Opinion of the European Central Bank of 11 June 2021 on the role of the Central Bank of Cyprus as regards the issuance of government guarantees to credit institutions (CON/2021/21)
Date: 2021-06-11
Institutions: European Central Bank
Subjects: banking supervision, legal basis

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 11 June 2021  

on the role of the Central Bank of Cyprus as regards  

the issuance of government guarantees to credit institutions  

(CON/2021/21) 

Introduction and legal basis 

On 11 May 2021 the European Central Bank (ECB) received a request from the Ministry of Finance of the 

Republic of Cyprus for an opinion on (a) the Law on the issuance of government guarantees towards credit 

institutions for the granting of loans to businesses and self-employed persons 1 (hereinafter the ‘Law’) and 

(b) a draft Decree on the issuance of government guarantees towards credit institutions for the granting of 

loans to businesses and self-employed persons 2 (hereinafter the ‘draft decree’). 

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 (TFEU), as the Law contains provisions which concern the Central Bank 
of Cyprus (CBC) 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 Law and the draft decree  

1.1  The Law empowers the Minister for Finance, following the approval of the Directorate-General for 

Competition of the European Commission and subject to any requirements imposed by the European 

Commission, to grant government guarantees up to a total of one billion euro to credit institutions for 

the purpose of granting new low-interest loans to businesses and/or self-employed persons3. These 

guarantees are granted for the purpose of increasing the liquidity in the economy and must not be 

used  to  facilitate  the  repayment  or  restructuring  of  any  outstanding  performing  or  non-performing 

facilities. Credit institutions must pass the benefit of the guarantees on to the businesses and/or self-

employed persons receiving the new loans. The potential borrowers need to prove that they were 

not facing financial difficulties on 31 December 2019, but that they face financial difficulties due to 

the impact of the COVID-19 pandemic after that date. The explanatory note that accompanies the 

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Ο  περί  της  Έκδοσης  Κυβερνητικών  Εγγυήσεων  προς  Πιστωτικά  Ιδρύματα  για  την  Παραχώρηση  Δανείων  σε 
Επιχειρήσεις και Αυτοτελώς Εργαζομένους Νόμος του 2021 (Ν. 110(I)/2021). 
Το  περί  της  Έκδοσης  Κυβερνητικών  Εγγυήσεων  Προς  Πιστωτικά  Ιδρύματα  για  τη  Παραχώρηση  Δανείων  σε 
Επιχειρήσεις και Αυτοτελώς Εργαζομένους Διάταγμα του 2021. 
The total amount of government guarantees provided for is made up of: EUR 300,000,000 for loans to self-employed 
persons  and  micro  businesses;  EUR  550,000,000  for  loans  to  small  and  medium-sized  businesses;  and 
EUR 150,000,000 for loans to large businesses.  

 
 
 
 
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consultation request of the Ministry of Finance explains that the aim of the Law is to address the 

effects of the measures taken to contain the COVID-19 pandemic. 

1.2  The Law stipulates that the government guarantees must be granted by 31 December 2021, for a 

minimum period of three months and a maximum period of six years. In addition, the government 

guarantees must cover any losses that may be incurred as a result of loans granted, up to a maximum 

of 70% of losses incurred by the Government, with the relevant credit institution retaining a minimum 

of 30% of losses. The potential borrowers are required to provide security for the loans by mortgaging 

any  unmortgaged  immovable  property  or  other  assets,  unless  no  such  property  or  assets  are 

available,  in  which  case  the  loan  granted  is  unsecured.  The  loans  may  be  granted  to  potential 

borrowers in order to cover liquidity  needs, working capital and investments in  Cyprus. If a credit 

institution refuses a loan application, the applicant has the right to file a complaint with the Monitoring 

Committee mentioned in paragraph 1.4 below. 

1.3  Further, the Law envisages that credit institutions will be invited to apply for government guarantees 

during a period of thirty days from the date on which the draft decree is adopted by the Minister for 

Finance. A contract will then be entered into between the Government and each of the interested 
credit institutions that apply, on the expiry of which the respective government guarantee will lapse. 

Government guarantees are to be allocated to individual credit institutions according to their share 

of  total  domestic  deposits  and  their  share  of  total  performing  domestic  loans,  excluding  amounts 

relating to companies registered or established but not physically present in Cyprus and excluding 

interbank deposits and loans. The provision of government guarantees is to be subject to payment 

of pro rata fees by the credit institutions. The maximum amount of guarantees that may be provided 
to any one credit institution is 25% of its Tier 1 and Tier 2 capital on 31 December 2020.  

