Opinion of the European Central Bank of 11 October 2016 on the handling of real property or share capital acquired by a credit institution after a debt settlement process (CON/2016/48)
Date: 2016-10-11
Institutions: European Central Bank
Subjects: Cyprus, banking supervision, credit institution, financial stability, national law, share capital

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 11 October 2016 

on the handling of real property or share capital acquired by a credit institution after a debt 

settlement process  

(CON/2016/48) 

Introduction and legal basis 

On 9 August 2016 the European Central Bank (ECB) received a request from the Ministry of Finance of 

Cyprus  for  an  opinion  on  a  draft  law  amending  the  Laws  on  the  business  of  credit  institutions  1997  to 
20161 (hereinafter the ‘draft law’). 

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/EC2,  as the  draft  law  contains  provisions  relating  to  a  national  central  bank,  the  ESCB’s task  of 

contributing to the smooth conduct of policies pursued by competent authorities relating to the prudential 

supervision of credit institutions and the stability of the financial market system pursuant to Article 127(5) 

of  the  Treaty,  and  the  tasks  conferred  on  the  ECB  pursuant  to  Article  127(6)  of  the  Treaty  concerning 

policies relating to the prudential supervision of credit institutions. 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  main  purpose  of  the  draft  law  is  to  harmonise  Cypriot  law  with  Directive  2013/36/EU  of  the 
European Parliament and of the Council3, Directive 2014/59/EU of the European Parliament and of 
the Council4, and Directive 2014/17/EU of the European Parliament and of the Council5, as well as 

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Business  of  Credit  Institutions  Law  of  1997  to  2016  (  L.  66(I)/1997),(L.  74(I)/1999),(L.94(I)/2000),(L.119(I)/2003), 
(L.4(I)/2004),(L.151(I)/2004),(L.231(I)/2004),(L.235(I)/2004),(L.20(I)/2005),(L.80(I)/2005),(L.100(I)/2009),(L.123(I)/20
09),(L.27(I)/2011),(L.104(I)/2011),(L.107(I)/2012),(L.14(I)/2013),(L.87(I)/2013),(L.102(I)/2013),(L.141(I)/2013),(L.5(I)/
2015),(L.26(I)/2015),(L.35(I)/2015),(L.71(I)/2015),(L.93(I)/2015),(L.109(I)/2015),(L.152(I)/2015),(L.168(I)/2015),(L.21(
I)/2016). 

Council  Decision  98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national 
authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 
Directive 2013/36/EU of  the  European  Parliament and of  the Council of 26  June 2013 on access  to the activity  of 
credit  institutions  and  the  prudential  supervision  of  credit  institutions  and  investment  firms,  amending  Directive 
2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.06.2013, p.338). 

Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for 
the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, 
and  Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC,  2007/36/EC,  2011/35/EU,  2012/30/EU  and 
2013/36/EU,  and  Regulations  (EU)  No  1093/2010  and  (EU)  No  648/2012,  of  the  European  Parliament  and  of  the 
Council (OJ L 173, 12.06.2014, p.190).  

 
 
 
 
 
                                                 
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to  ensure  that  Cypriot  law  complies  with  Guidelines  EBA/GL/2012/06  of  the  European  Banking 
Authority6.  

1.2  The  draft  law  also  introduces  certain  provisions  that  are  specific  to  Cypriot  law.  In  particular,  the 

draft law expands the circumstances in which a credit institution may exercise a business activity 

where  the  credit  institution,  as  a  consequence  of  debt  settlement  proceedings,  has  acquired 

immovable  property  or  share  capital  in  another  company.  Under  the  draft  law,  a  credit  institution 

that  acquires  property  following  such  proceedings  may  (a)  carry  out  maintenance  work  on  the 

property, (b) lease the property to third parties as long as the rent does not limit the possibilities of 

selling the property or (c) in cases where the credit institution has taken all the appropriate actions 

to sell the property but these were unsuccessful, may complete any semi-finished works or develop 
the  property  in  order  to  make  it  marketable,  in  line  with  a  viability  study7.  The  draft  law  further 

provides  that,  if  a  credit  institution  has  acquired  share  capital  in  a  company  following  debt 

settlement proceedings, the credit institution may appoint a receiver or a manager to wind up the 

company  or  a  manager  to  run  the  company  with  a  view  to  maintaining  its  value  prior  to 
foreclosure8. Credit institutions that acquire another company’s share capital during debt settlement 

proceedings  must  dispose  of  this  share  capital  within  three  years  of  the  date  of  its  acquisition. 

However,  upon  request  by  the  credit  institution,  the  Central  Bank  of  Cyprus  (CBC)  may  agree  to 
extend the three-year deadline due to exceptional circumstances9.  

1.3  Additionally,  the  draft  law  imposes  restrictions  on  granting  credit  facilities  to  the  members  of  the 

management  bodies  of  credit  institutions  and  to  persons  holding  more  than  10%  of  the  share 

capital  of  the  credit  institution.  According  to  the  draft  law,  these  restrictions  apply  subject  to  Part 
Four of Regulation (EU) No 575/2013 of the European Parliament and of the Council10. 

