The provision of emergency liquidity to the Cypriot Banks by the Central Bank of Cyprus (CBC) through the ECB`s Emergency Liquidity Assistance (ELA) has played and continues to play a stabilizing role, allowing the smooth functioning of the banking system and preventing the disorderly default of the state, CBC notes.
According to an announcement, issued by CBC in response to local media reports, the two Cypriot Banks, Bank of Cyprus and Popular Bank of Cyprus, were drawing liquidity from ELA until March 21 this year, with no objection from the Board of the European Central Bank.
On March 21, ECB’s Board of Directors, in accordance with previous decisions, would stop providing ELA to both Cypriot banks because there were no clear and no binding policy decisions by the Cypriot side to apply for the support programme.
CBC points out that based on ECB regulations as regards the Emergency Liquidity Assistance the two Cypriot Banks remained solvent until March 25, 2013.
The two Banks stopped to be considered solvent for purposes of providing ELA when the first decision of Eurogroup (March 15) was rejected by the House of Representatives.
For that reason, the Board of Directors of the ECB decided on March 21 to end liquidity assistance to both Banks with a demand for repayment on March 26, 2013. The implementation of the decision would lead to an uncontrolled default of the two Banks, which would eventually lead to a disorderly default of the country, says the CBC.
CBC clarifies that ELA is provided to Banks that are solvent and creditworthy against adequate collateral. ELA funding is not automatic, the key lies in the discretion of the national Central Bank, which evaluates the situation and acts as a lender by providing ELA, after having ensure that there is no objection by the ECB Board of Directors.
Excluded from international markets since April 2011, Cyprus applied for financial assistance from the EU bailout mechanism in June 2012, after its two largest banks sought state aid following massive write downs of Greek bond holdings amounting to €4.5 billion.
In March Cyprus and the Eurogroup agreed on a €10 billion bailout, on condition that Cyprus would secure 10.6 billion required for the recapitalization of its banking sector from own resources.
Under the agreement, Cyprus Popular Bank, Cyprus` second largest lender, would be wound down and its good part will be absorbed by Bank of Cyprus, the island`s largest lender, whose unsecured deposits (above €100,000) may take losses up to 60%. Furthermore, Cyprus has undertaken to implement fiscal consolidation measures amounting to 7.1% of GDP, by 2016.
Amid the adverse financial conditions both in Greece and Cyprus, Cyprus` two largest banks resorted to ECB emergency liquidity amounting to €11.2 billion (9,2 billion for CPB and €2 billion for Bank of Cyprus). This debt has been transferred to the consolidated Bank of Cyprus.
