## _cr09167 - Key Recommendations ## Source details **Canonical URL:** [_cr09167 - Key Recommendations](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09167.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09167.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09167.pdf.json) --- ### I. Introduction — scope and basis of update - Purpose: factual update of the 2005 assessment of Cyprus compliance with the 1997 Basel Core Principles for Effective Banking Supervision (BCP), including follow-up on implementation of the 2005 BCP assessment undertaken in the context of the 2005 Offshore Financial Center (OFC) assessment. - Sources used: factual update prepared by the Central Bank of Cyprus (CBC); interviews with CBC staff, external auditors, industry and professional associations; legal and other background documents. - Note on legal basis: update based solely on laws, supervisory requirements, and practices in place at the time of the assessment. A translation of the latest amendment of the Banking Law is pending. - Pending regulatory initiatives flagged: proposed amendments to mergers and acquisitions with respect to banks, to be enacted in accordance with EU Directive 2007/44/EC by March 20, 2009. ### II. Overview — supervisory scope and organization - CBC responsibilities: - Licensing, winding up and supervising all commercial domestic and foreign credit institutions and foreign bank branches in Cyprus. - Safeguarding financial stability of the financial system is defined as one of the main tasks of the CBC in the CBC Law. - CBC management body: board of directors consisting of the governor, the deputy governor, and five directors. - Appointment of senior officials: governor and deputy governor appointed by the president and the vice president of the Republic, respectively. - Independence: the independence of the CBC is secured by the Cyprus Constitution; no doubts identified on operational or financial independence. - CBC staffing (Banking Supervision and Regulation Division): - Bank Supervision and Regulation Department: 44 staff members. - Licensing Department: 3 staff members. - Sector structure: - 19 domestic commercial banks. - 24 branches of foreign incorporated banks operating in Cyprus. - Coordination and joint work: - CBC will conduct joint inspections with the Authority for the Supervision and Development of Cooperative Societies (ASDCS). - Duplication identified: CBC and ASDCS both have responsibilities for supervision of the Cooperative Central Bank (CCB) and affiliated Cooperative Credit Institutions (CCIs); CBC responsibilities confined to consolidated supervision of the CCB and affiliated CCIs. - Recommendation noted: a single supervisor for all credit institutions could enhance effectiveness and efficiency and support a level playing field. ### III. BCP factual update — measures, compliance and instruments - General finding: CBC has addressed all areas in the “Recommended Action Plan—Basel Core Principles” from the 2005 OFCA and has broadly implemented the recommendations of the 2005 OFCA. - Transposition and alignment: - CBC has transposed EU directives and supporting regulations in a timely and comprehensive fashion. - Full transposition of the Capital Requirements Directive (CRD) into legislation. - Directives, circulars and guidelines issued by CBC are based on EU Directives, CEBS recommendations and BCBS. - Selected directives, circulars and guidelines issued: - Calculation of the capital requirements and large exposures of banks. - Framework of principles for operation and criteria of assessment of banks' organizational structure, internal governance and internal control systems. - Supplementary supervision of banks belonging to a financial conglomerate. - Suspension of interest and other income on nonperforming credit facilities. - Fitness and probity (assessment criteria) of directors and managers of banks directive. - Management of credit risk, country risk, market risk, operational risk. - Conditions and professional conduct for offering investment or ancillary services. - Transactions effected by electronic payment instruments. - Covering expenses for supervision and on-site examinations. - Immovable property of banks and investments of banks in the capital of other companies. - Interest rate risk in the banking book. - Disclosure and transparency: - Pillar III disclosures provided either in banks' financial statements or on their websites. - In accordance with section 26A of the BL (transposing article 144 of EU Directive 2006/48/EC), CBC discloses on its website and updates regularly texts of laws, regulations, administrative rules and general guidance or aggregated statistical data on key aspects of implementation of the prudential framework in Cyprus. Cooperative banking sector aggregate statistical data are included via the CCB. ### IV. Progress on recommended actions and supervisory capacity - Staffing progress since 2005 FSAP: - Banking Supervision and Regulation Division staff increased by two employees since the 2005 FSAP (the Division now excludes financial stability). - Division participates actively in training seminars and has extensive experience. - Ongoing capacity needs and recommendations: - CBC should continue to develop staff expertise and skills as cross-border activities and complexity of Cypriot banks increase. - CBC