1.4  Without prejudice to the powers of the CBC, the Law establishes a Monitoring Committee to monitor 

the implementation of the provisions of the Law and the decrees adopted under it, and to coordinate 

their  proper  and  effective  implementation.  The  Committee  is  to  be  comprised  of:  the  Accountant 

General or the Deputy Accountant General, acting as chair; one officer of the Ministry of Finance 

appointed by the Minister for Finance; two officers of the CBC appointed by the Minister for Finance 

on  the  recommendation  of  the  Governor  of  the  CBC;  and  the  Auditor  General,  or  his  or  her 

representative, as observer. The Monitoring Committee must prepare a report every two months for 

the attention of the Minister on all matters that fall within its remit, which it must submit every two 

months to the Parliamentary Committee on Financial and Budgetary Affairs. The Minister shall also 

provide the same Parliamentary Committee with a quarterly update in connection with the said report.  

1.5  The Law empowers the Minister for Finance to issue decrees for the purposes of ensuring a better 

implementation  of  the  Law,  and  in  particular  to  determine  matters  such  as  the  procedure  for  and 

terms on which the guarantees are granted, the amount of the fee paid by the credit institutions, the 

applicable  interest  rate,  and  a  recommendation  to  credit  institutions  to  suspend  payment  of 

instalments, other than the amount relating to interest, for a period of 12 months from the date of 

commencement of the loan agreement. 

1.6 

In the event of an infringement by a credit institution or borrower of any provision of the Law and/or 

the  decrees  adopted  under  it,  or  of  any  terms  and  conditions  of  the  guarantees,  the  Minister  for 

Finance may impose an administrative penalty ranging from EUR 1,000 to EUR 500,000 depending 

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on the severity of the infringement, and a further penalty ranging from EUR 100 to EUR 50,000 for 

each  day  the  infringement  continues  taking  into  account  the  severity  of  the  infringement.  Before 

proceeding with the imposition of a penalty, the Minister must consult with the CBC in order to ensure 

that the penalty does not create any financial stability risks. Before imposing the fine, the Minister 

must also notify the credit institution or loan beneficiary concerned, explain why action is to be taken 

against it, and allow the right to submit observations within fifteen days from the date of the notice. 

1.7  The  draft  decree  sets  out  the  details  which  relate  to  the  granting  of  the  government  guarantees, 

including, but not limited to, the amount and interest rate of the new loans, the definition of the losses 

that can be covered under the scheme, the criteria for the distribution of  the  guarantees to credit 

institutions and the control mechanisms for the use of the guarantees by credit institutions.  

2. 

Observations  

2.1  The ECB notes that the Monitoring Committee established under the Law has been entrusted with 

the responsibility of (a) monitoring the implementation of the provisions of the Law and the decrees 

adopted under it and (b) coordinating their proper and effective implementation. The Committee must 

also report to the Minister for Finance on all aspects that fall within its remit and its report must be 

submitted to the Parliamentary Committee on Financial and Budgetary Affairs.  

2.2  The ECB understands that the Monitoring Committee’s role is, as its name implies, confined to an 

observational  or  monitoring  role,  with  a  duty  to  report  on  its  observations  to  the  relevant  Cypriot 

authorities. This is evidenced by the fact that the Law does not confer on the Monitoring Committee 

any decision-making or  discretionary  powers in relation to the  application  of  the  provisions of the 

Law.  Rather,  the  Law  merely  confers  on  the  Monitoring  Committee  a  function  of  reporting  as  to 

whether the legal framework is being properly and effectively implemented. In addition, the fact that 

the Law does not set out any rules of procedure governing the members of the Monitoring Committee 

or  the  Committee’s  operation  is  another  indication  that  the  Committee  has  no  legal  powers  with 

regard to taking any decisions on matters relating to credit institutions which fall within the remit of 

the Law and the decrees adopted under it.  

2.3  Moreover, with regard to the task of the Monitoring Committee to monitor the implementation of the 

provisions of the Law and the decrees adopted under it, and given the fact that the Law does not 

confer  any  decision-making  or  discretionary  powers  on  the  Monitoring  Committee,  the  ECB 

understands that the monitoring will be done for the sole purpose of informing the Minister for Finance 

and the relevant Parliamentary Committee. It is worth noting that the Law does not specify how such 

monitoring  will  take  place  in  practice.  In  particular,  the  Law  does  not  entrust  the  Monitoring 

Committee  with  any  investigative  and/or  supervisory  powers  to  ensure  the  compliance  of  credit 

institutions with the Law, such as the power to request information from credit institutions 4 or inspect 

their books and documents. In the absence of such powers, it is not possible to understand from the 

Law  how  the  Monitoring  Committee  might  discharge  its  responsibilities  of  monitoring  the 

implementation of the provisions of the Law and the decrees adopted under it, and of coordinating 

4  

It is noted that Article 12 of the draft decree stipulates that credit institutions must submit on a half-yearly basis or as 
and when requested by the Treasury, an electronic file containing a breakdown of the loans granted.  

