Introduction
The Cyprus House of Representatives has approved two legislative amendments to align national laws with EU directives on the recovery and resolution of credit institutions and investment firms. These developments are part of a broader effort by the European Commission to ensure full compliance with Directive 2014/59/EU (BRRD), as amended by Regulation (EU) 2022/2036. The directive aims to strengthen the financial resilience of globally systemic important institutions (G-SIIs) and harmonise EU banking regulations with international standards.
Directive 2014/59/EU provides a unified framework for managing banking crises across the EU. However, the European Commission identified gaps in the implementation of amendments introduced through Regulation (EU) 2022/2036. These changes are critical for:
- Enhancing the loss absorption and recapitalisation capacity of G-SIIs.
- Addressing risks associated with EU G-SIIs’ subsidiaries located in non-EU countries.
- Strengthening internal resources within complex banking groups to ensure stability during financial crises.
The European Commission has issued formal warning letters to nine member states, including Cyprus, for deficiencies in transposing these amendments. Countries such as Spain, Italy, and Austria now face a two-month deadline to address these issues or risk further action.
Cyprus’ legislative amendments
In response to the Commission’s warnings, Cyprus introduced and passed two harmonising bills designed to address prior discrepancies and incorporate new regulatory requirements.
Recovery and resolution of financial institutions law
The amendments correct earlier legislative errors, including misaligned references and misallocated discretionary powers, ensuring compliance with EU requirements. They also incorporate global standards under the Financial Stability Board’s Total Loss Absorbing Capacity (TLAC) framework. Specific provisions were added to manage risks from subsidiaries in third countries, aiming to prevent spillover effects on Cypriot parent institutions.
Credit institutions law
This legislation ensures compliance with updated Minimum Requirement for Own Funds and Eligible Liabilities (MREL) provisions. Furthermore, it introduces rules for “daisy chain” banking structures, mandating that intermediate entities maintain sufficient capital buffers to absorb losses.
Assessment
The amendments to the legislation are mainly of preventive nature, aimed at bolstering financial resilience and preparing Cyprus for potential crises. They are important for aligning the EU’s banking regulations with international standards and for ensuring systemic institutions can withstand financial shocks.
While Cyprus does not currently host banking groups with subsidiaries outside the EU, the legislation lays the groundwork for effectively managing future instances where such circumstances may arise.
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