## _cr09168

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---

### Introduction — scope and basis of update
- 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 original Offshore Financial Center assessment (OFCA) in 2005.
- Update based on:
  - a factual update prepared by the Authority for the Supervision and Development of Cooperative Societies (ASDCS);
  - interviews with ASDCS staff, external auditors, industry, and professional associations;
  - legal and other background documents.
- Update follows the 1997 BCP and took into account the revised BCPs which came into effect October 2006.
- Based solely on laws, supervisory requirements, and practices in place at the time of the assessment; noted but not-yet-final initiatives include implementation of the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP).

### Overview — supervisory scope and institutional arrangements
- ASDCS responsibilities:
  - licensing, winding up, regulating and supervising all cooperative credit institutions in Cyprus;
  - headed by the Commissioner who chairs the Committee of the ASDCS (Commissioner + four members appointed by the Council of Ministers for a term of five years).
- Cooperative sector structure and recent changes:
  - 121 CCIs with limited or unlimited liability and 88 non-credit limited liability cooperatives exist.
  - All cooperative societies are shareholders-members of the Cooperative Central Bank (CCB).
  - Dramatic reduction in number of CCIs since 2005 due to mergers.
  - As from 1/1/08 the CCB became the central body of the CCIs; affiliation with CCB was effected under Article 3 of directive 2006/48/EC.
  - 120 CCIs affiliated with the CCB; 1 CCI chose to “stand-alone.”
  - Affiliation does not create parent-subsidiary relationships; affiliated CCIs remain autonomous legal entities; CCB guarantees obligations and CCB + affiliated CCIs are monitored on a consolidated basis.
- Organizational progress:
  - ASDCS increased staff, upgraded expertise, and plans to intensify on-site supervision.
  - Mission stresses continued advancement of staff expertise and resources given expected growth in size and complexity of CCIs.
  - ASDCS will undergo additional changes such as a joint inspection program with the Central Bank of Cyprus (CBC).
- Financial independence:
  - Mission could not identify doubts about ASDCS financial independence; ASDCS receives necessary funds and the new law grants the Commissioner separate funds to hire outside experts.

### BCP factual update — overall progress and main achievements
- ASDCS actions since 2005:
  - Issued regulatory decisions on corporate governance, internal controls, supervisory reporting, minimum reserves, anti-money laundering (AML), and the solidarity fund.
  - Addressed most areas of the “Recommended Action Plan—Basel Core Principles” from the 2005 OFCA.
  - 2005 assessment gave ASDCS a low compliance level, closely related to inadequate staff levels; many recommendations have been implemented.
- Harmonization with EU framework:
  - Comprehensive transitional regulatory and supervisory system completed; requires every CCI to conform to EU-banking directives since the end of 2007.
  - CSL modified between 2003 and 2007 to ensure conformity with the acquis communautaire.
  - Legislative and regulatory framework harmonized with EU Directives.
  - Large-scale CCIs’ mergers performed; arrangements for establishment of the Central Body completed.
- Staff figures and capacity:
  - ASDCS staff in 2005: 56 employees.
  - Recruitment in final stage to increase total staff to 76; incoming staff will be adequately trained.
- Areas influenced by prior staff shortage (BCP reference):
  - BCP 7, BCP 8, BCP 9, BCP 10, BCP 13, BCP 14, BCP 16, BCP 18, BCP 19.

### Objectives, independence, powers, transparency and cooperation (Principle 1)
- Key observations:
  - Comprehensive transitional system completed; every CCI required to conform to EU-banking directives since end of 2007.
  - During transitional period CCIs continued existing business under CSL without restrictions, delaying full compliance until end of 2007.
  - Annual ASDCS budget prepared by Committee, forwarded to Council of Ministers via Ministry of Finance, and approved by the House of Representatives — noted as a potential question on financial independence, but mission did not identify doubts about financial independence in practice.
  - 2005 recommendation to proceed without delay to strengthen ASDCS capacity has been addressed through staffing increases and regulatory reforms.
- Structural recommendation:
  - Duplicated supervisory responsibilities between CBC and ASDCS for consolidated supervision of CCB and affiliated CCIs; a single supervisor for all banks could enhance effectiveness, efficiency, and create a level playing field.

