Opinion of the European Central Bank of 1 February 2013 on a resolution framework for credit and other institutions (CON/2013/10)
Date: 2013-02-01
Institutions: European Central Bank
Subjects: Cyprus, bank deposit, capital increase, company in difficulties, credit institution, financial stability, guarantee, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 1 February 2013 

on a resolution framework for credit and other institutions  

(CON/2013/10) 

Introduction and legal basis 

On 11 January 2013, the European Central Bank (ECB) received a request from the Cypriot Ministry of 

Finance for an opinion on a series of draft laws establishing a draft resolution framework for credit and 

other institutions operating in Cyprus (hereinafter the ‘draft laws’). 

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 third and 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 draft laws relate to the Central Bank of Cyprus (CBC) 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 and main features of the draft laws  

1.1   The draft laws are intended to establish a comprehensive framework for the recovery, restructuring 

and resolution of credit and other institutions, with a view to safeguarding the smooth operation of 

the  financial  system  and  serving  the  public  interest.  The  resolution  framework  is  to  consist  of 
proposed  amendments  to  (i)  the  Banking  Laws  of  1997  to  20092,  (ii)  the  Co-operative  Societies 
Laws of 1985 to 20123, (iii) the Financial Crises Management Laws of 2011 to 20124, and (iv) the 
Special  Tax  on  Credit  Institutions  Laws  of  2011  to  20125,  as  well  as  of  (v)  a  draft  law  and 

accompanying  Regulations  on  the  Establishment  and  Operation  of  a  Deposit  Protection  and 

Resolution  of  Credit and Other  Institutions  Scheme (hereinafter  the ‘Scheme’),  and finally  (vi)  a 

draft law on the resolution of credit and other institutions (hereinafter the ‘draft law on resolution’). 

1  
2  
3  
4  
5  

OJ L 189, 3.7.1998, p. 42.  
Law 66(I)/1997, Episimi Efimerida tis Dimokratias No 3168, 18.7.1997. 
Law 22/1985, Episimi Efimerida tis Dimokratias No 2043, 29.3.1985. 
Law 200(I)/2011, Episimi Efimerida tis Dimokratias No 4313, 30.12.2011. 
Law 84(I)/2011, Episimi Efimerida tis Dimokratias No 4282, 29.4.2011. 

 
 
 
 
                                                      
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1.2 

In particular, the amendments to the Banking Laws reinforce the powers of the CBC to (i) collect 

information from banks, including its powers of entry and inspection, (ii) intervene early, in terms 

of new powers to mandate (a) an increase of the share capital of the bank, without strict compliance 

with company law rules, (b) the submission of recovery plans and information for the Central Bank 

of Cyprus to draw up resolution plans in its capacity as resolution authority, and (c) the imposition 

of  limits  on  dividend  payments  and  the  remuneration  of  the  officials,  executive  officers  and 

directors  of  a  bank.  Finally,  the  amendments  to  the  Banking  Laws  introduce  a  new  special 

liquidation procedure, which includes the appointment of a special liquidator, where (a) the bank’s 

licence has been withdrawn, (b) the bank holds deposits covered by the Deposit Protection Fund, 

and (c) the special liquidation of the bank is in the public interest. 

1.3  The amendments to the Co-operative Societies Laws are intended to bring its text in line with the 

draft law on resolution. In particular, the amendments to the Co-operative Societies Laws empower 

the  Co-operative  Societies  Commissioner  to  demand  (i)  an  increase  of  the  share  capital  of  a  co-

operative  credit  institution  (CCI),  (ii)  the  submission  of  recovery  plans  and  information  to  the 

resolution  authority  for  the  development  of  resolution  plans,  and  (iii)  limits  on  the  payment  of 

dividends and the remuneration of the officials and directors of CCIs. The proposed amendments 

also  insert  into  the  Co-operative  Societies  Laws  provisions  relevant  to  the  special  liquidation  of 

CCIs, and the appointment of a special liquidator in cases where (a) the licence of a CCI has been 

withdrawn, (b) the CCI holds deposits covered by the Deposit Protection Fund, and (c) the special 

liquidation of the Co-Operative is in the public interest. 

