The Central Bank of Cyprus (CBC) was established in 1963, shortly after Cyprus gained its independence, in accordance with the Central Bank of Cyprus Law, 1963 and the relevant articles of the Constitution. Today the CBC is governed by the Central Bank of Cyprus Law, 2002 as amended (hereafter “the CBC Law”).
The primary objective of the CBC is to ensure price stability. Without prejudice to its primary objective, subject to fulfillment of its obligations under the provisions of paragraph (1) of Article 105 of the Treaty establishing the European Community, as currently modified, the CBC supports the general economic policy of the government.
The CBC exercises all the powers necessary to achieve its objectives, including the powers arising from the participation of the CBC in the European System of Central Banks (ESCB).
The main functions of the CBC are:
(a) To contribute, as an integral part of the ESCB, in the formulation and implementation of the European Community's monetary policy;
(b) The possession and management of the Republic’s official reserves, including the CBC’s and the government’s foreign currency and gold reserves;
(c) Conducting foreign exchange transactions and managing the international reserves which may be granted to the CBC for management, subject to the provisions of Article 111 of the Treaty establishing the European Community, as currently amended;
(d) Licensing and supervision of credit institutions in accordance with the provisions of the Business of Credit Institutions Law, as amended from time to time. Since the inception of the Single Supervisory Mechanism (SSM) on 4 November 2014, an important part of the supervisory functions of the CBC was assigned to the European Central Bank (ECB), in accordance with the provisions of Regulation (EU) No. 1024/2013 of the Council of 15 October 2013 for the conferring of specific tasks upon the ECB concerning policies relating to the prudential supervision of credit institutions;
(e) The macro-prudential oversight of the financial system, with a view to ensuring the stability of the financial system;
(f) The supply of services or the exercise of functions as banker and representative of the Republic of Cyprus in financial matters;
(g) The promotion, regulation and oversight of the smooth operation of payment, clearing or settlement systems;
(h) The collection, compilation and dissemination of statistical data, including data required by the CBC in order to fulfill its duties towards the ECB, being an integral part of the ESCB;
(i) Participation as a member in international monetary and economic organisations, subject to the ECB's approval under paragraph (2) of section 6 of the Statute of the ESCB.
During the early years of its operation, the CBC undertook fully the functions of banker to the government and the management of international reserves as well as the administration of exchange controls. In parallel, the CBC strengthened its internal structure and prepared the regulatory framework for banking supervision, also setting up the operational framework for the implementation of monetary policy. In the late 1960s and early 1970s, monetary policy became more active, while bank supervision was formalised. During this period government stocks were first issued, with a view to promoting savings and the non-inflationary financing of fiscal deficits.
Following the economic dislocation and disruption caused by the Turkish invasion in 1974, the CBC was actively involved in the reactivation of the economy. Thus, the CBC pursued an expansionary monetary policy, facilitating the financing of the housing needs of the refugees and the replenishment of lost capital stock and infrastructure. The role of the CBC was instrumental in the achievement of a rapid improvement in economic conditions that took place subsequently. During the post-invasion period, the CBC also assumed a leading role in promoting Cyprus as a regional financial and business centre. Over the years, the international business sector, in particular, has shown a rapid progress and expansion, making a significant contribution to foreign exchange earnings and employment on the island.
Prior to Cyprus’s accession to the European Union (EU) in 2004, the CBC began to intensify its efforts towards the liberalisation of the financial sector, which was necessitated both by economic considerations as well as by the need to harmonise Cypriot economic structures and policies with those of the EU.
In 1996 the CBC introduced a new monetary policy framework, in line with current EU practices, moving away from the use of direct tools for monitoring liquidity in the banking system in favour of market-based tools. More specifically, the liquid assets ratio, which was the main instrument of monetary policy, was abandoned and main refinancing operations allotted through tenders became the primary tool of liquidity management and monetary policy. Auctions for the acceptance of deposits were also introduced as a means to mop-up excess liquidity.
A landmark in the liberalisation process of the financial sector was the abolition of the statutory interest rate ceiling on 1 January 2001.
In the area of capital movement liberalisation, the Capital Movement Law was enacted in July 2003 and came into force on 1 May 2004, the date of Cyprus's accession to the EU. This law, inter alia, repealed the Exchange Control Law, thus abolishing all remaining exchange control restrictions.
On 2 May 2005, the Cyprus pound joined the Exchange Rate Mechanism II (ERM II) at the pre-existing central parity of €1=CY£0,585274, unchanged from the parity at which it had been unilaterally pegged to the euro since 1999. The standard fluctuation margins of + 15% were maintained, although in practice the pound fluctuated within the narrower range of + 2,25, both before and after ERM II entry.
On 1 January 2008, Cyprus joined the euro area, thus bringing to fruition the island’s goal of becoming a fully integrated member of the EU. The conversion rate between the euro and the Cyprus pound was set at CY£0, 585274 by the ECOFIN Council on 10 July 2007, in other words the same rate at which the Cyprus pound joined ERM II.
Since Cyprus became a member of the euro area, the CBC has implemented the single monetary policy of the Eurosystem. Under this framework, there are two standing facilities aimed at providing and absorbing overnight liquidity – the marginal lending facility and the deposit facility, respectively - while the minimum reserve account is the only operational account of banks with the CBC.
Furthermore, on 4 November 2014, when the SSM came into force, the supervision of important financial institutions was entrusted to the ECB. More specifically, the ECB is now responsible for the direct prudential supervision of important credit institutions (and their subsidiaries) established in the euro area member states, while the direct prudential supervision of other financial institutions established in the euro area continues to be exercised by the national supervisory authorities (i.e. by the CBC in Cyprus) under the guidelines and instructions of the ECB. The supervision of branches of credit institutions from third countries which are active in member states remains the exclusive competence of the national supervisory authority.
According to Section 59(1)(a) of the Prevention and Suppression of Money Laundering Activities Law, 2007-2014, the CBC is the competent authority for the enforcement of the provisions of the legislation regarding financial business on credit, payment and electronic money institutions. In this connection, in December 2013 the CBC issued the 4th version of the Directive on the Prevention of Money Laundering and Terrorist Financing, which sets out the procedures and control systems that all credit institutions should implement for the effective prevention of money laundering and terrorist financing, so as to achieve full compliance with the requirements of the Law. The CBC has also issued a series of guidelines to credit institutions on key thematic areas, such as customer identification procedures and due diligence measures, ongoing monitoring of accounts and transactions, politically exposed persons, fraudulent tax crimes as predicate offenses and risk management systems for the prevention and suppression of money laundering and terrorism financing.
In addition to the above, the CBC is the competent supervisory authority for payment institutions, electronic money institutions, bureaux de change businesses and credit acquiring companies operating in Cyprus.
Finally, in January 2015 the Single Resolution Board (SRB) was set up pursuant to Regulation (EU) No. 806/2014 for the establishment of the Single Resolution Mechanism as the second pillar of the Banking Union. The SRB is the resolution authority for the significant and cross-border banking groups established within participating member states, i.e. countries which have the euro as their currency. The SRB works in close cooperation with the national resolution authorities, including the CBC. Its mission is to ensure an orderly resolution of failing banks with minimum cost to the taxpayers, the real economy and public finances of participating member states and beyond. Since 1 January 2016, the SRB has been working on developing resolution plans for credit institutions, with a complete set of resolution powers.
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