### Licensing and Structure (Principles 2–5)
- Licensing regime:
  - No major changes to ASDCS licensing regime; operating licenses issued for all affiliated CCIs and for non-affiliated CCIs.
  - Only 1 of 121 CCIs stood alone; remaining 120 affiliated with CCB.
- Transparency and governance recommendations:
  - ASDCS should publish a list of CCIs they supervise.
  - Supervisor should evaluate board members and senior management more formally.
  - A “fit-and-proper” Regulative Decision scheduled to be issued in the first quarter of 2009 by ASDCS.

### Progress on 2005 recommended actions — regulatory decisions and definitions
- Use of term “Cooperative Credit Institution”:
  - Regulative Decision 103/2007 issued regarding services and activities CCIs may offer and criteria for Activity Program/operating license.
  - CSL amended law 37(I)/2007 prohibits use of the term “Cooperative Credit Institution” or any derivative without ASDCS Commissioner’s approval.
- Investment and participation criteria:
  - Regulative Decision 2/2008 harmonizes with European Directives for calculation of capital requirements and large exposures and CCIs' participation in other institutions.
  - Under Decision 2/2008:
    - Investment in a company within the financial sector should be deducted from own funds if it exceeds CRD-prescribed limits.
    - Investments in companies outside the financial sector should not exceed prescribed limits.

### Prudential Regulation and Requirements (CPs 6–15)
- CRD transposition and capital framework:
  - ASDCS has fully transposed the Capital Requirements Directive (CRD) into legislation for CCIs.
  - Requirement to calculate capital needs for operational risk introduced.
  - Under Pillar II ASDCS has powers to require additional capital coverage for other risks (e.g., interest rate risk, concentration risk).
  - Regulative Decision 2/2008 aligns ASDCS rules with CBC directives, with noted exceptions:
    - Definition of residential real estate (2006/48/EC);
    - Adoption of national discretion according to Article 154(1) of 2006/48/EC regarding past due exposures;
    - Farms may be considered eligible commercial real estate if criteria are satisfied.
  - ASDCS may consider increasing frequency of reporting from 6 to 3 months for capital adequacy and large exposure ratios.
- Large exposures and reporting:
  - Regulative decision sets prudential limits to restrict large exposures to single borrowers or groups; identical to CBC directive.
  - Affiliated CCIs excluded from solo compliance responsibility but lending limits and special rules reported to ASDCS and approved by the Commissioner.
- Credit granting to non-members:
  - Under Regulative Decision 196/2005 CCIs may grant credit facilities to legal entities (non-members) without Commissioner approval if they comply with set terms and conditions.
  - On-site examinations assess asset quality, provisions, and compare results with those of the CCI under examination.
- Nonperforming loans (NPL) and interest suspension:
  - ASDCS examines revising regulative decision to align with CBC intention to introduce IAS 39 treatment of interest income on NPL.
  - ASDCS set identification period for NPL to nine (9) months; this period will be reduced to 90 days by the end of 2010.
- Risk management and governance:
  - Transposed CRD extends qualitative requirements on risk management.
  - CCIs must comply with Regulative Decision on “Framework of Principles of Operation and Criteria of Assessment of Cooperative Credit Institutions Organization Structure, Internal Governance and Internal Control Systems.”
  - CCIs required to have written policies and procedures, establish a Risk Management Unit administratively independent, and submit an annual risk management report.
- Implementation timing and approaches:
  - All CCIs apply the simpler approaches to measuring risk under the CRD; effective date for implementation was January 1, 2008.
  - Capital ratio (both under CAD and CRD) is effectively higher than the 8 percent requirement.
  - Possibility to require capital add-ons under “Pillar II” exists but is subject to precise criteria and progressively more severe measures.
  - Practical experience with new regime for the cooperative sector is limited; too early to assess effectiveness, further monitoring via off-site and on-site supervision is required.
  - ASDCS to issue new Regulative Decisions on ICAAP and SREP following Regulative Decision for calculation of capital requirements and large exposures (RAA 2/2008); these will be in line with CBC guidelines.
- Liquidity and minimum reserves:
  - Commissioner issued a directive on Liquidity ratio determining minimum liquidity ratio of 25 percent.
  - Regulative decision regarding calculation of protective liquidity issued.
  - As from 27/12/07 CCIs signed a minimum reserve requirement agreement with CCB authorizing CCB to act as CCIs’ intermediary for ECB minimum reserve requirements.
  - CCIs obliged to follow prescribed principles for liquidity risk management.
- Corporate governance and internal control support:
  - 2007 regulative decision on corporate governance requires robust internal governance frameworks for each CCI, including small CCIs with minimum structures and guidance on independent control systems.
  - CCB as central body provides support to affiliated institutions; final decision on framework of CCB’s support to affiliated CCIs on internal control and risk management functions is in process.
- Anti-money laundering:
  - “The Prevention and Suppression of Money Laundering Activities Law” enacted in 2007 consolidated and revised former laws and came into force on January 1, 2008.
  - Cyprus legislation harmonised with the Third EU Directive on prevention of use of financial system for money laundering and terrorist financing.
  - Law criminalises laundering of proceeds generated from all serious criminal offences including terrorist financing offences and provides for confiscation.