1.4  The  draft  law  and  accompanying  Regulations  on  the  Establishment  and  Operation  of  a  Deposit 

Protection  and  Resolution  of  Credit  and  Other  Institutions  Scheme  abolish  (i)  the  Deposit 

Protection Fund established under Section 34 of the Banking Laws, and (ii) the Financial Stability 
Fund, established under Section 3(1) of the Financial Stability Fund Law6, and replace them with a 

separate legal entity, comprised of two separate funds, namely (a) a deposit protection fund, and 

(b) a resolution fund (hereinafter collectively referred to as the ‘Funds’). The Funds are to be kept 
separate through two distinct accounts, one for each of the Funds7. The Scheme applies to banks 

and  branches  of  banks  established  in  Cyprus,  banks  operating  on  a  cross-border  basis  and  the 

Housing  Finance  Corporation  (hereinafter  collectively  referred  to  as  the  ‘covered  credit 

institutions’). The Scheme will: (i) compensate depositors from the Deposit Protection Fund, in the 

event  a  covered  credit  institution  is  unable  to  repay  depositors,  or  a  receivership  or  liquidation 

order  has  been  issued  in  relation  to  a  covered  credit  institution,  and  (ii)  fund  the  resolution 

measures  provided  for  in  the  draft  law  on  resolution.  All  covered  credit  institutions,  unless 

6  
7  

Law 201(I)/2011, Episimi Efimerida tis Dimokratias No 4313, 30.12.2011. 
The Deposit Protection Fund is to be funded by the resources of  the existing fund, the future contributions of covered 
credit institutions, the transfer and liquidation of assets, the proceeds of sanctions imposed by the Scheme’s Committee, 
and loans which the Scheme may secure, backed by guarantees of the covered credit institutions. The Resolution Fund is 
to be funded by the resources of the existing fund in the form of levies collected on banks by virtue of the Special Tax on 
Credit Institutions Laws, future contributions, the transfer and liquidation of assets, the proceeds of sanctions imposed by 
the Scheme’s Committee, and loans. 

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exempted  by  the  Committee  of  the  Scheme,  are  to  pay  contributions  to  the  Deposit  Protection 

Fund,  as  per  the  accompanying  Regulations.  Branches  of  banks  established  in  another  Member 

State may be exempted if covered by deposit protection schemes in their home Member States. The 

affairs of the Scheme are to be managed by an independent committee, chaired by the Governor of 

the CBC. 

1.5  The amendments to the Financial Crises Management Laws aim to inter alia (a) broaden the scope 

of that law through a delegation to the Council of Ministers of powers for the adoption of support 
measures, on a recommendation of the CBC, subject to certain conditions,8 (b) make the granting 

of  government  support  to  any  of  the  Funds  conditional  on  their  management  committees  having 

exhausted  every  possibility  to  obtain  additional  resources  either  from  the  covered  institutions  or 

through  borrowing,  (c)  require  an  evaluation  of  the  long-term  viability  of  the  applicant  financial 

institution  prior  to  a  recommendation  by  the  Council  of  Ministers  to  adopt  support  measures, 

(d) remove references to the existence of a ‘financial crisis’ as a precondition for the adoption of 

support measures, and (e) introduce provisions on the management, by the Council of Ministers, on 

a  recommendation  of  the  CBC,  of  hybrid  capital  and  subordinated  liabilities  of  financial 

institutions that have received or have applied for support. 

1.6  Finally,  the  draft  law  on  resolution  establishes  a  framework  for  intervention  in,  and  the 

implementation  of,  resolution  measures  in  relation  to  credit  institutions  where  (a)  the  affected 

institution is not, or is likely to no longer be, viable, or (b) in the absence of such measures, the 

institution  will  be  unable  to  observe  its  capital  adequacy  and/or  liquidity  requirements,  or 

(c) resolution  measures  are  necessary  to  safeguard the  public  benefit  or  serve  the  public  interest. 

