Opinion of the European Central Bank of 26 November 2013 on the licensing, regulation and supervision of cooperative credit institutions (CON/2013/81)
Date: 2013-11-26
Institutions: European Central Bank
Subjects: Cyprus, European Stability Mechanism, bank deposit, banking supervision, credit union, financial stability, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 26 November 2013 

on the licensing, regulation and supervision of cooperative credit institutions  

(CON/2013/81) 

Introduction and legal basis 

On  3  September  2013,  the  European  Central  Bank  (ECB)  received  a  request  from  the  Minister  for 

Finance of the Republic of Cyprus for an opinion on a series of proposed amendments to Cypriot banking 

legislation  (hereinafter  the  ‘amending  laws’).  The  amending  laws  were  adopted  by  the  House  of 

Representatives on 5 September 2013 and published in the Official Gazette on 9 September 2013. 

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  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 amending laws relate to rules applicable to the Central Bank 

of Cyprus (CBC) and 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 amending laws 

1.1  General 

The  amendments  follow  the  need  to  implement  the  Memorandum  of  Understanding  between  the 

Republic of Cyprus and the European Stability Mechanism, and specifically to bring the licensing, 

regulation  and  supervision  of  cooperative  credit  institutions  (CCIs)  into  line  with  the  regime  for 

commercial  banks  by  integrating  these  functions  into  the  CBC.  The  amending  laws  are  also 

intended to strengthen the corporate governance of commercial banks and CCIs. Additionally, the 

amending  laws  put  the  Deposit  Protection  Fund  (DPF)  for  CCIs  under  the  CBC’s  general 

responsibility and specifically under the administration of the Deposit Protection and Resolution of 

Credit  and  Other  Institutions  Scheme.  The  amending  laws  amend  the  following  legislative  and 

regulatory instruments: 

1.2  The Business of Credit Institutions Laws of 1997 to (No. 3) 2013  

Several  new  provisions  refer  to  the  CBC’s  licencing,  regulation  and  supervision  of  CCIs.  All 

legislative  provisions  currently  applicable  to  banks  are  made  applicable  to  authorised  credit 

1 

OJ L 189, 3.7.1998, p. 42. 

 
 
 
 
                                                 
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institutions (ACIs), which are defined to include CCIs. CCIs are required to obtain a licence from 

the CBC before accepting deposits from the public and lending funds in the Republic of Cyprus or 

abroad.  A  CCI’s  affiliation  to  the  Cooperative  Central  Bank  (CCB),  which  is  the  CCI’s  central 

institute, requires the CBC’s prior approval under conditions that are set by the CBC. Additionally, 

the solvency and liquidity of the CCB and the CCIs are subject to the CBC’s supervision, and CCIs 

are subject to the same liquidation and winding up rules applicable to commercial banks. CCIs are 

prohibited  from  providing  cross-border  services  prior  to  31  March  2014.  Additionally,  existing 

regulations,  directives  and  other  administrative  acts  also  apply  to  and  shall  be  implemented  by 

CCIs. 

Several amendments pertain to the corporate governance of commercial banks and CCIs. ACIs are 

prohibited from having any credit exposure to independent members of their management bodies; 

credit  exposure  to  non-independent  members  of  ACIs’  management  bodies  is  permitted  under 

certain conditions. The level of credit facilities available to all non-independent members of ACIs’ 

management bodies is reduced to 10% of own funds and the level of unsecured credit facilities to 

1%  of  own  funds.  Credit  facilities  available  to  any  non-independent  member  of  the  ACIs’ 

management bodies are limited to EUR 500 000, whereas independent members are not allowed to 

obtain  any  credit  facilities.  An  ACI’s  credit  exposure  to  shareholders  who  directly  or  indirectly 

hold more than 10% of their share capital is limited to 20% of own funds, and to 2% if the credit 

exposure  is  not  secured  with  tangible  security.  ACIs  are  obliged  to  terminate  the  appointment  of 

members  of  a  management  body  whose  facilities  are  in  arrears,  and  the  restrictions  imposed  in 

relation to members of a management body extend to their related persons, including their spouses 

and dependents. 

ACIs are prohibited from acquiring or dealing in their own shares for their own account without the 

CBC’s prior approval. They are also prohibited from financially assisting in the acquisition of their 

own shares, or shares of their holding or subsidiary companies. 

1.3  The Laws on Cooperative Societies of 1985 to (No. 3) of 2013 

Several  provisions  refer  to  the  transfer  of  the  licensing,  regulatory  and  supervisory  powers  over 

CCIs  from  the  Cooperative  Societies  Authority  to  the  CBC.  Basic  terms  have  been  introduced 

which will govern CCIs’ ordinary shares so they are classified as Common Equity Tier-1 capital in 

accordance  with  Regulation  (EU)  575/2013  of  the  European  Parliament  and  the  Council  of 
26 June 2013 on prudential requirements for credit institutions and investment firms2. 

