The Republic of Cyprus has been a member of the European Union since 2004. It participates in the borderless single market and belongs to the monetary and banking union. The objective of the latter is to create a transparent, unified and safe market for financial institutions and banks. This European banking union was initiated by the global financial crisis and the subsequent sovereign debt crisis that had quite a heavy impact on the Cyprus economy in 2013. Managing the link between public finances and the banking sector, along with the risks of inter-connectedness, spill over, and contagion, is now a Union responsibility. Local regulators and supervisors then collaborate with the European Central Bank to monitor the internal financial market to enable early intervention in starting crises. This Single Supervisory Mechanism currently supervises Bank of Cyprus, Hellenic Bank and RCB Bank.
Historically, the Cypriot financial sector has played a significant role in the local economy. In the wake of the aforementioned sovereign debt crisis that nearly bankrupted the country, licensed financial institutions in Cyprus have contributed towards the successful performance of the country after the conclusion of the Economic Adjustment Program. As a result, the local banking sector was gradually reduced in size, while it restructured operations and procedures to ultimately restore credibility. Several financial institutions were resolved at the expense of creditors.
The international business climate and financial sector in Cyprus is characterized by substantial corporate and private sector bank deposits furthered by an influx of highly volatile non-resident capital and foreign direct investment. The banking sector is vulnerable for a nonchalant attitude towards loan repayment. As a result, the level of Non-Performing Loans (NPL) reached 17% of the total cross-sector loan portfolio in 2021. There is serious competition from efficient electronic payment institutions that challenges the profitability of traditional banks in an uncertain and unpredictable economic outlook. Due to this combination of factors, the supervisory authority closely monitors the performance of the financial sector and has proven to intervene when needed. In this regard, bank failure, resolution and the novel bail-in of uninsured bank deposits remains possible.
The Objectives of Bank Deposit Insurance
Savers and investors place their money with financial institutions they can trust. This leads to accumulation of wealth and account balances which provides for personal financial stability that limits the need for tax payer funded social support. It also provides banks with a solid capital base. It is therefore in the public interest to protect bank deposits and maintain confidence in the financial system, especially during times of economic decline. Such protection is warranted by a combination of regulatory bank capital requirements, supervisory review, market discipline and bank deposit insurance. Nevertheless, financial institutions can still encounter severe difficulties that require regulatory intervention.
Regulatory intervention is justified when banks are unable to repay deposits to creditors for reasons relating to their financial position or are failing or likely to fail. It involves a recovery and resolution scheme that starts with statutory administration, goes through deposit insurance to eventually restructure or dissolve the bank. From a theoretical perspective, the available resolution tools do their job. The practical implementation is, however, often time consuming and subject to several conflicts of law at the expense of the creditors of the failing financial institution.
Bank deposit insurance is for most creditors the first milestone to recover a substantial part of their account balance. The objectives of bank deposit insurance can be considered from the perspective of the regulator and the account holder. It is a form of bank regulation that protects account holders up to specified limits and provides for stability of the financial system. Bank deposit protection thus prevents a run on the capital of a bank in distress by managing the response of account holders to bad press.
Legal Foundations of a Deposit Guarantee Scheme and Claim Eligibility
Bank deposits in Cyprus are protected by the Deposit Guarantee and Resolution of Credit Institutions Scheme (DGS). The scheme is also in charge of operating the resolution fund. Deposit Guarantee Schemes compensate bank deposits held by supervised participants when one of them is unable to repay such account balances to creditors. In cases of institutional failure, resolution measures may also be funded through the scheme.
The legal foundations of the Cyprus DGS follows several European Directives on bank regulation and supervision (EU 1024/2013), the provision of credit to the public (1093/2010/EU, 1024/2013/EU), recovery and resolution of credit institutions (2014/59/EU), and deposit guarantee systems (2014/49/EU, previously known as 1994/19/EC and 2009/14/EC). As a result, the Republic of Cyprus has implemented the Business of credit Institutions Law, the Deposit Guarantee and Resolution of Credit and Institutions and Investment Firms laws and the Resolution of Credit Institutions and Investment Firms law into its national legal framework.
Definitions and interpretations of terminology are crucial parts of deposit protection frameworks and their subsequent claim submission and eligibility processes. The Cypriot Deposit Guarantee and Resolution of Credit and Other Institutions Scheme Laws provides insights for creditors of banks that fail in Cyprus. It is important to realize that membership of a DGS is obligatory to all deposit taking credit institutions, subsidiaries and branches of foreign financial institutions that operate in Cyprus. The management committee of the DGS may however exclude credit institutions from its DGS. A list of participants in the Cyprus DGS is published on the website of the Central Bank of Cyprus and available here.
Deposit protection is activated when a supervised deposit taking credit institution is unable to repay deposits to its account holders for reasons relating to its financial condition. Claim eligibility of the Cyprus DGS is laid down in national law and European directives. Bank account deposits that are freely repayable at par and held with contribution paying participants in the Cyprus DGS are protected up to a maximum of 100.000 euro unless these are:
- Deposits arising out of transactions in connection with which there has been a criminal conviction for money laundering.
- Deposits by financial institutions and investment firms.
- Deposits the holder of which has not been identified or who cannot be identified for repayment of the insured account balance.
- Deposits on dormant accounts where no transactions took place within the last twenty four months.
Bank Deposit Protection in Cyprus
The banking system in Cyprus is well capitalized with a high level of private sector deposits and corporate liquidity. This corporate liquidity is shared by local companies, international organizations and other non-resident account holders. Historic events where account holders faced restrictions on the use of their funds, had to apply to deposit insurance, or even accept a ‘haircut’ on their deposit, make bank customers cautious. Cyprus established liquidity regulations, macro-prudential measures and a deposit protection scheme in line with international standards to ensure the stability of its financial sector.