The main objectives of the draft resolution law are to (i) ensure continuity of banking and financial 

services, (ii) avert adverse effects on the financial system, (iii) safeguard the stability and smooth 

operation  of  the  financial  system,  and  (iv)  protect  public  funds  and  depositors.  Intervention  is 

based, inter alia, on the following principles: (a) shareholders and stakeholders are to be the first to 

bear losses, (b) creditors are to absorb losses after shareholders and creditors of the same rank are 

to  be  treated  equally,  (c)  no  creditor  is  to  be  worse  off  than  if  the  affected  institution  had  been 

liquidated as part of an insolvency procedure, (d) the senior management of an affected institution 

is to be replaced and be liable for any breaches of their duties, (e) any interference with property 

rights is to comply with the Constitution of the Republic of Cyprus and the European Convention 

on  Human  Rights,  and  not  be  in  conflict  with  the  acquis  communautaire.  The  CBC  will  act  as 

resolution  authority,  with  the  power  to  issue,  on  consultation  with  the  Minister  for  Finance, 

relevant orders for the implementation of the following resolution measures: (i) 

an  increase  of 

the  share  capital  of  an  affected  institution,  (ii)  the  sale  of  the  business  of  an  affected  institution, 

including  the  transfer  of  some  or  all  of  its  assets  and  liabilities,  (iii)  the  transfer  of  assets  or 

liabilities to a bridge bank or to an asset management company and (iv) bail-in. The CBC will also 

8  

See paragraph 4 of this Opinion. 

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have,  as  resolution  authority,  the  power  to  appoint  special  administrators  to  take  over  the 

management of the CI under resolution.  

1.7  The ECB understands that the proposed adoption of a comprehensive framework for the recovery, 

restructuring  and  resolution  of  credit  and  other  institutions  is  motivated  by  a  possible  financial 

support programme for Cyprus in response to the impact of the sovereign debt crisis on the Cypriot 

banking sector and economy.   

2. 

General observations  

2.1  Subject  to  its  remarks  in  the  remainder  of  this  opinion,  the  ECB  welcomes  the  draft  laws  as  a 

means  of  enhancing  financial  stability  in  Cyprus.  The  ECB  has  previously  been  consulted  on 
previous legislation on these subjects9.  

2.2  The ECB reminds the consulting authority that according to Article 4 of Decision 98/415/EC, the 

ECB  must  be  consulted  ‘at  an  appropriate  stage’  in  the  legislative  process.  This  implies  that  the 

consultation should take place at a point in the legislative process that affords the ECB sufficient 

time to examine the draft legislative provisions and adopt its opinion.   

3.   The draft law on resolution  

3.1  The ECB notes that, in keeping with other national resolution frameworks recently subject to ECB 

consultation, Section 4 of the draft law on resolution provides for the priority of claims in the event 

of the liquidation of an institution under resolution. In particular, Section 4(3) will rank the claims 

of  uninsured  depositors  in  liquidation  ahead  of  those  of  other  general  unsecured  creditors.  This 

appears to be motivated by financial stability and practical considerations specific to Cyprus and its 

banking sector. However, the ECB points out that the pari passu status of uninsured creditors has 

been  adopted  in recent resolution laws in  other euro area countries, including  Spain  and  Ireland. 

Views  on  the  impact  of  granting  preferential  ranking  to  depositors  are  highly  divergent,  as  such 

preferential  ranking  may  have  an  impact  on  the  funding  costs  of  banks  given  the  greater  efforts 

likely  to  be  made  by  other  creditors  to  secure  their  claims.  This  impact  could  be  somewhat 

mitigated if priority claims were only extended to guaranteed deposits. Granting priority status to 

insured deposits is warranted, as this reduces potential losses to insured depositors of a liquidated 

institution and, as a result, the risk of bank runs as well as any excessive depletion of the deposit 
guarantee scheme10.  