### Additional progress notes and next steps
- ASDCS has broadly implemented recommendations of the 2005 OFCA.
- New regulatory decisions forthcoming include ICAAP and SREP frameworks aligned with CBC guidelines (RAA 2/2008 context).
- Continued strengthening recommended in areas where staff shortages previously constrained supervisory effectiveness; intensify off-site monitoring and on-site inspection planning for next year.
- Transparency and formal fit-and-proper evaluations of boards and senior management remain outstanding items (fit-and-proper Regulative Decision planned Q1 2009).
- Consideration suggested to increase capital and large exposure reporting frequency from 6 to 3 months.

### Reporting, capital adequacy, and data systems
- 2005 mission proposal: ASDCS should require reporting on CCIs’ capital ratios and their components at least semi-annually.
- Regulative decision mandates CCIs’ obligation to report their solvency ratios and capital requirements on a semi-annual basis.
- Current reporting mechanisms:
  - through common reporting (COREP)
  - structured form prepared by ASDCS
- New software acquired to comply with Basle II gives ASDCS access to a larger range of data for monitoring purposes of all CCIs.
- Recommendation/consideration: increase frequency of reporting from six to three months for:
  - capital adequacy ratios (CP 6)
  - large exposures ratios (CP 9)
- ASDCS has direct access to CCIs' databases; capability to regularly acquire and analyze information (including interest rate risk) is established or will be available soon.

### Connected lending and conflicts of interest
- Article 41KD of amended law 37(I)/2007 prohibits granting credit facilities to:
  - members of the CCIs’ Committee and Supervision Board
  - the Secretary/Director and other staff members
  - their connected persons
  - on more favorable terms than normal.
- Definition of “connected persons” aligns with regulative decision 2/2008 used for capital adequacy and large exposures purposes.
- Further guidelines and CCIs' obligations derived from article 41KD have been issued.

### Supervisory expertise, market risk, and foreign exchange risk
- CCIs currently are not exposed to market risk because they do not keep a trading book.
- CCIs do not perform foreign exchange transactions as independent dealers; they act as agents of the CCB.
- Training programs/seminars attended by CCIs personnel and ASDCS officers on foreign exchange activities.
- ASDCS considers the possibility of granting CCIs permission to perform foreign exchange transactions as independent dealers and intends to issue a regulative decision regulating this issue.
- 2005 recommendation: supervisor should adjust and develop expertise to supervise new risks assumed by CCIs.

### Mergers, internal control, and CCB support
- Encouragement of mergers to favor critical mass and organizational capabilities has been addressed:
  - ongoing merger process led to larger entities
  - affiliation with the CCB supports improvements in internal control and audit
- Considerations remain on level of support CCB will provide on internal control and risk management to affiliated CCIs; no final decision agreed yet.
- Cooperative Movement acquired via Cooperative Computer Society (SEM) Ltd. an IT system specialized for detecting money laundering; all CCIs and ASDCS are on-line connected with this system.

### Anti-money-laundering
- Revised directive requires new revised policies and procedures and upgrading/enhancement of measures and systems for effective prevention of money laundering and terrorist financing.
- Law explicitly states competent authorities’ Directives are binding and compulsory to all persons to whom they are addressed.

### Methods of on-going supervision (CPs 16–20)
- CRD and risk-based supervision will require ASDCS to enhance frequency and scope of on-site inspections to ensure adequate coverage of the full scope of credit institutions.
- ASDCS should enforce plans to have a full scope on-site examination of each single CCI in the years 2009 and 2010.
- Planned introduction of a joint on-site inspection plan (20 inspections) with the CBC for consolidated supervision of the CCB and its affiliates.
- ASDCS's computerization project is almost completed; direct access to CCIs' databases established.
- A rating system for CCIs developed based on "CAMEL" (Capital, Asset, Management, Earnings, Liquidity).
- Investigated risk profile used for early warning and planning on-site supervision; rating influences supervisory strategy.
- Since systems are new, their effectiveness will need further evaluation.
- Consolidated supervision: CCIs do not have subsidiaries or affiliated companies; Article 41D(1)(e) of the CSL assigns the commissioner responsibility for supervising registered societies affiliated to the Central Body for consolidated supervision purposes.