When a bank in Cyprus fails and is unable to repay credit balances to account holders on demand, or an order for special liquidation of the bank is issued by the court, the Central Bank of Cyprus triggers the Deposit Guarantee Scheme. The decree follows the statutory administration imposed on the bank and is announced at the official website of the Central Bank of Cyprus, in local newspapers and via email by the bank to its account holders. In line with the European guidelines, the DGS is active for a two year period and standard protection is maximized at 100.000 euro per eligible creditor. This amount can be raised with 300.000 euro for temporary high balances held at the account for a period not exceeding a twelve months prior to the activation of the DGS.
How to File a DGS Claim in Cyprus
DGS administrators have a duty towards the participants of the fund and the failed financial institution. The fund is responsible for the repayment of insured account balances to eligible account holders. The procedures to submit, verify and settle a DGS claim depend on the private arrangements between the DGS administration and the failed financial institution. The thin line between bank secrecy, privacy protection and creditor verification must be warranted. As a result, an important administrative role is often reserved for the designated financial institution.
To fulfil its duties, the DGS administration must ensure the correct repayments to eligible account holders only. They must therefore verify the information available in the records of the bank with the claim submitted by the claimant. A claim is therefore submitted by the account holder in person at the premises of the DGS administration located at the Central Bank of Cyprus. The claim includes a by the bank approved claim form complemented with supporting evidence of account ownership in its original form, and a repayment instruction to a verifiable bank account of the account holder held at a supervised credit institution within the European Economic Area.
Recovery of Large, Unsecured and Subordinated Deposits
To ensure an effective and efficient market, companies in distress must be resolved accordingly. This same principle applies to bank failure where failed financial institutions are unable to repay account balances to creditors. As a result, resolution frameworks must not only protect and maintain the working of the financial system but must also allow for recovery of account balances for large, unsecured and subordinated creditors. The resolution and recovery framework indicates three main steps for repayment. These include statutory administration, deposit insurance and bank liquidation, but creditors can always take civil action against the bank and others deemed responsible for their losses.
Statutory administration is the first step in bank resolution and aims to identify the most appropriate solution to resolve the issues at the bank. While the available options for are considered via a resolvability assessment, a moratorium on incoming and outgoing payments is imposed. Account holders may be granted restricted access to some account facilities for the time being. When the financial institution is deemed unable to repay deposits on demand to its account holders and this situation remains in the foreseeable future, the deposit guarantee scheme is activated.
Bank deposit protection and the deposit guarantee scheme in Cyprus compensate eligible account holders of deposit taking credit institutions that are unable to honor their financial obligations up to 100.000 euro. Pursuant to Article 7(8) of EU Directive 2014/49/EU, member states may increase this limit for temporarily high account balances for a period of three to twelve months after the amount was credited. The Cyprus Deposit Guarantee and Resolution of Credit and Other Institutions Scheme Law allows deposits derived from real estate transactions, deposits that serve social purposes, and deposits defined in national law, may qualify for an additional coverage of 300.000 euro.
The resolution authority has different tools and legal safeguards to support the continuation or dissolution of the financial institution. Structural reform, asset separation and the sale of the healthy parts of the bank seeks to avoid a bail-out while bail-in and corporate liquidation remain feasible alternatives. To dismantle a bank, national laws in Cyrus prevail over Union law whilst systemically important financial institutions are supervised by the European Central Bank. Bank liquidation and dissolution is identical to the winding up of the insolvent company.
Bail-in and bank liquidation follow the traditional creditor or insolvency hierarchy to repay account holders and other creditors from the assets of the bank. A distinction is made between secured, unsecured and subordinated claims. Secured creditors are paid in full via their floating charge or the assets of the bank. The remaining assets form a common fund for distribution to unsecured creditors (such as regular account holders) on an equal basis. Shareholders are only compensated form the corporate assets when the unsecured creditors are paid in full. Since corporate dissolution and bank liquidation mainly occurs because of financial shortages, unsecured creditors and shareholders are often forced to accept a loss. Hence the reason that all creditors, irrespective of their size should participate in every recovery option available. Contact us via the form below for further information on maximum recovery.
How to Object Against Cyprus DGS Rejections
Only eligible account holders should be repaid insured account balances. Consequently, the DGS administration must verify whether the information in the records of the bank corresponds to the information presented by the claimant. Misunderstanding or indistinctness on both sides of the claim procedures may lead to a request for more information or a rejection of the DGS claim. Claimants must appreciate the gravity of the situation when they are asked for supporting evidence of their claim or have their claim rejected due to the restrictions on successive legal action.
Questions raised by the DGS administration must be answered by the claimant. As long as the DGS administration does not receive an appropriate response to their questions, the claim remains pending until the submission timeframe expires. The administrative court may then decide on the matter, where it must be established that the procedures justify a reinspection of the presented material. Even though the administrative court does not rule on the claim eligibility, an appropriate response to the DGS administration allows the court to refer the case back for reinspection. Reinspection may once again result in claim ineligibility and rejection. The higher court is then the appropriate forum to consider evidence of claim eligibility versus the reasons for rejection. It is important to realize that claimants must comply with the repayment requirements regardless of the decision of the DGS administration and the judicial system. In the worst case scenario, claimants may win the case in court but still not receive their compensation because they do not follow these very rules to receive their repayment.
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This website is an initiative of Legal Floris LLC and Floris Alexander. For more than a decade, we provide local assistance to international creditors and bank account holders to reclaim their money when their bank fails or investment disappears. Our vast experience in dozens of bank failures in different countries allows us to maximize repayment and minimize risk for our clients. For more information, contact us right now and find out how we can help you as well to get your money back:
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