should continually ensure it has the necessary resources, expertise and advanced skills. - CBC plans to intensify on-site supervision. ### V. Licensing, ownership and structure (Principles 2–5) - Licensing clarifications and withdrawal of authorizations (section 4A of the BL): - Withdrawals occur when the bank: - does not make use of the authorization within 12 months, expressly renounces the authorization or has ceased to engage in business for more than six months; - has obtained the authorization through false statements or any other irregular means; - no longer fulfills the conditions under which authorization was granted; - no longer possesses sufficient own funds or can no longer be relied on to fulfill its obligations towards its creditors, and in particular no longer provides security for the assets entrusted to it; - falls within one of the other cases where Cyprus law provides for withdrawal of authorization. - Fit-and-proper regime: - New comprehensive “fit-and-proper” directive introduced for boards of directors and senior management, supplementing existing criteria. - Ownership thresholds and approvals: - Any intention to increase control above initially approved levels or to reach 20 percent, 33 percent or 50 percent of the voting rights or of the shares requires notification and prior approval of the CBC. - CBC vets all controlling shareholders (over 10 percent) and obtains names and holdings of all significant shareholders (below 10 percent). - Limits on investments outside financial sector: - CBC Directive requires that investments in excess of prescribed limits are deducted from the bank’s own funds. - BL being amended to adopt Article 120 of EU Directive 2006/48/EC: individual participation to 15 percent of capital and aggregate participation to 60 percent—current Cyprus rules on investment outside the financial sector are stricter than Article 120. ### VI. Prudential regulation and requirements (CPs 6–15) - CRD implementation: - Capital requirements imposed on basis of new approaches in CRD; operational risk included. - Pillar II powers: CBC can require additional capital coverage for other risks (e.g., interest rate risk in the banking book, concentration risk). - Implementation date: January 1, 2007; most banks deferred under Article 152(8) of the CRD to January 1, 2008. - Banks' capital ratios: all banks comply with the ratio and the average ratio for the sector as at 31 December 2007 exceeded 12 percent. - Prudential filters agreed at CEBS adopted. - ICAAP and SREP: - CBC Directive requires banks to have an ICAAP and provide CBC with information necessary for assessment of compliance with CRD. - Adequacy of internal ICAAP evaluated in course of Supervisory Review and Evaluation Process (SREP). - Large exposures and reporting: - Large exposure limits amended per CRD; CBC Directive sets prudential limits to restrict large exposures to single borrowers/groups and connected parties. - Exceptional exposures exceeding limits must be reported without delay; CBC may allow limited time to comply. - Recommendation: change frequency of reporting from 6 to 3 months. - Credit risk management: - 2008 Guidelines require banks to have established and well-documented credit and investment policies, practices and procedures, approved by Boards and implemented by management. - Guidelines provide for setting internal limits for concentration risk but do not negate CRD obligation for comprehensive assessment of all types of risk concentration. - Recommendation: consider establishing a centralized registry of information on credits of one million or more Euro to be collected, aggregated by CBC and made available to banks and other credit providers. - Provisioning and income recognition: - CBC policies where provisioning deemed inadequate may require a bank to hold own funds in excess of minimum level of 8 percent and/or apply specific provisioning policies under Pillar II. - An amendment to the Directive on income recognition recommended to avoid inconsistencies with IAS 39. - Connected persons exposure limits: - BL allows granting loans to “connected persons.” - Current statutory limits: total unsecured exposure to members of the Committee or Supervision Board and to the Secretary/Director and their connected persons should not exceed 5 percent of the bank’s own funds; total exposures of all facilities granted to the above persons should not exceed 40 percent of the bank’s own funds. - Recommendation: these limits should be halved to reduce risk. The granting of loans up to 40 percent of banks own funds to connected persons could be characterized as being too high. - Country and transfer risk: - CBC guidelines require licensed commercial banks to apply systems and procedures for identification, measurement, monitoring and control of country risk; Boards must approve, review and revise country limits. - CBC has not prescribed specific, formal country risk limits; focus is on Board-approved country limits and senior management monitoring. - Market risk: - January 2008 Guidelines on management of market risk emphasize sound management practices for identification, measurement, monitoring and control of market risk commensurate with risks undertaken. - Focus of CBC is on review of limits rather than setting limits, but maximum intraday and overnight foreign exchange limits