### Progress on recommended actions from 2005 assessment
- Strengthening supervisory capacity:
  - Continuous mergers reduced the number of CCIs and enhanced supervisory efficiency.
  - Within 2007 and 2008 ASDCS performed 177 on-site examinations, covering all CCIs:
    - basic on-site supervision performed by the Development Division
    - detailed/comprehensive supervision performed only 6
  - By the end of the year 2008 the number of staff will be increased by 20 compared to 2005.
- 2008 regulative decision obliges CCIs to immediately notify the Commissioner of ASDCS of any material changes in activities and/or any adverse developments, presenting all details involved.
  - Commissioner may require CCIs to take corrective measures.
  - Article 19(16): the AOCS must immediately inform the Commissioner of any negative finding.
- ASDCS consulting on changing the Law to allow regular external auditors (in addition to AOCS) to audit CCIs in the future.

### Formal powers of supervisors (CP 22)
- ASDCS retains exclusive sanctioning powers and thus carries full responsibility.
- Recommendation: reconsider the range of sanctions available; the “middle section” between symbolic fines and hard enforcement actions seems weak.

### Cross-border banking (CPs 23–25)
- Principles on cross-border banking not applicable currently:
  - no entities of foreign banks under ASDCS supervision
  - no Cyprus CCIs have entities in foreign countries
- Ongoing mergers could make CCIs larger and more competent to enter foreign countries in the future.

### Key recommendations (summary)
- CP 1.1 Objectives: An evaluation of the approach to banking supervision should be take place as soon as possible.
- CP 1.2 Independence: Continue to advance the depth of staff expertise and skills.
- CP 2 Permissible Activities: ASDCS should publish a list of CCIs they supervise.
- CP 3 Licensing: Develop more comprehensive criteria on the fit and properness of the board and senior management.
- 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 13 Other Risks: Finalize the regulatory decision on the implementation of the ICAAP and SREP.
- CP 14 Internal Control and Audit: Finalize decision on level of CCB support for internal control and risk management to affiliated CCIs.
- CP 16 On-site and Off-site Supervision: Evaluate the effectiveness of the new capital regime. Enforce plans for full scope on-site examinations.
- CP 22 Remedial measures: Develop a more comprehensive system of monetary penalties.

