Cyprus: Cyprus Chapter Of "International Banking Law And Regulation"

I. BANKING SYSTEM

§ 15:1 Banking legislation

There been profound changes in the banking sector in Cyprus and this in turn has been reflected in changes to its legislative framework. The key legislation underpinning the Cyprus banking system is:

  1. The Central Bank Law;1and
  2. The Banking Law.2

The principal drivers for legislative amendments since 1997 have been:

  1. Increased internationalization of banking activities;
  2. New entrants to the banking market place;
  3. Implementation of the acquis communautaire in preparation for and since the accession of Cyprus to the European Union (EU) on 1 May 2004;
  4. Transposition of the recommendations of the Basel Committee on Banking Supervision;3and
  5. Entry into the European Monetary Union (EMU) and adoption of the euro as the national currency on 1 January 2008.

Following the entry of Cyprus into the EMU, one of the most important functions of the Central Bank of Cyprus since its establishment, the determination and implementation of monetary policy, was delegated to the European Central Bank. The Governor of the Central Bank of Cyprus participates in the General Council and the Governing Council of the European Central Bank as a permanent and ex officio member with the governors of all the other EU national central banks that are also part of the Eurosystem.4

The Central Bank of Cyprus is vested with the power and authority to regulate and supervise the banking sector in Cyprus in accordance with the provisions of the banking legislative framework, to assure the stability of the financial system, to regulate and oversee the payment, clearing, and settlement systems operating in Cyprus,5and to collect statistical data on domestic banking in fulfillment of the obligations of the Central Bank of Cyprus as a member of the European System of Central Banks.6

The Central Bank of Cyprus exercises its supervisory role with a view to maintaining the stability of the banking system, to minimize systemic risk and to protect the interests of depositors. The paramount and primary objective of the Central Bank of Cyprus remains price stability7although, as mentioned above, the pursuit of this goal has been delegated to the European Central Bank.

In exercising its functions, the Central Bank of Cyprus is granted extensive powers to issue secondary legislation directives,8as well as to impose sanctions on participants in the domestic banking system for violations of the primary and secondary banking legislation. The sanctions range from reprimanding and imposing fines on the bank's management to initiating its winding up, or revoking its license.9

The Central Bank of Cyprus, the Ministry of Finance and the Cyprus Securities and Exchange Commission jointly constitute the Resolution Authority for the purposes of the Resolution of Credit and Other Institutions Law of 2013 as amended ("the Bank Resolution Law"). Further details of the Bank Resolution Law are given in section 15:24 below.

§ 15:2 Definition of "bank"

The Banking Law defines a "bank" as a legal person with a special license issued by the Central Bank of Cyprus to conduct banking activities.

A bank as a body corporate and as far as its corporate aspects are concerned is regulated by the provisions of the Companies Law if it is incorporated in Cyprus, or other relevant laws applicable at the place of its establishment, if established outside Cyprus. Branches of foreign banks do not have a distinct legal personality.

§ 15:3 Types of financial institutions

There are currently (May 2014) 40 banks and numerous local cooperative credit societies active in Cyprus. The principal categories are:

  1. Public listed companies established in Cyprus;
  2. Affiliates of foreign banks established in Cyprus as private companies;
  3. Branches of foreign banks-companies;
  4. Cooperative banks and special-purpose banks;
  5. The Housing Finance Corporation; and
  6. Representative offices of major international banks.

§ 15:4 Activities of banks

Banking activities are defined as activities carried out within Cyprus or abroad from within Cyprus and consist of the lending of funds acquired from the assumption of obligations to the public in the form of deposits, securities, or other evidence of debt.1

According to the Banking Law,2a deposit is a sum of money paid or received on terms under which it will be repaid with or without interest or a premium and either on demand or within a term, or under conditions agreed by or on behalf of the person making the payment and the person receiving it, but which are not related to the sale or supply of property, the provision of services, or the issue of debentures or shares.

The sole business of accepting deposits, although not a banking activity per se according to the definition in the Banking Law, nevertheless requires a license from the Central Bank of Cyprus and is subject to all applicable regulation. The Central Bank of Cyprus has the power3to exempt certain transactions from the definition of deposit by reference to any factors it deems appropriate and especially by reference to the amount of the deposit, the overall obligations of the person who accepts the deposit, the circumstances surrounding the deposit or the purpose for which the deposit was made, and the number or value of the transactions.