are set by the CBC. - Guidelines based on Basel Core Principle on Market Risk and CEBS Guideline on Technical aspects of stress testing under the SREP. ### VII. International cooperation and Memoranda of Understanding (MoUs) - CBC initiatives to enhance cooperation with EU and non-EU supervisors, consistent with CRD and CEBS guidelines. - Memoranda of Understanding (MoUs) signed with: - Banque du Liban - Central Bank of the Republic of Armenia - De Nederlansche Bank - Jersey Financial Services Commission - Austrian Financial Market Authority - Estonian Financial Supervision Authority - National Bank of Kyrgyz Republic - Malta Financial Services Authority - CBC is party to a multilateral MoU signed between banking supervisors of South Eastern Europe. ### VIII. Key recommendations and actions for consideration (extracted) - Continue implementation and enforcement of CRD-related requirements and associated CEBS/BCBS guidance. - Continue to develop CBC staff expertise and advanced skills to meet increasing complexity from cross-border activities. - Intensify on-site supervision. - Consider creation of a single supervisor for all credit institutions to enhance effectiveness, efficiency and level playing field. - Change frequency of reporting large exposures from 6 to 3 months. - Consider establishing a centralized registry of credits of one million or more Euro aggregated by CBC and available to banks and credit providers. - Amend Directive on income recognition to remove inconsistencies with IAS 39. - Reduce statutory connected-person exposure limits (recommendation to halve current limits, noting current total exposures up to 40 percent of bank own funds is too high). - Monitor adoption of proposed amendments to mergers and acquisitions regime in line with EU Directive 2007/44/EC by March 20, 2009. ### Under the transposed CRD — qualitative requirements with regard to risk - Qualitative risk management framework: - Qualitative requirements regarding risk management have been "extended, deepened and, above all, made more explicit." - Banks must comply with the Directive issued by the CBC concerning the Framework of Principles of Operation and Criteria of Assessment of Banks Organization Structure, Internal Governance and Internal Control Systems. - Banks should have a written policy and procedures, in line with their operational strategy, covering monitoring and management of risks such as credit risk, market risk, liquidity risk and operational risk. - Banks are required to establish a Risk Management Unit which should be administrative independent of any other units which have operational responsibilities. - Banks should submit to the CBC an annual report on the management of risks. - The CBC appears to have adequate capacity to assess banks’ risk management processes. - Liquidity requirements: - In 2007, the CBC issued a revised Directive on the Computation of Prudential Liquidity setting out CBC requirements for maintaining bank liquidity. - Different liquidity requirements apply to two broad groups of banks: - (i) Group 1: banks primarily active in international business; - (ii) Group 2: banks primarily active in domestic business. - Each bank should have in place a contingency plan for the management of liquidity crises. - Interest rate risk in the banking book: - In 2007, the CBC issued a circular on the interest rate risk in the banking book. - Banks are required to monitor and measure the risk arising from potential changes in interest rates of the order of 200 basis points. - Banks are required to apply and implement the CEBS Guideline on technical aspects of the management of interest rate risk arising from non-trading activities. - Operational risk management: - In 2008 the CBC issued guidelines on the management of operational risk. - Guidelines require banks to recognize the existence and significance of operational risk in relation to their safety and viability and to develop an appropriate framework, commensurate with their size, complexity and risk profile. - For branches in Cyprus of banks incorporated outside the country, the CBC expects that these will apply comparable operational risk management principles. - Governance and AML: - The 2006 directive on corporate governance provides that each commercial credit institution should have a robust internal governance framework. - Cypriot rules and regulations have been amended and explicitly enhanced with the transposition of the CRD; CEBS’s standards and guidance papers with regard to Pillar II have been fully taken on board. - Appendix I of the Directive addresses the issue of outsourcing. - Legislation implementing the third EU Anti-Money Laundering (AML) Directive was passed by the House of Representatives at end of 2007: “The Prevention and Suppression of Money Laundering Activities Law” consolidated, revised and repealed the former Laws on the Prevention and Suppression of Money Laundering Activities. - Under the current Law, Cyprus legislation has been harmonized with the Third EU Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. - The CBC issued a Directive to banks on 2 April 2008 supplementing the requirements of the Law on preventive measures to be taken for the effective forestalling of money laundering and terrorist financing. - Main changes focus on increased powers of the supervisor, e.g., by