### Recommended action plan 2005 (status as of 2008) — selected items and exact figures
- CP 1.1 Objectives:
  - Recommended action: Manage changes during the transitional period through a global change committee.
  - Status 2008: Since 2005 a comprehensive transitional regulatory and supervisory system has been completed that requires every CCI to conform to the EU banking directives from the end of 2007.
- CP 1.2 Independence:
  - Recommended action: Full government support of supervisory strengthening capacity.
  - Status 2008: When the recent recruitment process is completed, staff numbers will stand at 76 compared to 56 in 2005.
- CP 6 Capital Adequacy:
  - Recommended action: Mandatory semi-annual reporting on each CCI’s compliance with capital requirements regime.
  - Status 2008: A regulative decision has been introduced requiring 6 monthly reporting of capital adequacy positions.
- CP 7 Credit Policies:
  - Recommended action: Strengthen supervisory capacity. Enhance the supervisors’ capacity to evaluate loan policies.
  - Status 2008: Twenty additional staff have or are in course of being recruited since 2005 and increased training on supervisory matters have also been strengthened.
- CP 8 Loan Evaluation:
  - Recommended action: Strengthen supervisory capacity. Provide for additional prudential reporting.
  - Status 2008: Following the introduction of new software, ASDCS has now access to a wide range of data for monitoring purposes.
- CP 9 Large Exposure Limits:
  - Recommended action: Strengthen supervisory capacity.
  - Status 2008: Twenty additional staff have or are in the course of being recruited and there has been a significant increase in the number of inspections over the three year period.
- CP 10 Connected Lending:
  - Recommended action: Strengthen supervisory capacity. Facilities to connected persons should not be granted on terms more favourable than those used in the normal course of business.
  - Status 2008: Article 41KD provided by the amended law 37(I)/2007, prohibits the granting of credit facilities to the members of the CCIs’ Committee and Supervision Board, to the Secretary/Director and to the rest staff members and their connected persons on more favourable terms.
- CP 12 Market Risks:
  - Recommended action: Adjust and develop expertise to supervise new risks.
  - Status 2008: CCIs are not currently exposed to market or foreign exchange rate risk. Nonetheless, staff have attended seminars and received training on the matter.
- CP 13 Other Risks:
  - Recommended action: Strengthen supervisory capacity. Organize accelerated access to centralized reporting system regarding interest rate risk.
  - Status 2008: The ability to acquire information on a regular basis and analyze such information has been, or is in the course of being, introduced. This will include information on interest rate risk.
- CP 14 Internal Controls:
  - Recommended action: Strengthen supervisory capacity. Undertake efforts to encourage mergers favouring critical mass and organizational capabilities of CCIs.
  - Status 2008: There have been a considerable number of mergers since 2005.
- CP 15 Money Laundering:
  - Recommended action: Update guidance note.
  - Status 2008: A revised directive has been introduced.
- CP 16 On-site and Off-site Supervision:
  - Recommended action: Strengthen supervisory capacity.
  - Status 2008: Additional staff and increased training have been introduced to address this issue. In addition, it is proposed to carry out an on-site inspection of all CCIs in 2009/2010.
- CP 17 Bank Management Contact:
  - Recommended action: Impose mandatory and timely communication of material changes in activities and adverse developments.
  - Status 2008: A regulative decision was issued in 2008 requiring all CCI’s to notify the Commissioner of all material changes in activities and adverse developments.
- CP 18 Off-site Supervision:
  - Recommended action: Strengthen supervisory capacity. Accelerate direct connection to central data server.
  - Status 2008: The ASDCS’s computerized project is almost complete which will provide it with full access to all CCI’s databases.
- CP 19 Validation of Supervisory Information:
  - Recommended action: Strengthen supervisory capacity.
  - Status 2008: This has been facilitated by the recruitment of the additional staff referred to in Principle 1.2 above.

*Source: _cr09168 - 1.         Key         Recommendations*

### 1.         Key         Recommendations .................................................................................

### 1.         Key         Recommendations

### Introduction — scope and basis of update
- This note is a 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 original Offshore Financial Center assessment (OFCA) in 2005.
- The update was based on:
  - a factual update prepared by the Authority for the Supervision and Development of Cooperative Societies (ASDCS);
  - interviews with ASDCS staff, external auditors, industry, and professional associations;
  - legal and other background documents.
- The update follows the 1997 BCP and took into account the revised BCPs which came into effect October 2006.
- The update is based solely on laws, supervisory requirements, and practices in place at the time of the assessment; noted but not-yet-final initiatives include implementation of the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP).

### Overview — supervisory scope and institutional arrangements
- ASDCS responsibilities:
  - licensing, winding up, regulating and supervising all cooperative credit institutions in Cyprus;
  - headed by the Commissioner who chairs the Committee of the ASDCS (Commissioner + four members appointed by the Council of Ministers for a term of five years).
- Cooperative sector structure and recent changes:
  - 121 CCIs with limited or unlimited liability and 88 non-credit limited liability cooperatives exist.
  - All cooperative societies are shareholders-members of the Cooperative Central Bank (CCB).
  - Dramatic reduction in number of CCIs since 2005 due to mergers.
  - As from 1/1/08 the CCB became the central body of the CCIs; affiliation with CCB was effected under Article 3 of directive 2006/48/EC.
  - 120 CCIs affiliated with the CCB; 1 CCI chose to “stand-alone.”
  - Affiliation does not create parent-subsidiary relationships; affiliated CCIs remain autonomous legal entities; CCB guarantees obligations and CCB + affiliated CCIs are monitored on a consolidated basis.
- Organizational progress:
  - ASDCS increased staff, upgraded expertise, and plans to intensify on-site supervision.
  - The mission stresses continued advancement of staff expertise and resources given expected growth in size and complexity of CCIs.
  - The ASDCS will undergo additional changes such as a joint inspection program with the Central Bank of Cyprus (CBC).
- Financial independence:
  - The mission could not identify doubts about ASDCS financial independence; ASDCS receives necessary funds and the new law grants the Commissioner separate funds to hire outside experts.