1.4  The draft law also provides that, in determining compliance with the restrictions on granting credit 

facilities to the members of the management bodies and to persons holding more than 10% of the 

share  capital  of  the  credit  institution,  the  CBC  may  exempt  any  exposure  having  regard  to  the 

exceptionally  low  risk  arising  from  the  exposures  concerned.  The  draft  law  deletes  the  existing 

provision  in  the  Laws  on  the  business  of  credit  institutions  1997  to  2016,  which  states  that  such 

exemptions must not be in conflict with Union legislation currently in force in Cyprus. 

1.5  The draft law prohibits legal entities from acting as members of the management board of a credit 

institution  established  in  Cyprus.  The  draft  law  further  specifies  that  no  person  may  act  as  a 

member of the management board or a senior manager, nor may any person hold a key function or 

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Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for 
consumers  relating  to  residential  immovable  property  and  amending  Directives  2008/48/EC  and  2013/36EU  and 
Regulation (EU) No 1093/2010 (OJ L 60, 28.02.2014, p. 34). 
Guidelines  EBA/GL/2012/06  of  the  European  Banking  Authority  of  22  November  2012  on  the  assessment  of  the 
suitability  of  members  of  the  management  body  and  key  function  holders,  available  on  the  European  Banking 
Authority’s website at www.eba.europa.eu. 
Article 6 (1A) of the draft law. 

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10    Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on  prudential 
requirements  for  credit  institutions  and  investment  firms  and  amending  Regulation  (EU)  No  648/2012  (OJ  L  176, 
27.06.2013, p.1). 

Article 6(1B) of the draft law. 
Article 6(1C) of the draft law. 

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participate  in  meetings  of  the  management  board  of  a  credit  institution  established  in  Cyprus, 

without  the  CBC’s  prior  approval.  The  draft  law  exempts  experts  and  senior  managers  of  credit 

institutions from this approval procedure if they have been asked to give advice on specific issues 

under  consideration  by  the  management  board.  If,  in  the  CBC’s  opinion,  a  member  of  the 

management  board,  the  chief  executive  officer,  a  senior  manager  or  a  key  function  holder  of  a 

credit  institution  established  in  Cyprus  is  not  a  fit  and  suitable  person  to  continue  to  act  in  that 

position, the CBC may order that that person be removed from the position. The draft law specifies 

that the assessment procedure and the criteria determining the fitness and suitability of the above  

mentioned individuals are laid down in the CBC’s Directive on the Assessment of the Fitness and 

Probity  of  Members  of  the  Management  Board  and  managers  of  Authorised  Credit  Institutions  of 
2014 (hereinafter the ‘CBC Directive’)11. 

2. 

General observations 

2.1  This opinion does not address whether Cypriot law has been effectively harmonised with Directive 

2013/36/EU,  Directive  2014/59/EU,  and  Directive  2014/17/EU,  for  which  the  Commission  is 

responsible,  neither  whether  the  draft  law  observes  Guidelines  EBA/GL/2012/06  or  whether  the 

provisions of the draft law that specifically interact with directly applicable provisions of Union law 

are fully compliant with such directly applicable provisions.  

2.2  The  ECB  notes  that  the  draft  law  broadens  the  scope  of  the  activities  of  credit  institutions,  as  it 

expands the circumstances in which a credit institution may exercise a business activity where, as 

a consequence of debt settlement proceedings, it acquires immovable property or share capital of 

another company. The ECB appreciates that this proposal is necessary due to the high number of 

non-performing loans in Cyprus. Therefore, it is extremely likely that credit institutions will acquire a 

substantial  number  of  immovable  properties  and  shareholdings  as  a  result  of  debt  settlement 

arrangements,  which  will  need  to  be  dealt  with.  Allowing  credit  institutions  to  conduct  business 

activities with immovable properties and shareholdings they acquire will facilitate the preservation 

of financial stability and the soundness of the Cypriot banking sector. However, having immovable 

property  and  shareholdings  on  the  credit  institutions’  balance  sheets  will  result  in  the  credit 

institutions’ solvency and profitability being more sensitive to fluctuations in the value of immovable 

property and share prices. The ECB recommends that credit institutions should take measures to 

ensure that they are adequately protected from such changes and that they employ individuals with 

the  appropriate  expertise  to  manage  real  estate  portfolios,  since  this  is  not  a  part  of  their  core 

business activity. 

2.3  The ECB considers that the proposed restrictions on granting credit facilities to the members of the 

management  bodies  of  credit  institutions  and  to  persons  holding  more  than  10%  of  the  share 

capital of the credit institution should positively contribute to more robust governance arrangements 

in the Cypriot banking sector. 

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Available on the CBC’s website at www.centralbank.gov.cy. 

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2.4  The  ECB  welcomes  the  provisions  concerning  the  evaluation  of,  inter  alia,  key  function  holders, 

which aim to comply with Guidelines EBA/GL/2012/06. The key function holders may substantially 

influence the day-to-day management and risk profile of credit institutions, and thus play a crucial 

role  in  ensuring  compliance  with  robust  government  arrangements.  The  ECB  would  like  to  recall 

that  the  ECB  will  conduct  the  suitability  assessment  of  members  of  the  management  bodies  of 

significant institutions, with the assistance of the CBC. In that regard the CBC Directive should be 

aligned with ECB administrative practices. 

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

Done at Frankfurt am Main, 11 October 2016. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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