increasing fines and revoking licenses. - Progress on Recommended Actions from the 2005 Assessment: - Effective 1 January 2006 the 90 days in arrears rule applies for interest suspension; this will be further refined upon alignment with the provisions of International Accounting Standard 39. - The CBC issued formal guidance on the management of country and transfer risks in 2007. - For market risk, the CBC issued Guidelines on the management of market risk in January, 2008, including provisions on scenario analysis, stress testing and contingency planning, and periodic validation or testing of internal systems/models used to measure market risk in line with the EU CRD. - The Banking Supervision and Regulation Division recruited an expert specializing in financial modeling and has recognized the need for enhancing staff expertise through specialized training courses. - Methods of on-going supervision (CPs 16–20): - Under CRD requirements, the ICAAP assessment within the SREP will be carried out once a year for all banks licensed by the CBC. - For all Cyprus-based banks on site examinations are conducted once a year, including material overseas operations; for Cyprus based branches of EU banks the scope is limited. - Some banks have already submitted their ICAAP and the CBC is in the process of conducting the SREP; first reporting results do not identify material problems. - The CRD and risk-based supervision will require the CBC to enhance the frequency and scope of on-site inspections. - An internal rating system for commercial banks has been developed based on the "CAMEL" system. Components are strategy, credit/market/liquidity and operational risk corporate governance and internal control. - A rating for each bank is derived upon completion of the risk assessment exercise and is included in the Internal Rating System template. - Specific audit programs are being designed for use during on-site examinations to assist risk assessment. - The investigated risk profile is used for early warning purposes and for planning on-site supervision. - CBC takes into account information received directly from banks, its own reviews and from other supervisors and to a limited extent from the external auditor. - The classification reflects systemic importance and each credit institution’s risk profile. The system is expected to come into force by the end of the year. - A formal procedure to assess the effectiveness of supervisory functions was introduced by: - (i) establishing an internal quality control panel to ensure effectiveness of the supervisory function and address weaknesses; and - (ii) an Examiners’ Panel to ensure all relevant and material risks have been identified and procedures are applied consistently. - End of 2008 it is planned to introduce a joint on-site inspection plan (20 inspections) between the CBC and the ASDCS concerning their responsibility for consolidated supervision of the CCB. - In the course of 2008 the CBC developed a more formal early warning system implemented at the micro level in the context of the application of SREP. - Information requirements (CP 21): - Amendment to the BL requires the external auditor promptly to report to the CBC any fact or decision concerning his client bank of which he has become aware while carrying out his audit which is liable to constitute a material breach of the laws, regulations or administrative provisions. - Formal powers of supervisors (CP 22): - The CBC retains exclusive sanctioning powers and thus carries full responsibility thereof. - Recommendation: reconsider the range of sanctions available; the “middle section” between essentially symbolic fines and hard enforcement actions seems somewhat weak in the supervisory toolkit. - Cross-border banking (CPs 23–25): - CBC is enhancing cooperation with foreign supervisors given growing involvement of Cypriot banks abroad and of foreign banks in Cyprus. - Under the CRD, the CBC, as a home supervisor, will have to organize colleges with host supervisors for each internationally active group headed by a Cyprus based bank. - Since the last BCP assessment, on-site visits by home supervisors have been conducted in Cyprus by three different regulators. *Source — _cr09167 - 1. Key Recommendations (text content provided from the IMF PDF chapter) and _cr09167 - 31. Under the transposed CRD, qualitative requirements with regard to risk* ### 1. Key Recommendations ................................................................................. ### _cr09167 - 1. Key Recommendations ................................................................................. ### I. Introduction — scope and basis of update - Purpose: factual update of the 2005 assessment of Cyprus compliance with the 1997 Basel Core Principles for Effective Banking Supervision (BCP), including follow-up on implementation of the 2005 BCP assessment undertaken in the context of the 2005 Offshore Financial Center (OFC) assessment. - Sources used: factual update prepared by the Central Bank of Cyprus (CBC); interviews with CBC staff, external auditors, industry and professional associations; legal and other background documents. - Note on legal basis: update based solely on laws, supervisory requirements, and practices in place at the time of the assessment. A translation of the latest amendment of the Banking Law is