3.2  Furthermore,  Section  5(6)  of  the  draft  law  on  resolution  will  require  the  CBC,  in  exercising  its 

powers  as  resolution  authority,  to  take  all  measures  necessary  to  ensure  the  effective  separation 

9  

10  

See  Opinions  CON/2011/29  and  CON/2011/93.  All  ECB  opinions  are  published  on  the  ECB’s  website  at 
www.ecb.europa.eu.   
See Opinion CON/2013/3, paragraph 4 and Opinion CON/2012/99, paragraph 8.2. 

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between its supervisory tasks pursuant to the Central Bank of Cyprus Laws of 2002 to 200711, and 

its  resolution  tasks,  as  provided  for  in  the  draft  law  on  resolution.  The  ECB  expects  the  same 

degree of separation to apply to the CBC’s monetary policy tasks, in line with the Treaty and the 

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

3.3  Further, the ECB refers to the principle of financial independence which requires Member States 

not to put their NCBs in a position where they have insufficient financial resources to carry out all 
their  tasks12.  The  ECB  expects  that  the  new  tasks  assigned  to  the  CBC  under  the  draft  law  on 

resolution will not affect the resources it currently allocates to supervision and to the performance 

of its monetary policy tasks.  

3.4   Moreover,  Section  6(1)  of  the  draft  law  on  resolution,  entitled  ‘Conditions  for  the  adoption  of 

resolution measures’, provides that the resolution authority may only take resolution measures in 

relation to institutions which, based on the assessment of the CBC, as resolution authority, are no 

longer  viable  or  are  likely  to  no  longer  be  viable,  thereby  giving  rise  to  a  credible  risk  that  the 

institution may no longer meet its obligations and/or continue to operate as a going concern. The 

ECB welcomes the application, under the draft  law on resolution, of resolution measures to non-

viable  entities  only,  both  for  conceptual  reasons,  and  for  reasons  of  consistency  with  the 
Commission proposal of 6 June 2012 for a Union framework for bank recovery and resolution13. 

3.5  The  ECB  notes  that  Section  12  of  the  draft  law  does  not  exclude  guaranteed  deposits  from  the 
scope of bail-in measures. At the same time, the general principles of the draft law14 point to the 

conclusion that, in the event of a bail-in, guaranteed deposits would not be affected. For reasons of 

clarity,  the  ECB  would  invite  the  consulting  authority  to  consider  an  explicit  reference  in 

Section 12 of the draft law to the exclusion of guaranteed deposits from the scope of an eventual 

bail-in. 

3.6  Finally, the ECB notes that the draft law on resolution authorises the CBC, as resolution authority, 
to  issue  directives  or  to  adopt  decrees,  so  as  to  give  effect  to  its  decisions.15  The  draft  law  on 

resolution may require further provisions for the enforcement of the directives or decrees issued by 

the  CBC,  as  resolution  authority,  as  well  as  other  measures  envisaged  to  enforce  the  draft 

resolution law. In this respect, the consulting authority may also wish to insert a provision in the 

draft  law  on  resolution,  requiring  third  parties,  including  governmental  authorities,  to  recognise, 

enforce and observe the terms of such directives or decrees. 

11  
12  
13  

14  

15  

Law 138(I)/2002, Episimi Efimerida tis Dimokratias No 3624, 19 July 2002. 
See ECB Convergence Report 2012, p. 25.  
Proposal  for  a directive  of  the  European Parliament  and  of  the  Council  establishing  a  framework  for  the  recovery  and 
resolution  of  credit  institutions  and  investment  firms  and  amending  Council  Directives  77/91/EEC  and  82/891/EC, 
Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC,  2007/36/EC  and  2011/35/EC  and  Regulation  (EU) 
No 1093/2010 (COM(2012) 280 final). 
Section  3(1)(e)  on  the  protection  of  depositors  and  Section  4(3)  on  the  priority  of  guaranteed  deposit  claims,  in 
conjunction with the ‘no creditor worse off than in insolvency’ principle set out in Section 3(2)(d). 
See, for instance, Section 8(1) of the draft law on resolution. 