The  external  audit  of  CCIs’  accounts  whose  size  exceeds  the  limit  set  by  the  CBC  will  be 

performed  by  independent  auditors  instead  of  the  Cooperative  Societies  Audit  Service.  The 

independent auditors will be appointed by a CCI’s general assembly and will be approved by the 

CBC. 

2  

OJ L 176, 27.6.2013, p. 1. 

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Arrangements are introduced for the recapitalisation of the CCB and CCIs through the acquisition 

of capital from the Republic of Cyprus, and CCIs are prohibited from lending to individuals who 

are not their members. 

The  liquidation  of  CCIs  will  be  carried  out  in  accordance  with  the  provisions  of  the  Business  of 

Credit Institutions Laws and the Companies Law, and provisions have been introduced to facilitate 

CCI mergers. 

The  amendments  also  include  provisions  under  which  the  Law  on  the  Financial  Ombudsman  is 

applied to the arbitration framework of CCIs. In addition, the CBC Code of Conduct in relation to 

the management of loans or other credit facilities in arrears is also applied to CCIs. 

The Deposit Protection Scheme for CCIs is under the CBC’s responsibility and will be governed by 

the provisions of the Law on the Deposit Protection and Resolution of Credit and Other Institutions 

Scheme. 

1.4  The Laws on the Central Bank of Cyprus of 2002 to 2013 

Amendments  have  been  introduced  to  generally  reflect  that  the  supervision  of  CCIs    is  brought 

within the CBC’s regulatory and supervisory competence, and restrictions have been imposed on 

CBC officers from holding office in ACIs or from participating in the capital of ACIs, without first 

obtaining approval from the CBC’s Board. 

1.5  The Law on the Deposit Protection and Resolution of Credit and Other Institutions Scheme  

The main purpose of the amendments is to implement the transfer of the DPF of CCIs under the 

administration of the Management Committee of the Deposit Protection and Resolution of Credit 

and Other Institutions Scheme. 

2. 

Appropriate time to consult the ECB 

The  consulting  authority  sent  the  request  for  an  opinion  only  two  days  before  the  amending  laws  were 

adopted by parliament. The consultation request did not make any reference to such timetable and did not 

indicate such a deadline for preparing the opinion. Pursuant 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 allows the ECB sufficient time to examine the 

draft  legislative  provisions  and  adopt  its  opinion,  and  the  national  authorities  to  take  into  account  the 

ECB’s  views  in  accordance  with  Decision  98/415/EC.  Therefore,  the  ECB  would  appreciate  the 

consulting authority honouring its obligation to consult the ECB in good time in future. 

3. 

Principle of central bank independence  

3.1  The principle of central bank independence requires Member States to ensure that national central 

banks (NCBs) have sufficient financial resources to perform European System of Central Banks or 

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Eurosystem-related tasks as well as their own national tasks3. Pursuant to the Laws on Cooperative 

Societies  of  1985  to  (No.  3)  of  2013,  the  powers  of  licencing,  regulation,  supervision  and 

imposition  of  supervisory  measures  over  CCIs  are  transferred  from  the  Cooperative  Societies 

Authority to the CBC. The transfer of these tasks to the CBC should not affect the CBC’s ability to 

carry  out  its  Eurosystem-related  tasks  from  an  operational  and  financial  point  of  view.  In  this 

respect, the new CBC functions should be performed in a manner that is fully compatible with the 

CBC’s  institutional  and  financial  independence  and  consequently  should  not  impede  the  proper 

performance  of  its  Eurosystem-related  tasks.  The  CBC  should  be  able  to  collect  fees  for  the 

performance of its new supervisory tasks that began on 9 September 2013. In this respect, the ECB 

welcomes that pursuant to Section 26(3) of the Business of Credit Institutions Laws, the CBC has 

the power to demand that authorised credit institutions, including CCIs, pay to it the costs relating 

to their supervision, thereby safeguarding its financial independence. The ECB understands that the 

CBC has put in place a regulatory framework implementing Section 26(3) of the Business of Credit 

Institutions Laws under which the supervised entities pay supervisory fees. 

3.3  The  ECB  understands  that  the  transfer  of  jurisdiction  and  power  from  the  Cooperative  Societies 

Authority to the CBC as regards CCIs provided by the Laws on Cooperative Societies of 1985 to 

(No.  3)  of  2013  does  not  involve  any  transfer  of  liabilities.  Provisions  under  which  an  NCB 

becomes the legal successor to any liabilities of a specific supervisory authority may raise issues in 

regard  to  financial  independence  and  compliance  with  the  prohibition of  monetary  financing  laid 
down  in  Article  123(1)  of  the  Treaty4,  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 Treaty5. 

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

Done at Frankfurt am Main, 26 November 2013. 

[signed] 

The President of the ECB 

Mario DRAGHI 

3 

4 
5 

See, inter alia, the ECB’s Convergence Report of June 2013, p. 30, paragraph 3 of Opinion CON/2011/69 and paragraph 
2.3 of Opinion CON/2012/52.All ECB opinions are published on the ECB’s website at www.ecb.europa.eu. 
See paragraph 3.2.3 of Opinion CON/2010/33. 
OJ L 332, 31.12.1993, p. 1. 

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