### BCP factual update — overall progress and main achievements
- ASDCS actions since 2005:
  - Issued regulatory decisions on corporate governance, internal controls, supervisory reporting, minimum reserves, anti-money laundering (AML), and the solidarity fund.
  - Addressed most areas of the “Recommended Action Plan—Basel Core Principles” from the 2005 OFCA.
  - The 2005 assessment gave ASDCS a low compliance level, closely related to inadequate staff levels; many recommendations have been implemented.
- Harmonization with EU framework:
  - Comprehensive transitional regulatory and supervisory system completed; requires every CCI to conform to EU-banking directives since the end of 2007.
  - CSL modified between 2003 and 2007 to ensure conformity with the acquis communautaire.
  - Legislative and regulatory framework harmonized with EU Directives.
  - Large-scale CCIs’ mergers performed; arrangements for establishment of the Central Body completed.
- Staff figures and capacity:
  - ASDCS staff in 2005: 56 employees.
  - Recruitment in final stage to increase total staff to 76; incoming staff will be adequately trained.
- Noted areas influenced by prior staff shortage (BCP reference):
  - BCP 7 on Credit Policies
  - BCP 8 on Loan Evaluation
  - BCP 9 on Large Exposure
  - BCP 10 on Connected lending
  - BCP 13 on Other Risks
  - BCP 14 on Internal Controls
  - BCP 16 on On-site and Off-site Supervision
  - BCP 18 on Off-site Supervision
  - BCP 19 on Validation of Supervisory Information

### Objectives, independence, powers, transparency and cooperation (Principle 1)
- Key observations:
  - Comprehensive transitional system completed; every CCI required to conform to EU-banking directives since end of 2007.
  - During transitional period CCIs continued existing business under CSL without restrictions, delaying full compliance until end of 2007.
  - Annual ASDCS budget prepared by Committee, forwarded to Council of Ministers via Ministry of Finance, and approved by the House of Representatives — noted as a potential question on financial independence, but mission did not identify doubts about financial independence in practice.
  - Recommendation from 2005 that the government proceed without delay to strengthen ASDCS capacity has been addressed through staffing increases and regulatory reforms.
- Structural recommendation noted:
  - Existence of duplicated supervisory responsibilities between CBC and ASDCS for consolidated supervision of CCB and affiliated CCIs; a single supervisor for all banks could enhance effectiveness, efficiency, and create a level playing field.

### Licensing and Structure (Principles 2–5)
- Licensing regime:
  - No major changes to ASDCS licensing regime; operating licenses issued for all affiliated CCIs and for non-affiliated CCIs.
  - Only 1 of 121 CCIs stood alone; remaining 120 affiliated with CCB.
- Transparency and governance recommendations:
  - ASDCS should publish a list of CCIs they supervise.
  - Supervisor should evaluate board members and senior management more formally.
  - A “fit-and-proper” Regulative Decision scheduled to be issued in the first quarter of 2009 by ASDCS.

### Progress on 2005 recommended actions — specific regulatory decisions and definitions
- Definition and use of term “Cooperative Credit Institution”:
  - Regulative Decision 103/2007 issued regarding services and activities CCIs may offer and criteria for Activity Program/operating license.
  - CSL amended law 37(I)/2007 prohibits use of the term “Cooperative Credit Institution” or any derivative without ASDCS Commissioner’s approval.
- Investment and participation criteria:
  - Regulative Decision 2/2008 issued for harmonization with European Directives regarding calculation of capital requirements and large exposures and CCIs' participation in other institutions.
  - Under Decision 2/2008:
    - Investment in a company within the financial sector should be deducted from own funds if it exceeds CRD-prescribed limits.
    - Investments in companies outside the financial sector should not exceed prescribed limits.

