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Banking System

The Central Bank of Cyprus

The Central Bank of Cyprus was established in 1963 as an autonomous institution in accordance with the Central Bank of Cyprus Law 1963.  Since July 2002, the Central Bank has been governed by the Central Bank of Cyprus Law 2002. This law ensures the independence of the Bank and compatibility with the relevant provisions both of the Treaty establishing the European Community and of the Statute of the European System of Central Banks and of the European Central Bank. The pertinent constitutional provisions have been amended so as to ensure central bank independence as prescribed by the European Union acquis communautaire. More specifically, the Law establishes the institutional and financial independence of the Bank and the independence of the members of its decision-making bodies when carrying out the tasks conferred upon them.

In addition, the Law specifies that the primary objective of the Bank is to ensure price stability, as stipulated in the Treaty establishing the European Community and in the Statute of the European System of Central Banks and of the European Central Bank. The Law explicitly prohibits the financing of the government, local authorities, public corporations or public undertakings by the Central Bank.

Under the Central Bank of Cyprus Law, the main tasks of the Bank are the:

(a) definition and implementation of monetary policy (including credit policy)
(b) conduct of exchange rate policy, within the framework of the exchange rate policy formulated by the Council of Ministers after the opinion expressed by the Bank
(c) holding, keeping and management of official international reserves
(d) supervision of banks
(e) promotion, regulation and oversight of the smooth operation of payment and settlement systems
(f) provision of services or performance of the tasks of banker and financial agent of the government, and
(g) participation as a member in international monetary and economic organisations.

Monetary Policy of the Central Bank

Cyprus joined the euro area on 1 January 2008 and as a result the setting of interest rates is now the responsibility of the European Central Bank (ECB).  The primary objective of the ECB is to ensure price stability, which means keeping inflation rates below, but close to, 2%.

In order to regulate the supply of money and credit in the economy, the Eurosystem has at its disposal the following set of monetary policy instruments:

· Open market operations
· Standing facilities
· Minimum reserves

The Banking System

Cyprus has a well-developed banking system, which offers a wide range of services catering for the needs of businesses and individuals. Cyprus’ banking system comprises the Central Bank of Cyprus, domestic banks and international banking units.  It also encompasses the co-operative credit institutions, which are supervised by the Co-operative Societies’ Supervision and Development Authority.

The Central Bank of Cyprus is the licensing authority for the conduct of banking business and for the supervision of banks.  In the exercise of its supervisory role, the Central Bank is guided by the recommendations of the Basel Committee on Banking Supervision and the regulatory framework of the European Union.  In July 2003, the Banking (Amendment) Law 2003 was enacted by the House of Representatives for purposes of full compliance and harmonisation with the acquis communautaire.

In recent years banks have expanded their activities beyond traditional banking and their services include insurance, leasing, hire purchase finance, factoring, mutual fund management, investment and consulting as well as custody and asset management services.  Developments in technology and the opening of markets have contributed to a more competitive environment. Banks have responded by upgrading their technological infrastructure and launching new products and services through electronic means or electronic access, using alternative distribution channels such as the Internet, call centers, etc.

In addition to the domestic banks, there are several international banking units, which have been authorised by the Central Bank to operate from within Cyprus.  They are required, however, to confine their activities primarily to the provision of services to non-residents and in currencies other than the Cyprus pound.  Since January 2001, these institutions have been permitted to grant medium and long-term loans in foreign currencies to residents.

International Banking

Since 1 May 2004, when Cyprus became a member of the European Union, all banks licensed by the competent authorities of European Union countries have been allowed to establish branches in Cyprus or provide banking services on a cross border basis without requiring a license from the host supervisory authority i.e. the Central Bank of Cyprus («single passport» principle).

Applicant banks originating from third / non-European Union countries are expected to be institutions enjoying a good reputation internationally with an established track record of growth and profitability. Banking business licences will be granted only to banks licenced in jurisdictions where in the opinion of the Central Bank of Cyprus, proper licencing and banking supervision are exercised and whose banking supervisory authorities subscribe to all the recommendations / principles embodied in the various papers issued by the Basel Committee on Banking Supervision. Applicant banks should also originate from jurisdictions which enjoy a stable economic and political environment. In addition, applicant banks should, inter alia, have a widespread and transparent ownership and, preferably, be listed on a recognized stock exchange, enjoy high ratings by a recognized credit assessment institution, have a strong capitalization and have no significant concentration in lending and deposits or related party business.

Establishing a Business in Cyprus

The Central Bank is currently responsible for authorising the acquisition by non-residents of equity in legal entities registered in Cyprus. Non-residents wishing to participate in Cypriot legal entities that are not quoted on the Cyprus Stock Exchange should apply through an appropriate professional (lawyer or accountant) practising in Cyprus. Applications are classified into one of the three main categories: Direct Investment, International Business Companies, Ship Ownership and Related Activities.

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SCORDIS, PAPAPETROU & Co LLC is a Lawyers’ Limited Liability Company (Reg. No. 221102) regulated by the Cyprus Law Council and the Cyprus Bar Association (Reg. No. 003), Reg. Off. at 30 Karpenisi Street, 1077 Nicosia, Cyprus.