By Angelos Anastasiou
Five bills establishing a bank-depositors’ guarantee fund for insured deposits up to €100,000, as well as a bank-resolution fund, were discussed by the House Finance committee on Tuesday.
The bills aim to harmonise Cyprus with European directives, and should have been voted into law – the resolution fund by end 2014, and the deposit fund by July 2015.
Per the provisions of the proposals, oversight authorities will be able to intervene in a timely and speedy manner in a distressed financial institution or investment firm to ensure continuity of its critical financial operations and minimise impact of the company’s resolution to the financial system and the economy.
According to the proposed legislation, losses will burden primarily shareholders, and then creditors, while maintaining the principle that no creditor can be burdened with losses greater than they would have had the company been liquidated.
The bill on creating the two guarantee funds – one for insured bank deposits, and another for the orderly resolution of banks of investment firms – calls for the mandatory contribution of banks’ total insured deposits, currently estimated at €24 billion, to the tune of 0.8 per cent by July 2024 for the deposit-guarantee fund, and 1 per cent by end 2024 for the resolution fund.
Speaking to reporters after the session, committee chairman Nicolas Papadopoulos welcomed the fact that lessons were learned from the tragedy Cyprus faced in March 2013, both at local and European level.
“Funds will be created, both at national and European levels, for the protection of deposits, and clearly-defined procedures for the bail-in of deposits that was imposed on Cyprus at the time,” he said.
“It is not yet clear whether a European deposit-guarantee mechanism will be created. For now, our European partners have asked us to create our own, to which credit institutions will contribute so that a fund for the protection of insured deposits can be tapped in case a bank goes into resolution.”
At 0.8 per cent of total insured deposits, he added, the fund cannot cover the billions parked in Cypriot banks, but it is a positive step that sends a message of stability and security.
“It is also clarified that, in the case of a bail-in, the first to pay for losses are shareholders, then bondholders, and finally bank depositors, with insured deposits protected by the deposit-guarantee fund,” Papadopoulos said.
Questions remain, he added, on whether pension and provident funds can be protected, and “ambiguities” over procedures of offsetting loans against deposits.
“Our effort is for this legislative framework to be voted into law, not only because Cyprus is currently facing a reasoned-opinion procedure from the European Union over our failure to meet harmonisation deadlines, but also because we feel that expedited ratification will strengthen the sense of security for deposits in the Cypriot banking system,” he said.
