This transaction will remove c.a. €6 billion of non-performing loans from the Cypriot banking sector and thereby contribute to its recovery. It is subject to standard regulatory reviews.
The measures approved by the Commission today are the final steps in the restructuring process of CCB, which was initiated by the Cypriot authorities in February 2014 and modified in December 2015. Contrary to expectations at the time, CCB – the second largest credit institution in Cyprus – was unable to return to viability: it failed to recover much money from its very significant portfolio of non-performing loans, partly because of CCB's own governance failures and partly because of obstacles created by the Cypriot legal framework to work out non-performing loans. In light of these difficulties, CCB initiated a sale process on 19 March 2018, which however did not result in any bids at a positive price. All bids proposed a negative sale price, i.e. a sale requiring additional State support.
On 17 June 2018, the Cypriot authorities notified to the Commission for assessment under EU State aid rules their plans to support the orderly liquidation of CCB, including the sale and full integration of some of CCB's assets and deposits into another Cypriot bank, Hellenic Bank. In particular, Cyprus plans to provide around €3.5 billion to CCB (of which €2.5 billion were provided already in April 2018) and to counter-guarantee the guarantees provided by CCB to Hellenic Bank in the context of the sale, including a large asset protection scheme.
As the restructuring of CCB started on the basis of national law before EU rules entered into force (namely the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR)), the process remains governed by Cypriot national law and managed by national authorities. In this context, if Member States consider public support necessary to mitigate the effects of a bank's market exit, EU State aid rules apply, in particular the 2013 Banking Communication.
The Commission concluded today that the Cypriot support measures constitute aid that is compatible with EU State aid rules. In particular, the public support will finance the orderly market exit of the bank, through the sale and full integration of some activities into another credit institution and the wind down of the rest of the bank. CCB's residual entity will be entirely focused on working out its remaining assets. Thus, it will not carry out any new business, which will limit potential distortions of competition arising from the aid.
The Commission was able to take this decision also on the basis of significant binding commitments by Cyprus to reform its domestic legal and judicial framework. These reforms will underpin the long-term viability of Hellenic Bank (as well as the entire Cypriot banking system) and allow the Cypriot State to recover money over time from the workout of CCB's non-performing loans, thereby reducing the net cost of the support measures for the taxpayer. Cyprus' compliance with the commitments under the Commission State aid decision will be closely monitored by an independent monitoring trustee, which will report back to the Commission on a regular basis. The Commission will also closely follow the developments as part of Cyprus' post-programme surveillance.
Finally, the Commission also confirmed that the measures do not constitute aid to Hellenic Bank. This is because Hellenic Bank was selected after an open, fair and transparent private sales process, ensuring that the activities were sold at the best offer available.
Commissioner in charge of competition policy, Margrethe Vestager, said: "The Commission decision approves under EU rules Cypriot plans to take measures to facilitate the liquidation of CCB. CCB will exit the market in an orderly fashion, while some of its activities will be sold and integrated into Hellenic Bank. Deposits of Cypriot households and non-financial corporations will remain fully protected at all times. The approved measures will remove around €6 billion of non-performing loans from the Cypriot banking sector. This, together with Cyprus' commitment to implement key reforms to its legal framework, will help foster the stability and recovery of the Cypriot banking sector."
Background on applicable EU rules
The treatment of CCB was designed and carried out under the national framework in place in February 2014, prior to the entry into force of Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR). Since the recapitalisation and the restructuring of the bank was initiated in 2014 under the Cyprus' national law, the sale of CCB which is part of the same process, remains governed by that law, and not by the post-crisis Union legal framework, i.e. the BRRD and SRMR. This is also in line with the Commission's practice, in respect of legacy cases of the banking crisis, to apply the same set of resolution rules in order to provide legal certainty.
The Commission's assessment of the State aid measures granted by the Cypriot authorities rests on the EU rules applicable for State aid control i.e. the 2013 Banking Communication.
Separately, this transaction is still subject to standard regulatory reviews.
Background on Cyprus Cooperative Bank and the Cypriot economy
Cyprus Cooperative Bank (CCB) is the second largest credit institution in Cyprus. As of February 2018, the Bank had assets with a book value around €12 billion. It had deposits around €11 billion and gross loans in the amount around €11 billion. CCB had around 2,700 employees and a network comprising around 170 branches in Cyprus. CCB does not have any international presence.
CCB has been hampered by a very high non-performing loan ratio (57% as of February 2018), high operating costs and a subdued income generation capacity. The bank was entirely funded through deposits and it did not have any senior or subordinated debt.
The Cypriot economy is subject to close European monitoring through two complementary mechanisms: post-programme surveillance (PPS) and the macroeconomic imbalances procedure (MIP). Both PPS and MIP missions will continue following closely the actions taken to reduce non-performing loans in the Cypriot banking sector.