### Prudential Regulation and Requirements (CPs 6–15)
- CRD transposition and capital framework:
  - ASDCS has fully transposed the Capital Requirements Directive (CRD) into legislation for CCIs.
  - New approaches include requirement to calculate capital needs for operational risk and introduction under Pillar II of powers for ASDCS to require additional capital coverage for other risks (e.g., interest rate risk, concentration risk).
  - Regulative Decision 2/2008 aligns ASDCS rules with CBC directives, with noted exceptions:
    - Definition of residential real estate (2006/48/EC);
    - Adoption of national discretion according to Article 154(1) of 2006/48/EC regarding past due exposures;
    - Farms may be considered eligible commercial real estate if criteria are satisfied.
  - ASDCS may wish to consider increasing the frequency of reporting from 6 to 3 months for capital adequacy and large exposure ratios.
- Large exposures and reporting:
  - Regulative decision sets prudential limits to restrict large exposures to single borrowers or groups; identical to CBC directive.
  - Affiliated CCIs excluded from solo compliance responsibility but lending limits and special rules reported to ASDCS and approved by the Commissioner.
- Credit granting to non-members:
  - Pursuant to Regulative Decision 196/2005 the Commissioner vests CCIs applying for power to grant credit facilities to legal entities (non-members) without his approval if they comply with terms and conditions set.
  - On-site examinations assess asset quality, provisions, and compare results with those of the CCI under examination.
- Nonperforming loans (NPL) and interest suspension:
  - ASDCS examines revising regulative decision to align with CBC intention to introduce IAS 39 treatment of interest income on NPL.
  - ASDCS set identification period for NPL to nine (9) months; this period will be reduced to 90 days by the end of 2010.
- Risk management and governance:
  - Transposed CRD extends qualitative requirements on risk management.
  - CCIs must comply with Regulative Decision on “Framework of Principles of Operation and Criteria of Assessment of Cooperative Credit Institutions Organization Structure, Internal Governance and Internal Control Systems.”
  - CCIs required to have written policies and procedures, establish a Risk Management Unit administratively independent, and submit an annual risk management report.
- Implementation timing and approaches:
  - All CCIs apply the simpler approaches to measuring risk under the CRD; effective date for implementation was January 1, 2008.
  - Capital ratio (both under CAD and CRD) is effectively higher than the 8 percent requirement.
  - Possibility to require capital add-ons under “Pillar II” exists but is subject to precise criteria and progressively more severe measures.
  - Practical experience with new regime for the cooperative sector is limited; too early to assess effectiveness, further monitoring via off-site and on-site supervision is required.
  - ASDCS to issue new Regulative Decisions on ICAAP and SREP following Regulative Decision for calculation of capital requirements and large exposures (RAA 2/2008); these will be in line with CBC guidelines.
- Liquidity and minimum reserves:
  - Commissioner issued a directive on Liquidity ratio determining minimum liquidity ratio of 25 percent.
  - Regulative decision regarding calculation of protective liquidity issued.
  - As from 27/12/07 CCIs signed a minimum reserve requirement agreement with CCB authorizing CCB to act as CCIs’ intermediary for ECB minimum reserve requirements.
  - CCIs obliged to follow prescribed principles for liquidity risk management.
- Corporate governance and internal control support:
  - 2007 regulative decision on corporate governance requires robust internal governance frameworks for each CCI, including small CCIs with minimum structures and guidance on independent control systems.
  - CCB as central body provides support to affiliated institutions; final decision on framework of CCB’s support to affiliated CCIs on internal control and risk management functions is in process.
- Anti-money laundering:
  - “The Prevention and Suppression of Money Laundering Activities Law” enacted in 2007 consolidated and revised former laws and came into force on January 1, 2008.
  - Cyprus legislation harmonised with the Third EU Directive on prevention of use of financial system for money laundering and terrorist financing.
  - Law criminalises laundering of proceeds generated from all serious criminal offences including terrorist financing offences and provides for confiscation.

### Additional progress notes and next steps
- ASDCS has broadly implemented recommendations of the 2005 OFCA.
- New regulatory decisions forthcoming include ICAAP and SREP frameworks aligned with CBC guidelines (RAA 2/2008 context).
- Continued strengthening recommended in areas where staff shortages previously constrained supervisory effectiveness; intensify off-site monitoring and on-site inspection planning for next year.
- Transparency and formal fit-and-proper evaluations of boards and senior management remain outstanding items (fit-and-proper Regulative Decision planned Q1 2009).
- Consideration suggested to increase capital and large exposure reporting frequency from 6 to 3 months.

