By Elias Hazou
LAWMAKERS yesterday got a glimpse of a long-overdue bill creating a bank depositors’ guarantee fund and a bank resolution fund, legislation that Cyprus must enact as part of the EU’s single rulebook or common financial regulatory framework.
Under the government bill, a fund will be set up guaranteeing deposits under €100,000. Banks in Cyprus will contribute to this fund, with a target set for July 2024 to cover 0.8 per cent of secured deposits. Each bank will contribute according to the secured deposits it holds and its risk profile.
A finance ministry official told MPs that the local deposit guarantee scheme currently has €125m, which already satisfies the 0.8 per cent target.
Legislators heard that another fund, setting aside cash for bank resolutions throughout the EU, does exist in Cyprus, but is currently empty. The target is for this fund – which again banks would pay into – to cover 1 per cent of secured deposits by end-2024.
According to DISY MP Prodromos Prodromou, the goal is to create a common EU pot from which banks across the bloc can borrow when they are in distress.
“Effectively they would be borrowing from each other,” he said.
The Single Resolution Fund (SRF), which will start in 2016, will be financed from annual contributions from banks, but it will only reach its target size of €55bn after seven years.
The 19 countries sharing the euro have already agreed on a single bank supervisor and a Single Resolution Mechanism (SRM) for winding up failed banks, with the costs to be covered from a dedicated fund, filled by the banks themselves.
Related to this, the Central Bank of Cyprus (CBC) is meanwhile drafting another law. Cyprus must transpose into national law the EU’s Bank Recovery and Resolution Directive (BRRD), under which bank shareholders, junior and senior bondholders and even large depositors must first lose money if a bank goes bankrupt before any public money can be spent on saving it.
Cyprus is behind schedule in enacting this legislation as well, and has previously been warned by the EU about the delay.
The BBRD complements the European Central Bank-led SRM and vice versa. The BRRD provides uniform rules for the entire single market while the SRM provides the institutional and funding architecture for applying those rules in member states participating in the EU’s banking union.
The common deposit guarantee would represent the third pillar of a European banking union, an initiative designed to strengthen the financial sector in response to the sovereign debt crisis.
But EU paymaster Germany opposes the idea of setting up an EU-wide guarantee, fearing its accumulated funds could be used to guarantee the deposits of savers in other European countries.