A bank is prohibited from engaging in activities other than those necessary in the ordinary course of banking operations for the satisfaction of debts due to the bank and the activities specified by the Banking Law as integral or closely related to banking business, e.g., financial leasing, factoring, money transmission services, issuing and administering means of payment including credit cards, travelers' checks, and banker's drafts, guarantees and commitments, investment services, data processing services, insurance brokerage services, safe custody services, and any other activity which may be specified as such by the Central Bank of Cyprus.4

Insofar as banks provide investment services, they are subject to the provisions of the legislation implementing the EU Markets in Financial Instruments Directive (MIFID),5but they remain subject to the exclusive supervision of the Central Bank of Cyprus in relation to these services as well.6

§ 15:5 Particular activities—Banks

The Banking Law imposes specific restrictions on certain business activities and transactions with the intent of ensuring that a bank always maintains an adequate capital base. These restrictions are summarized below:

A bank incorporated in Cyprus may not allow the total value of exposure granted to any one person to exceed at any time 25 per cent of its net assets, or such other lower percentage as the Central Bank of Cyprus may determine from time to time.1

A bank may not permit the aggregate of all large exposure2to exceed at any time 800 per cent of its net assets, or such other lower percentage as the Central Bank of Cyprus may determine from time to time.3

A bank may not grant any credit facility to any director unless the transaction has been approved by a resolution of the board of directors carried by a majority of two-thirds of the total number of directors of the bank at a meeting at which the director concerned was not present during the discussion of the subject by the board and did not vote on the resolution. The exposure in such a case should be granted on the same commercial terms as would apply to a customer for a similar exposure in the ordinary course of banking business.4In any case, the bank may not permit the total value of exposure in respect of all its directors to exceed at any time 40 per cent of its net assets, or such other lower percentage as the Central Bank of Cyprus may determine from time to time. Furthermore, the bank may not permit the total value of unsecured exposure in respect of all its directors to exceed at any time 5 per cent of its net assets, or such other lower percentage as the Central Bank of Cyprus may determine from time to time.5

A bank may not acquire, purchase, or hold any right in any immovable property, except where the property may be currently required for the purpose of conducting its business and other activities or where the property is acquired in the course of satisfaction or settlement of debts due to the bank, in which event the property must be disposed of as soon as possible and in any case within three years of its acquisition, except where the Central Bank of Cyprus extends the period of three years if it considers that such extension is fully justified on account of exceptional circumstances.6

A bank may not acquire or hold, directly or indirectly, more than 10 per cent of the share capital of any other company or have control over such a company and, in the case of a bank incorporated in Cyprus, the value of any share capital held in any other company may not exceed 10 per cent and for all companies in aggregate may not exceed 25 per cent of the bank's net assets, unless the Central Bank of Cyprus gives its prior written approval subject to any conditions which it may consider proper to impose.7This limitation does not apply:

  1. Where a bank acquires or holds any part of the share capital of any company under an underwriting or sub-underwriting contract for a period not exceeding two years from the time of acquisition except where the Central Bank of Cyprus considers it proper to extend the period of two years on account of exceptional circumstances;
  2. To any holding of share capital in a company incorporated in Cyprus which carries out banking business, nominee, executor, or trustee functions, or predominantly other functions integral to or closely related to banking business;8or
  3. To any share capital in another company which was acquired by the bank in the course of satisfaction of debts due to it, provided that such share capital is disposed of not later than three years from the time of its acquisition, except where the Central Bank considers it proper to extend the period of three years on account of exceptional circumstances.9

A bank is prohibited from engaging in any trading activity or enterprise, whether on its own account or on a commission basis, save in so far as may be necessary in the ordinary course of banking operations for the satisfaction of debts due to the bank.10

A bank may not acquire or deal for its own account in its own shares without permission from the Central Bank of Cyprus, or grant credit facilities to persons other than the employees of the bank in excess of ¬85,430 per person for the purpose of financing the purchase of its own shares, the shares of its holding company, or the shares of any subsidiary of the bank or of its holding company.11

§ 15:6 Particular activities—Cooperative societies

In Cyprus, the more than 100 Cooperative Credit Societies and the Central Cooperative Bank (the CCB) currently hold an aggregate market share of over 30 per cent of local deposits and loans. The main aim of the Societies is to make available credit facilities and other banking services to their members in accordance with their principles of mutual help and assistance. The Societies are not profit-oriented organizations and they have strong links with local communities, since each is governed by a committee of residents of the geographic area where it offers its services. They are registered cooperative societies and comply with the Cooperative Societies Laws and Rules.

The Central Cooperative Bank is the core of the system of cooperative credit societies since it fulfils both the role of lender of last resort and the banker of the system and the role of the central body, as defined in Directive 2000/12/EC.1This dual role renders it subject to the supervision of both the Cooperative Societies' Supervision and Development Authority and the Central Bank of Cyprus2on all issues related to the conduct of banking activities, e.g., capital adequacy, liquidity, risk management policies, governance, internal control, and anti-money laundering regulations.

In February 2014 plans were announced to recapitalise and restructure the cooperative credit institutions and their central body, the Cooperative Central Bank Limited. The number of cooperative credit institutions will be reduced to 18 via mergers. They will be owned and controlled by the cooperative central body, 99% of whose shares will be owned by the government.

§ 15:7 Housing Finance Corporation

The Housing Finance Corporation is a state-owned banking institution whose main aim is the provision of housing loans to individuals of middle and low income.1The board of directors of the Corporation, consisting of seven members, is appointed by the Council of Ministers. The Board may:

  1. Proceed with loans on mortgages and promote saving plans;
  2. Grant loans using deposits as security; and
  3. Act as a trustee of the government, international or local organizations, foundations, or other legal entities.