pending. - Pending regulatory initiatives flagged: proposed amendments to mergers and acquisitions with respect to banks, to be enacted in accordance with EU Directive 2007/44/EC by March 20, 2009. ### II. Overview — supervisory scope and organization - CBC responsibilities: - Licensing, winding up and supervising all commercial domestic and foreign credit institutions and foreign bank branches in Cyprus. - Safeguarding financial stability of the financial system is defined as one of the main tasks of the CBC in the CBC Law. - CBC management body: board of directors consisting of the governor, the deputy governor, and five directors. - Appointment of senior officials: governor and deputy governor appointed by the president and the vice president of the Republic, respectively. - Independence: the independence of the CBC is secured by the Cyprus Constitution; no doubts identified on operational or financial independence. - CBC staffing (Banking Supervision and Regulation Division): - Bank Supervision and Regulation Department: 44 staff members. - Licensing Department: 3 staff members. - Sector structure: - 19 domestic commercial banks. - 24 branches of foreign incorporated banks operating in Cyprus. - Coordination and joint work: - CBC will conduct joint inspections with the Authority for the Supervision and Development of Cooperative Societies (ASDCS). - Duplication identified: CBC and ASDCS both have responsibilities for supervision of the Cooperative Central Bank (CCB) and affiliated Cooperative Credit Institutions (CCIs); CBC responsibilities confined to consolidated supervision of the CCB and affiliated CCIs. - Recommendation noted: a single supervisor for all credit institutions could enhance effectiveness and efficiency and support a level playing field. ### III. BCP factual update — summary of measures, compliance and instruments - General finding: CBC has addressed all areas in the “Recommended Action Plan—Basel Core Principles” from the 2005 OFCA and has broadly implemented the recommendations of the 2005 OFCA. - Transposition and alignment: - CBC has transposed EU directives and supporting regulations in a timely and comprehensive fashion. - Full transposition of the Capital Requirements Directive (CRD) into legislation. - Directives, circulars and guidelines issued by CBC are based on EU Directives, CEBS recommendations and BCBS. - Key directives, circulars and guidelines issued (selection): - Calculation of the capital requirements and large exposures of banks. - Framework of principles for operation and criteria of assessment of banks' organizational structure, internal governance and internal control systems. - Supplementary supervision of banks belonging to a financial conglomerate. - Suspension of interest and other income on nonperforming credit facilities. - Fitness and probity (assessment criteria) of directors and managers of banks directive. - Management of credit risk, country risk, market risk, operational risk. - Conditions and professional conduct for offering investment or ancillary services. - Transactions effected by electronic payment instruments. - Covering expenses for supervision and on-site examinations. - Immovable property of banks and investments of banks in the capital of other companies. - Interest rate risk in the banking book. - Disclosure and transparency: - Pillar III disclosures provided either in banks' financial statements or on their websites. - In accordance with section 26A of the BL (transposing article 144 of EU Directive 2006/48/EC), CBC discloses on its website and updates regularly texts of laws, regulations, administrative rules and general guidance or aggregated statistical data on key aspects of implementation of the prudential framework in Cyprus. Cooperative banking sector aggregate statistical data are included via the CCB. ### IV. Progress on recommended actions and supervisory capacity - Staffing progress since 2005 FSAP: - Banking Supervision and Regulation Division staff increased by two employees since the 2005 FSAP (the Division now excludes financial stability). - Division participates actively in training seminars and has extensive experience. - Ongoing capacity needs and recommendations: - CBC should continue to develop staff expertise and skills as cross-border activities and complexity of Cypriot banks increase. - CBC should continually ensure it has the necessary resources, expertise and advanced skills. - CBC plans to intensify on-site supervision. ### V. Licensing, ownership and structure (Principles 2–5) - Licensing clarifications and withdrawal of authorizations (section 4A of the BL): - Withdrawals occur when the bank: - does not make use of the authorization within 12 months, expressly renounces the authorization or has ceased to engage in business for more than six months; - has obtained the authorization through false statements or any other irregular means; - no longer fulfills the conditions under which authorization was granted; - no longer possesses sufficient own funds or can no longer be relied on to fulfill its obligations towards its creditors, and in particular no longer provides security for the assets entrusted to it; - falls within one of the other cases where Cyprus law provides for withdrawal of authorization. - Fit-and-proper regime: - New comprehensive “fit-and-proper” directive