Resolution of credit institutions in 2013
New law

This update explores the scope and measures of the new Law for the Resolution of Credit Institutions and Investment Companies (Law 2 22(I)/2016), which was introduced in 2016.

Resolution of credit institutions in 2013

In early 2013 the Cyprus banking sector was in severe difficulties. As a result of the disproportionately large banking sector, Cyprus faced a major economic crisis. Laiki Bank, the second-largest bank in Cyprus, was on the verge of bankruptcy, a factor which would inevitably have led to the collapse of the Cyprus economy if no steps were taken. At the time, there was no concrete banking resolution infrastructure or regulation in Cyprus to assist in such a dire situation. Parliament convened an emergency session on March 22 2013, which lasted just two days, and passed the Resolution of Credit and Other Institutions Law (17(I)/2013) in order to facilitate the restoration of the viability of the financial sector in Cyprus and to satisfy the criteria imposed by the Eurogroup (the eurozone finance ministers) as a condition to the €10 billion bailout to the Cyprus economy.

The 2013 law gave power to the Central Bank of Cyprus (CBC) as resolution authority to impose certain measures to credit, banking and cooperative institutions. These measures included:

  • the increase of share capital of the affected institution;
  • the sale of operations of an affected institution;
  • the transfer of assets rights or liabilities; and
  • the bail-in of the affected institution.

The 2013 law resulted in Laiki being placed under resolution, whereby substantially all of its assets were transferred to Bank of Cyprus, leaving it with minor, mainly insignificant assets. Further, Bank of Cyprus absorbed the largest part of Laiki's operations.

Although the 2013 law allowed for the resolution of credit institutions, due to the hasty nature of its application and as it was enacted before the implementation of the EU Banking Recovery and Resolution Directive (2014/59/EU), which was published by the European Commission on June 12 2014, this law provided insufficient detail on certain vital aspects of its implementation.

New law

In March 2016 Parliament enacted the new Law for the Resolution of Credit Institutions and Investment Companies. The 2016 law replaced the existing legislation in order to align Cyprus national law fully with EU provisions.

Scope of 2016 law
The 2016 law gives the CBC as the resolution authority the power to impose, together with the Ministry of Finance, certain measures on:

  • institutions (ie, authorised credit institutions or investment firms);
  • financial institutions established in Cyprus if they are a subsidiary of a credit institution or of a company referred to in the third and fourth bullets below and are covered by the supervision of the parent undertaking on a consolidated basis in accordance with Articles 6 to 17 of EU Regulation 575/2013;
  • financial holding companies, mixed financial holding companies and mixed-activity holding companies established in Cyprus;
  • parent financial holding companies and mixed financial holding companies established in Cyprus; and
  • branches of institutions which are established outside Cyprus in accordance with the specific provisions laid down in the 2016 law (together, 'the affected institutions'). The resolution authority may impose these measures on an affected institution provided that certain conditions are met and in order to achieve the resolution principles as stated in the 2016 law.

Resolution measures
The resolution measures may be implemented with the following means:

  • the sale of business tool;
  • the bridge institution tool;
  • the asset separation tool; and
  • the bail-in tool.

A brief summary of each of these resolution measures is set out below.

Sale of business tool
The resolution authority has the power to transfer to a purchaser that is not a bridge institution:

  • shares or other instruments of ownership issued by an institution under resolution; and
  • all or any assets, rights or liabilities of an institution under resolution.

Subject to certain provisions in the 2016 law, this transfer is deemed valid and enforceable against third parties and can take place without obtaining the consent of the shareholders of the institution under resolution or a third party other than the purchaser and without the need to comply with any requirements of any law or contract term.

Bridge institution tool
In order to ensure the critical function of the bridge institution, the resolution authority may issue a decree for the transfer to a bridge institution:

  • shares or other instruments of ownership issued by one or more institutions under resolution; and
  • all or any assets, rights or liabilities of one of more institutions under resolution.

As with the sale of business tool, subject to certain restrictions this transfer may take place without obtaining the consent of the shareholders of the institutions under resolution or a third party other than the bridge institution, and without complying with any procedural requirements under company or securities law.

Asset separation tool
The resolution authority may also issue a decree for the transfer of assets, rights or liabilities of an institution under resolution or a bridge institution to one or more management vehicles. This may also be obtained without the consent of the shareholders or a third party. For this purpose, an asset management vehicle is deemed to be a legal person which:

  • is wholly owned by the resolution fund and controlled by the resolution authority; and
  • has been created for the purpose of receiving some or all of the assets, rights and liabilities of one or more institutions under resolution or a bridge institution.