The Corporation is a banking institution and by express provision of the Housing Finance Corporation Law2is subject to the supervision of the Central Bank of Cyprus and the provisions of the Banking Law.3Owing to its nature as a state-owned and controlled entity, its activities are also monitored by the central government.

§ 15:8 Housing Finance Corporation—Representative offices of international banks

The Banking Law defines a representative office as an office (and not a distinct legal entity) of a foreign bank from which the interests of that bank are in any way promoted or assisted. Importantly, neither banking business nor the business of accepting deposits may be carried on at such an office.1The establishment of a representative office is subject to the prior approval of the Central Bank of Cyprus that may grant its approval subject to any conditions it considers proper to impose.2

A representative office may use the word bank or any grammatical variation of that word as part of its name, provided that it is the name under which the banking institution to which it belongs carries on business in its country of origin and provided further that the name is used in Cyprus in conjunction with the description "Cyprus representative office". The Central Bank of Cyprus has wide discretion in the exercise of its supervisory functions over representative offices operating in Cyprus. At any time it may impose conditions or cancel any conditions already imposed or even revoke any approval granted.3

To read this Chapter in full, please click here.

Originally published by Thomson Reuters Westlaw.

Footnotes

[Section 15:1]

1. Law Number 13 8(I) of 2002, as amended by Law Number 166(I) of 2003 and Law Number 34(I) of 2007.

2. Law Number 66(1) of 1997, as amended by Law Number 74(I) of 1999, Law Number 94(I) of 2000, Law Number 119(I) of 2003, Law Number 4(I) of 2004, Law Number 151(I) of 2004, Law Number 231(I) of 2004, Law Number 235(I) of 2004, Law Number 20(I) of 2005, Law Number 80(I) of 2008, Law Number 100(I) of 2009, Law Number 123(I) of 2009 and Law Number 27(I) of 2011.

3. Core Principles for Effective Banking Supervision, Basel Committee on Banking Supervision (September 1997).

4. Central Bank Law, section 20(3)(a).

5. All references to Cyprus in this text refer to the legally recognized Republic of Cyprus and to its legitimate government and institutions.

6. Central Bank Law, section 6.

7. Central Bank Law, section 5.

8. Central Bank Law, section 16.

9. Central Bank Law, section 16; Banking Law, Part XII, XIII, sections 30, 42, and 42A.

[Section 15:4]

1. Banking Law, section 2.

2. Banking Law, section 2.

3. Banking Law, section 3(3).

4. Banking Law, sections 14 and 13(3).

5. Investment Services and Activities and Regulated Markets Law, Law Number 144(I) of 2007. MIFID came into force on 1 November 2007 when it replaced the Investment Services Directive. It provides a harmonized regulatory regime for investment services across the 30 member states of the European Economic Area (EEA, the 27 member states of the EU plus Iceland, Norway, and Liechtenstein).

6. Law Number 144(I) of 2007, section 120. See also in this respect the Directive for the Professional Conduct of Banks during the Provision of Investment or Ancillary Services and during the Performance of Investment Activities issued by the Central Bank in December 2007, available at http://www.centralbank.gov.cy/media/pdf/BSDRE_Directive_for_the_professional_conduct_of_banks.pdf.

[Section 15:5]

1. Under the Banking Law, section 11(1)(a), the Central Bank may allow exposure in excess of 25 per cent provided that the excess relates to trading book exposures and is covered by additional capital requirements as prescribed by the Central Bank of Cyprus Directive.

2. A large exposure is defined in the Banking Law, section 11(4), as an exposure to any one person equal to or greater than 10 per cent of the net assets of a bank.

3. Banking Law, section 11(1)(b).

4. Banking Law, section 11(1)(c).

5. Banking Law, section 11(1)(e).

6. Banking Law, section 12. According to a directive issued by the Central Bank on this issue, see http://www.centralbank.gov.cy/media/pdf_gr/BCDRG_AKINITI_PERIOUSIA_TRAP.pdf, banks are required to report bi-annually acquisitions and disposals of real property.

7. Banking Law, section 13. See the directive issued by the Central Bank on this issue at http://www.centralbank.gov.cy/media/pdf_gr/BCDRG_EPEND_SE_TRITEW_ETER.pdf, whereby banks are required to report annually acquisitions and disposals of shares in other companies.

8. Banking Law, section 13(3).

9. Banking Law, section 13(4).

10. Banking Law, section 14.

11. Banking Law, section 15.

[Section 15:6]

1. Article 2(5) and (6) of Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions.

2. Banking Law, section 35(2).

[Section 15:7]

1. Housing Finance Corporation Law, Law Number 43 of 1980, section 5(1).

2. Housing Finance Corporation Law, section 5(3).

3. Banking Law, section 36.

[Section 15:8]

1. Banking Law, section 2.

2. Banking Law, section 8(1).

3. Banking Law, section 8(3) and (4).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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