introduced for boards of directors and senior management, supplementing existing criteria. - Ownership thresholds and approvals: - Any intention to increase control above initially approved levels or to reach 20 percent, 33 percent or 50 percent of the voting rights or of the shares requires notification and prior approval of the CBC. - CBC vets all controlling shareholders (over 10 percent) and obtains names and holdings of all significant shareholders (below 10 percent). - Limits on investments outside financial sector: - CBC Directive requires that investments in excess of prescribed limits are deducted from the bank’s own funds. - BL being amended to adopt Article 120 of EU Directive 2006/48/EC: individual participation to 15 percent of capital and aggregate participation to 60 percent—current Cyprus rules on investment outside the financial sector are stricter than Article 120. ### VI. Prudential regulation and requirements (CPs 6–15) - CRD implementation: - Capital requirements imposed on basis of new approaches in CRD; operational risk included. - Pillar II powers: CBC can require additional capital coverage for other risks (e.g., interest rate risk in the banking book, concentration risk). - Implementation date: January 1, 2007; most banks deferred under Article 152(8) of the CRD to January 1, 2008. - Banks' capital ratios: all banks comply with the ratio and the average ratio for the sector as at 31 December 2007 exceeded 12 percent. - Prudential filters agreed at CEBS adopted. - Internal Capital Adequacy Assessment Process (ICAAP) and SREP: - CBC Directive requires banks to have an ICAAP and provide CBC with information necessary for assessment of compliance with CRD. - Adequacy of internal ICAAP evaluated in course of Supervisory Review and Evaluation Process (SREP). - Large exposures and reporting: - Large exposure limits amended per CRD; CBC Directive sets prudential limits to restrict large exposures to single borrowers/groups and connected parties. - Exceptional exposures exceeding limits must be reported without delay; CBC may allow limited time to comply. - Recommendation: change frequency of reporting from 6 to 3 months. - Credit risk management: - 2008 Guidelines require banks to have established and well-documented credit and investment policies, practices and procedures, approved by Boards and implemented by management. - Guidelines provide for setting internal limits for concentration risk but do not negate CRD obligation for comprehensive assessment of all types of risk concentration. - Recommendation: consider establishing a centralized registry of information on credits of one million or more Euro to be collected, aggregated by CBC and made available to banks and other credit providers. - Provisioning and income recognition: - CBC policies where provisioning deemed inadequate may require a bank to hold own funds in excess of minimum level of 8 percent and/or apply specific provisioning policies under Pillar II. - An amendment to the Directive on income recognition recommended to avoid inconsistencies with IAS 39. - Connected persons exposure limits: - BL allows granting loans to “connected persons.” - Current statutory limits: total unsecured exposure to members of the Committee or Supervision Board and to the Secretary/Director and their connected persons should not exceed 5 percent of the bank’s own funds; total exposures of all facilities granted to the above persons should not exceed 40 percent of the bank’s own funds. - Recommendation: these limits should be halved to reduce risk. The granting of loans up to 40 percent of banks own funds to connected persons could be characterized as being too high. - Country and transfer risk: - CBC guidelines require licensed commercial banks to apply systems and procedures for identification, measurement, monitoring and control of country risk; Boards must approve, review and revise country limits. - CBC has not prescribed specific, formal country risk limits; focus is on Board-approved country limits and senior management monitoring. - Market risk: - January 2008 Guidelines on management of market risk emphasize sound management practices for identification, measurement, monitoring and control of market risk commensurate with risks undertaken. - Focus of CBC is on review of limits rather than setting limits, but maximum intraday and overnight foreign exchange limits are set by the CBC. - Guidelines based on Basel Core Principle on Market Risk and CEBS Guideline on Technical aspects of stress testing under the SREP. ### VII. International cooperation and MoUs - CBC initiatives to enhance cooperation with EU and non-EU supervisors, consistent with CRD and CEBS guidelines. - Memoranda of Understanding (MoUs) signed with: - Banque du Liban - Central Bank of the Republic of Armenia - De Nederlansche Bank - Jersey Financial Services Commission - Austrian Financial Market Authority - Estonian Financial Supervision Authority - National Bank of Kyrgyz Republic - Malta Financial Services Authority - CBC is party to a multilateral MoU signed between banking supervisors of South Eastern Europe. ### VIII. Key recommendations and actions for consideration (extracted) - Continue implementation and enforcement of CRD-related requirements and associated CEBS/BCBS guidance. - Continue to develop CBC staff expertise and advanced