of  the  Central  Bank  of  Cyprus, 

thereby  safeguarding  the  proper  performance  of  its  tasks  under  the  Treaty  and  the  Statute  of  the 

European System of Central Banks and of the European Central Bank.  

9.  

Lending to the real economy and monitoring mechanism 

9.1  The  ECB  is  of  the  view  that  the  guarantee  scheme  should  clearly  state  that  one  of  its  legislative 

objectives  is  to  foster  Cypriot  banks’  lending  to  the real  economy.  The  consulting  authority  may 

therefore consider it beneficial to include this objective, for instance in the draft decree, providing 

for the terms of conduct for credit institutions benefiting from government guarantees. This would 

facilitate the monitoring of the lending-behaviour of banks by the Committee set up under Article 7 

of the draft decree. 

9.2  The ECB notes that the draft decree does not provide for any follow-up to the monitoring activity. 

Efficient monitoring should allow for control of the beneficiary credit institutions’ compliance with 

the guarantee-scheme and the ECB would welcome more clarity in this respect. 

19  
20  
21  

See Article 5(13)(e) of the draft decree. 
OJ L 332, 31.12.1993, p. 1. 
In this regard see, most recently,, paragraph 3.5 of Opinion CON/2009/12,.  

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

Done at Frankfurt am Main, 6 November 2012. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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