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4.   Amendments to the Financial Crises Management Law 

According to Section 4 of the draft law amending the Financial Crises Management Law (hereinafter, ‘the 

draft crises law’), the Cypriot Council of Ministers is to activate the Financial Crises Management Law 

on an application from a financial institution ‘in order to safeguard its long-term viability’. This will be 

subject to a recommendation from the CBC, if the latter considers it probable that resolving the applicant 

may have more serious repercussions on the stability of the financial system and/or may result in higher 

public spending than the application of support measures under the draft crises law. Section 4 might be 

understood as being compatible with the provision of financial support to viable and non-viable financial 
institutions alike16. As pointed out earlier in this opinion, non-viable financial institutions fall within the 

remit of the draft law on resolution. While the ECB agrees that the competent national authorities should 

have a margin of discretion when deciding to which institutions to grant State support, the interaction of 

State support schemes with national resolution frameworks requires careful consideration to avoid legal 

ambiguities and practical implementation uncertainties at times of crisis. The ECB is of the view that the 

restructuring of a non-viable entity as a going concern (‘open bank scenario’) instead of its resolution as a 

gone concern (‘closed bank scenario’) should only be considered under exceptional circumstances, where 

the orderly resolution of a credit institution would have seriously damaging effects on the stability of the 
financial system, with heightened risks of cross border contagion17. 

5.   Amendments to the Cooperative Societies Laws 

Section 4 of the draft law amending the Cooperative Societies Laws inserts a new Section 49BA on the 

special liquidation of CCIs. The ECB notes that CCIs currently benefit from a cross-guarantee extended 
to  them  from  the  Cooperative  Central  Bank18.  Although  not  explicitly  stated  in  the  draft law, the  ECB 

understands  that  the  liquidation  of  individual  CCIs  would  only  be  possible  on  the  assumption  that  the 

cross-guarantee could be lifted, albeit only temporarily and on an individual basis.  

6.   The  establishment  and  operation  of  a  deposit  protection  and  resolution  of  credit  and  other 

institutions scheme  

As  explained  earlier in this  opinion, the  proposed  Deposit Protection  Fund  will  compensate  depositors, 

while the proposed Resolution Fund will fund resolution measures. The ECB notes with satisfaction that 

16  

17  
18  

Section 4 provides that support measures are conditional on (a) a financial institution applying for support to safeguard its 
long-term viability, and (b) an assessment by the CBC that the resolution of the financial institution in question, under the 
law on resolution, may have more serious repercussions on the stability of the financial system or result in higher public 
spending than the application of support measures under the Financial Crises Management Law. 
See Opinion CON/2013/3, paragraph 6 and Opinion CON/2012/99, paragraphs 1 and 6.2.  
The  liabilities  of  the  Cooperative  Central  Bank  are,  in  turn,  guaranteed  by  CCIs,  as  shareholders  of  the  Cooperative 
Central Bank. 

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whilst the Deposit Protection Fund may borrow from the Resolution Fund, the Resolution Fund may not 
borrow from the Deposit Protection Fund if the funds available to it prove insufficient for its tasks19. The 

clear separation between the two Funds in terms of their lending capabilities is also in line with the draft 

law  on resolution,  according  to  which the financing  of  the  implementation of resolution  measures falls 

within the remit of the Resolution Fund, with the Deposit Protection Fund only paying an amount equal to 
the value of the covered deposits20.  

7.   Amendments to the Special Tax on Credit Institutions Law  

The draft law amending the Law on the special tax on credit institutions reflects the replacement of the 

Financial  Stability  Fund  by  a  Resolution  Fund  and  will  transfer  the  25/60  of  the  total  revenues  levied 

through  the  imposition  of  the  special  tax,  to  finance  the  Resolution  Fund,  from  1  January  2017  to  a 

dedicated account held at the CBC. In this regard, the ECB draws the attention of the consulting authority 
to Opinion CON/2011/2921. 

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

Done at Frankfurt am Main, 1 February 2013. 

[signed] 

The President of the ECB 

Mario DRAGHI 

19  

20  
21  

See Section 10(1) of the draft law on the establishment and operation of a deposit protection and resolution of credit and 
other institutions. 
See Sections 9(6) and 10(7) of the draft law on resolution. 
See, in particular, paragraph 2. 

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