skills to meet increasing complexity from cross-border activities. - Intensify on-site supervision. - Consider creation of a single supervisor for all credit institutions to enhance effectiveness, efficiency and level playing field. - Change frequency of reporting large exposures from 6 to 3 months. - Consider establishing a centralized registry of credits of one million or more Euro aggregated by CBC and available to banks and credit providers. - Amend Directive on income recognition to remove inconsistencies with IAS 39. - Reduce statutory connected-person exposure limits (recommendation to halve current limits, noting current total exposures up to 40 percent of bank own funds is too high). - Monitor adoption of proposed amendments to mergers and acquisitions regime in line with EU Directive 2007/44/EC by March 20, 2009. *Italic: Source — _cr09167 - 1. Key Recommendations (text content provided from the IMF PDF chapter).* ### 31. Under the transposed CRD, qualitative requirements with regard to risk ### 31. Under the transposed CRD, qualitative requirements with regard to risk ### Qualitative risk management framework - Qualitative requirements regarding risk management have been "extended, deepened and, above all, made more explicit." - Banks must comply with the Directive issued by the CBC concerning the Framework of Principles of Operation and Criteria of Assessment of Banks Organization Structure, Internal Governance and Internal Control Systems. - Banks should have a written policy and procedures, in line with their operational strategy, covering monitoring and management of risks such as credit risk, market risk, liquidity risk and operational risk. - Banks are required to establish a Risk Management Unit which should be administrative independent of any other units which have operational responsibilities. - Banks should submit to the CBC an annual report on the management of risks. - The CBC appears to have adequate capacity to assess banks’ risk management processes. ### Liquidity requirements - In 2007, the CBC issued a revised Directive on the Computation of Prudential Liquidity setting out CBC requirements for maintaining bank liquidity. - Different liquidity requirements apply to two broad groups of banks: - (i) Group 1: banks primarily active in international business; - (ii) Group 2: banks primarily active in domestic business. - Each bank should have in place a contingency plan for the management of liquidity crises. ### Interest rate risk in the banking book - In 2007, the CBC issued a circular on the interest rate risk in the banking book. - Banks are required to monitor and measure the risk arising from potential changes in interest rates of the order of 200 basis points. - Banks are required to apply and implement the CEBS Guideline on technical aspects of the management of interest rate risk arising from non-trading activities. ### Operational risk management - In 2008 the CBC issued guidelines on the management of operational risk. - Guidelines require banks to recognize the existence and significance of operational risk in relation to their safety and viability and to develop an appropriate framework, commensurate with their size, complexity and risk profile. - For branches in Cyprus of banks incorporated outside the country, the CBC expects that these will apply comparable operational risk management principles. ### Governance and AML - The 2006 directive on corporate governance provides that each commercial credit institution should have a robust internal governance framework. - Cypriot rules and regulations have been amended and explicitly enhanced with the transposition of the CRD; CEBS’s standards and guidance papers with regard to Pillar II have been fully taken on board. - Appendix I of the Directive addresses the issue of outsourcing. - Legislation implementing the third EU Anti-Money Laundering (AML) Directive was passed by the House of Representatives at end of 2007: “The Prevention and Suppression of Money Laundering Activities Law” consolidated, revised and repealed the former Laws on the Prevention and Suppression of Money Laundering Activities. - Under the current Law, Cyprus legislation has been harmonized with the Third EU Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. - The CBC issued a Directive to banks on 2 April 2008 supplementing the requirements of the Law on preventive measures to be taken for the effective forestalling of money laundering and terrorist financing. - Main changes focus on increased powers of the supervisor, e.g., by increasing fines and revoking licenses. ### Progress on Recommended Actions from the 2005 Assessment - Effective 1 January 2006 the 90 days in arrears rule applies for interest suspension; this will be further refined upon alignment with the provisions of International Accounting Standard 39. - The CBC issued formal guidance on the management of country and transfer risks in 2007. - For market risk, the CBC issued Guidelines on the management of market risk in January, 2008, including provisions on scenario analysis, stress testing and contingency planning, and periodic validation or testing of internal systems/models used to measure market risk in line with the EU CRD. - The Banking Supervision and Regulation Division recruited an expert specializing in financial modeling and has recognized