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their proper implementation. At any rate, the ECB underlines that any investigative or other type of 

power and any task that may be conferred on the Monitoring Committee by the legislator would need 

be exercised for the sole purpose of fulfilling the tasks of that Committee under the Law and should 

be without prejudice to the tasks and powers conferred by Union law on the CBC and the ECB as 

regards the prudential supervision of credit institutions. It is further understood that the Monitoring 

Committee’s responsibility for coordinating the effective implementation of the Law and the decrees 

adopted  under  it,  is  intended  to  ensure  that  the  underlying  objective  of  granting  new  low-interest 

loans  to  businesses  and  self-employed  persons  for  the  purpose  of  increasing  the  liquidity  in  the 

Cypriot economy is achieved.  

2.4  The Law is silent in relation to the function of the Monitoring Committee of receiving complaints by 

unsuccessful loan applicants, and does not prescribe the procedure to be followed in the event that 

such a complaint is submitted, or what the role of the Committee is. In the absence of any specific 

provisions, the ECB understands that the Monitoring Committee will simply report to the Minister for 

Finance  and  to  the  relevant  Parliamentary  Committee  on  the  receipt  of  such  complaints,  without 

having the power to take any action towards resolving or adjudicating on any disputes arising out of 

such complaints. 

2.5  Considering the tasks conferred on the Monitoring Committee, the ECB understands that the role 

envisaged  for  the  Monitoring  Committee  by  the  Law  is  essentially  that  of  fiscal  oversight.  This 

understanding is also supported by the presence of the Accountant and Auditor Generals, as chair 

and observer, respectively, in the Monitoring Committee. In view of the mandate of the Monitoring 

Committee  to  assist  the  Government  in  the  application  of  a  State  guarantee  scheme,  a  qualified 

independent entity would be well positioned to monitor compliance with the Law 5. In the absence of 

any fiscal oversight mandate or role for the CBC, it is noted that the officials of the CBC are not well 

positioned for the purposes of fulfilling this mandate.  

2.6  By  the  same  token,  given  the  CBC’s  role  as  a  national  competent  authority  for  the  prudential 

supervision of credit institutions within the Single Supervisory Mechanism (SSM), the participation of 

CBC officials  in the  Monitoring Committee,  and especially in potential reporting by the Monitoring 

Committee, may give rise to legal uncertainty as regards the capacity in which they participate in that 

Committee and the tasks that they perform in this capacity, which could potentially lead to conflicts 

of  interest.  This  is  particularly  relevant  in  relation  to  the  function  of  the  Monitoring  Committee  of 

receiving  complaints  by  unsuccessful  applicants  against  decisions  of  credit  institutions  which  are 

themselves  supervised  by  the  CBC  and  the  ECB  within  the  SSM.  Even  though  the  Monitoring 

Committee does not enjoy any formal powers in this respect, it should be ensured that, in practice, 

there is no interference with credit institutions’ credit risk management processes and that conflicts 

of interest with respect to prudential supervisory concerns regarding the need for effective credit risk 

management are avoided. 

2.7 

In  this  regard,  the  national  legislator  is  invited  to  reconsider  the  CBC’s  representation  in  the 

Monitoring Committee at the next available occasion, and thus ensure that the legal framework will 

be  monitored  by  an  independent  body  that  is  not  involved  in  the  prudential  supervision  of  credit 

5  

See paragraph 3.1 of Opinion CON/2019/42 and paragraph 3.2.4 of Opinion CON/2016/17. 

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institutions 6. The national legislator could also consider a better delineation of the tasks and powers 

of the Monitoring Committee in order to ensure legal clarity and certainty in the application of the 

Law. 

2.8 

In any case, given that the Law does not confer any tasks on the CBC, and given that the Monitoring 

Committee  does  not  enjoy  any  decision-making  or  discretionary  powers  under  the  Law,  the  ECB 

understands that neither the CBC nor its representatives on the Monitoring Committee can incur any 

liability in respect of that Committee’s activities. 

2.9  Finally,  the  Law  envisages  a  consulting  role  for  the  CBC  in  relation  to  the  financial  stability 

implications  of  the  imposition  by  the  Minister  for  Finance  of  administrative  penalties  on  credit 

institutions and borrowers. Given that the Law does not confer any new tasks on the CBC, but rather 

envisages  for  it  this  consulting  role  and  leaves  decisions  on  the  imposition  of  penalties  with  the 

Minister, it is understood that the CBC cannot incur any liability in this respect. 

2.10  The ECB expects to be re-consulted if it is envisaged that: (a) the role of the CBC is to be substantially 

expanded beyond that provided for by the Law and the decrees adopted under it and the CBC is to 

extend its participation in the Monitoring Committee beyond the provision of advice in the context of 

the  Committee’s  monitoring  mandate;  and  (b)  powers  are  to  be  conferred  on  the  Monitoring 

Committee that may have an impact on the prudential supervision of credit institutions.   

This opinion will be published on EUR-Lex.  

Done at Frankfurt am Main, 11 June 2021. 

[signed] 

The President of the ECB 

Christine LAGARDE 

6  

See paragraph 2 of Opinion CON/2013/86. 

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