Bail-in tool
The bail-in tool allows the resolution authority to recapitalise a failing institution through the writedown of liabilities or their conversion to equity so that the bank can continue as a going concern. The resolution authority may use the bail-in tool to:

  • recapitalise an institution or a relevant person that meets the conditions for resolution to the extent which it can:
    • restore the ability to comply with the conditions for the authorisation in order to continue to carry out the activities for which the entity is authorised or if a relevant person is subject to such conditions, to such person;
    • allow the continuation of operations which have been authorised pursuant to the Provision of Investment Services Law or the Business of Credit Institutions Law 66(I)/1997 (as amended); and
    • sustain sufficient market confidence in the institution or entity; and
  • convert to equity or reduce the principal amount of claims or debt instruments that are transferred:
    • to a bridge institution in order to provide capital to that bridge institution; and
    • within the scope of the sale of business tool or the asset separation tool.

Although the scope of the bail-in tool is generally broad, the 2016 law contains exclusions from the scope, implementing Article 44 of the directive regardless of whether the liabilities are governed by the laws of a member state or a third country. These include, but are not limited to:

  • covered deposits;
  • secured liabilities, including covered bonds and liabilities in the form of financial instruments used for hedging purposes which form an integral part of the cover pool, and which, according to national law, are secured in a way similar to covered bonds; and
  • liabilities to institutions, excluding entities that form part of the same group, with an original maturity of less than seven days.

Contractual recognition of bail-in
The 2016 law includes the provision for the contractual recognition of bail-ins. Under this provision, institutions and related persons must include a contractual term by which the creditor or a party to the agreement creating the liability recognises that liability may be subject to writedown or conversion powers and agrees to be bound by any reduction of the principal amount or the outstanding balance due, conversion or cancellation that is effected by the exercise of those powers by the resolution authority under certain conditions.

Overrides and stays
The resolution authority has, in addition to the implementation of the resolution measures, a number of powers pursuant to the 2016 law, as follows:

  • the power to suspend obligations to make a payment or delivery under a contract where one of the parties is an institution under resolution measures;
  • the power to restrict secured creditors of an institution under resolution from enforcing security interests in relation to any assets of that institution under resolution; and
  • the power to suspend temporarily termination rights (including a right to close out, offset or net obligations or any similar provision that extinguishes an obligation of a party to the contract and a provision that prevents an obligation from arising under contract) of any contract with a bank under resolution assuming that all the obligations under the contract to make payment or deliveries or provide collateral continue to be performed

The restriction period for these powers ends at midnight at the end of the first business day following the publication of the restriction. A person may exercise a termination right under a contract before the end of the restriction period if he or she receives notice from the resolution authority that the rights and liabilities covered by the contract shall not be:

  • transferred to another entity; or
  • subject to writedown or conversion on the application of the bail-in tool.

Where a resolution authority exercises the power to suspend termination rights, and where no notice has been given for the exercise of a termination right before the end of the period of restriction, those rights may be exercised on the expiry of the period of suspension, subject to Section 70, as follows:

  • If the rights and liabilities covered by the contract have been transferred to another entity, a counterparty may exercise termination rights in accordance with the terms of that contract only on the occurrence of any continuing or subsequent enforcement event by the recipient entity.
  • If the rights and liabilities covered by the contract remain with the institution under resolution and the resolution authority has not applied the bail-in tool in accordance with Section 53(1)(a) to that contract, a counterparty may exercise termination rights in accordance with the terms of that contract on the expiry of a suspension.

Safeguards of Articles 76-80 of directive
The safeguards set out in Articles 76-80 of the directive have been implemented through Sections 78-82 of the 2016 law. These provisions provide for safeguards for the following:

  • shareholders and creditors, whereby if a shareholder or creditor has incurred greater losses than it would have incurred in a winding-up under normal insolvency proceedings, it is entitled to the payment of the difference from the resolution fund;
  • counterparties in partial transfers;
  • financial collateral, set-off and netting arrangements;
  • security arrangements;
  • structured finance arrangements and covered bonds; and
  • in relation to partial transfers, protection of trading, clearing and settlement systems.

For further information on this topic please contact Nancy Erotocritou, Stephanie Havatzias or Marios Koutsios at Harneys by telephone (+357 2582 0020) or email ([email protected], [email protected] or [email protected]). The Harneys website can be accessed at