the need for enhancing staff expertise through specialized training courses. ### Methods of on-going supervision (CPs 16–20) - Under CRD requirements, the ICAAP assessment within the SREP will be carried out once a year for all banks licensed by the CBC. - For all Cyprus-based banks on site examinations are conducted once a year, including material overseas operations; for Cyprus based branches of EU banks the scope is limited. - Some banks have already submitted their ICAAP and the CBC is in the process of conducting the SREP; first reporting results do not identify material problems. - The CRD and risk-based supervision will require the CBC to enhance the frequency and scope of on-site inspections. - An internal rating system for commercial banks has been developed based on the "CAMEL" system. Components are strategy, credit/market/liquidity and operational risk corporate governance and internal control. - A rating for each bank is derived upon completion of the risk assessment exercise and is included in the Internal Rating System template. - Specific audit programs are being designed for use during on-site examinations to assist risk assessment. - The investigated risk profile is used for early warning purposes and for planning on-site supervision. - CBC takes into account information received directly from banks, its own reviews and from other supervisors and to a limited extent from the external auditor. - The classification reflects systemic importance and each credit institution’s risk profile. The system is expected to come into force by the end of the year. - A formal procedure to assess the effectiveness of supervisory functions was introduced by: - (i) establishing an internal quality control panel to ensure effectiveness of the supervisory function and address weaknesses; and - (ii) an Examiners’ Panel to ensure all relevant and material risks have been identified and procedures are applied consistently. - End of 2008 it is planned to introduce a joint on-site inspection plan (20 inspections) between the CBC and the ASDCS concerning their responsibility for consolidated supervision of the CCB. - In the course of 2008 the CBC developed a more formal early warning system implemented at the micro level in the context of the application of SREP. ### Information requirements (CP 21) - Amendment to the BL requires the external auditor promptly to report to the CBC any fact or decision concerning his client bank of which he has become aware while carrying out his audit which is liable to constitute a material breach of the laws, regulations or administrative provisions. ### Formal powers of supervisors (CP 22) - The CBC retains exclusive sanctioning powers and thus carries full responsibility thereof. - Recommendation: reconsider the range of sanctions available; the “middle section” between essentially symbolic fines and hard enforcement actions seems somewhat weak in the supervisory toolkit. ### Cross-border banking (CPs 23–25) - CBC is enhancing cooperation with foreign supervisors given growing involvement of Cypriot banks abroad and of foreign banks in Cyprus. - Under the CRD, the CBC, as a home supervisor, will have to organize colleges with host supervisors for each internationally active group headed by a Cyprus based bank. - Since the last BCP assessment, on-site visits by home supervisors have been conducted in Cyprus by three different regulators. ### Key recommendations (excerpt) - CP 1.1 Objectives: Evaluation of the approach to banking supervision should be in the medium term focus. - CP 1.2 Independence: Additional qualified supervision staff is needed. Continue to advance the depth of staff expertise and skills. - CP 5 Investment Criteria: Align investment criteria in line with CRD’s Article 120. - CP 6 Capital Adequacy: Increase the frequency of reporting from 6 to 3 months. - CP 9 Large Exposure Limits: Increase the frequency of reporting from 6 to 3 months. - CP 10 Connected Lending: Respective limits should be sharply cut. - CP 22 Remedial Measures: Develop a more comprehensive system of monetary penalties. ### Recommended action plan 2005 (follow-up status as of 2008) - CP 1.2 Independence: Since the 2005 FSAP the number of staff of the Banking Supervision and Regulation Division (which now excludes financial stability) increased by two employees. The Division’s staff participates actively in training seminars and has extensive experience in all of the CBC’s supervisory tasks. - CP 8 Loan Evaluating and Loan Loss Provisioning: Finalize implementation of the more stringent criteria for interest suspension. Effective 1 January 2006 the 90 days in arrears rule applies and this will be further refined upon the alignment of the calculation of the interest to be suspended with the provisions of the International Accounting Standard 39. - CP 11 Country Risk: Establish formal guidance for a framework for country and transfer risk. The CBC issued guidelines to banks requiring them to have adequate systems and procedures in place. - CP 12 Market Risks: Improve market expertise and supervision. The CBC issued guidelines on the management of market risk and has recruited an expert in financial modelling. *Source: _cr09167 - 31. Under the transposed CRD, qualitative requirements with regard to risk* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09167.pdf_