The House finance committee on Tuesday said that 99 per cent of provident funds would be shielded from a ‘bail-in’ or haircut on deposits, under legislation to be put to the vote this week or the next.
The committee has wrapped up discussion of a batch of bills regulating the failure of banks and investment firms. Cyprus needs to pass the legislation to harmonise with the European Union’s Bank Recover and Resolution Directive (BRRD). The laws will not however be retroactive.
Parties have introduced amendments to the government items, so that protection from a bank ‘bail-in’ is afforded to the provident funds of small and medium-sized enterprises (SMEs) and of charitable institutions.
Exempt from a bail-in will be insured deposits – up to €100,000 – per account in a provident fund, for SMEs with up to 250 employees, a turnover of up to €50 million or an annual budget of €43 million.
According to MPs, this coverage would extend to 99 per cent of provident funds. The remaining 1 per cent concerns provident funds of large organisations, such as the Cyprus Telecommunications Authority.
Acting committee chairman Angelos Votsis (DIKO) said the government has agreed to the parties’ proposals to extend the same degree of protection to provident funds of SMEs which are grouped into a single fund, such as for hotel employees and construction workers.
This applies where hotels and construction companies are considered to be SMEs.
In order to be covered, a fund must be registered with the Registrar of Provident Funds.
The key difference in the new legislation, explained Votsis, lies in the term ‘per account.’ In other words, any haircuts on amounts over €100,000 would be imposed on individual accounts, rather than the fund as a whole. Thus, if in theory no individual account is over €100,000, none would be touched in the event of a bail-in.
Having agreed to the changes, the government now has to go back and accordingly modify the accompanying ordinances, meaning voting on the bills could be delayed to next week.
Where a financial institution is placed under resolution, and a bail-is imposed on creditors, the cash raised will come in this order: shareholders, bondholders, uninsured depositors.
And based on a separate legislative proposal to be tabled at the plenum, the deposits of charitable institutions who do not pay income tax are to be completely exempt from any deposit haircuts.
DIKO meanwhile plans to table an amendment by which any creditors of a financial firm subject to resolution shall not fare worse financially as a result of resolution measures compared to their financial status had the firm been placed under liquidation.
AKEL MP Stavros Evagorou said his party would vote against the bills, as they disagree with the “European Union’s neo-liberal philosophy on bank resolutions, where the European Central Bank insists on treating as investments the millions in depositors’ savings.”
Nevertheless, AKEL will table amendments geared at improving the legislation. One such amendment doubles the monetary sanctions on bank managers and senior officers who are found criminally liable for the collapse of a bank or an investment firm.
As they stand, the government bills provide for a €500,000 fine for such offences where bank failures are concerned, and €350,000 for investment firms. AKEL wants to double those amounts. Persons judged guilty for the collapse of a bank or investment firm could also face up to five years in jail.
According to finance ministry and central bank officials, when a bank is found to be in distress the BRRD is triggered, and if the measures to save the institution fail, it is placed in resolution, which in turn triggers the deposit-guarantee fund.
If the fund fails to cover total deposits guaranteed at the troubled institution, it has the option of borrowing from other similar funds, levying a tax on other banks, and, as a last resort, taking the matter up with the council of ministers for a bailout by the state.
However, according to the BRRD, before the fund takes any action, at least 8 per cent of the required cash must come from a bail-in, or haircut, on creditors’ holdings.
During a previous session of the house committee, finance ministry officials told lawmakers that the bank deposit guarantee fund has met its 0.8 per cent target – or €120 million.
Total deposits under €100,000 in Cypriot banks are currently €24 billion. A separate deposit-guarantee fund has been created for the co-operative group.
Earlier this month, parliament passed two of the BRRD-related bills, and four remain.