*Source: _cr09168 - 1.         Key         Recommendations*

### 33.  In 2005 the mission proposed that the ASDCS should require reporting on CCIs’

### _cr09168 - 33.  In 2005 the mission proposed that the ASDCS should require reporting on CCIs’

### Reporting, capital adequacy, and data systems
- 2005 mission proposal: ASDCS should require reporting on CCIs’ capital ratios and their components at least semi-annually.
- Regulative decision mandates CCIs’ obligation to report their solvency ratios and capital requirements on a semi-annual basis.
- Current reporting mechanisms:
  - through common reporting (COREP)
  - structured form prepared by ASDCS
- New software acquired to comply with Basle II gives ASDCS access to a larger range of data for monitoring purposes of all CCIs.
- Recommendation/consideration: increase frequency of reporting from six to three months for:
  - capital adequacy ratios (CP 6)
  - large exposures ratios (CP 9)
- ASDCS has direct access to CCIs' databases; capability to regularly acquire and analyze information (including interest rate risk) is established or will be available soon.

### Connected lending and conflicts of interest
- Article 41KD of amended law 37(I)/2007 prohibits granting credit facilities to:
  - members of the CCIs’ Committee and Supervision Board
  - the Secretary/Director and other staff members
  - their connected persons
  - on more favorable terms than normal.
- Definition of “connected persons” aligns with regulative decision 2/2008 used for capital adequacy and large exposures purposes.
- Further guidelines and CCIs' obligations derived from article 41KD have been issued.

### Supervisory expertise, market risk, and foreign exchange risk
- CCIs currently are not exposed to market risk because they do not keep a trading book (i.e., they don’t perform transactions in transferable securities).
- CCIs do not perform foreign exchange transactions as independent dealers; they act as agents of the CCB.
- Training programs/seminars attended by CCIs personnel and ASDCS officers on foreign exchange activities.
- ASDCS considers the possibility of granting CCIs permission to perform foreign exchange transactions as independent dealers and intends to issue a regulative decision regulating this issue.
- Recommendation from 2005: supervisor should adjust and develop expertise to supervise new risks assumed by CCIs.

### Mergers, internal control, and support from CCB
- Recommendation to encourage mergers that favor critical mass and organizational capabilities has been addressed comprehensively:
  - ongoing merger process led to larger entities
  - affiliation with the CCB supports improvements in internal control and audit
- Considerations remain on the level of support CCB would provide on internal control and risk management to affiliated CCIs; no final decision agreed yet.
- Cooperative Movement acquired via Cooperative Computer Society (SEM) Ltd. an IT system specialized for detecting money laundering; all CCIs and ASDCS are on-line connected with this system.

### Anti-money-laundering
- Revised directive requires new revised policies and procedures and upgrading/enhancement of measures and systems for effective prevention of money laundering and terrorist financing.
- Law explicitly states competent authorities’ Directives are binding and compulsory to all persons to whom they are addressed.

### Methods of on-going supervision (CPs 16–20)
- CRD and risk-based supervision will require ASDCS to enhance frequency and scope of on-site inspections to ensure adequate coverage of the full scope of credit institutions.
- ASDCS should enforce plans to have a full scope on-site examination of each single CCI in the years 2009 and 2010.
- Planned introduction of a joint on-site inspection plan (20 inspections) with the CBC for consolidated supervision of the CCB and its affiliates.
- ASDCS's computerization project is almost completed; direct access to CCIs' databases established.
- A rating system for CCIs developed based on "CAMEL" (Capital, Asset, Management, Earnings, Liquidity).
- The investigated risk profile is used for early warning and planning on-site supervision; rating influences supervisory strategy.
- Since systems are new, their effectiveness will need further evaluation.
- Consolidated supervision: CCIs do not have subsidiaries or affiliated companies; Article 41D(1)(e) of the CSL assigns the commissioner responsibility for supervising registered societies affiliated to the Central Body for consolidated supervision purposes.

### Progress on recommended actions from 2005 assessment
- Strengthening supervisory capacity:
  - Continuous mergers reduced the number of CCIs and enhanced supervisory efficiency.
  - Within 2007 and 2008 ASDCS performed 177 on-site examinations, covering all CCIs:
    - basic on-site supervision performed by the Development Division
    - detailed/comprehensive supervision performed only 6
  - By the end of the year 2008 the number of staff will be increased by 20 compared to 2005.
- 2008 regulative decision obliges CCIs to immediately notify the Commissioner of ASDCS of any material changes in activities and/or any adverse developments, presenting all details involved.
  - Commissioner may require CCIs to take corrective measures.
  - Article 19(16): the AOCS must immediately inform the Commissioner of any negative finding.
- ASDCS consulting on changing the Law to allow regular external auditors (in addition to AOCS) to audit CCIs in the future.

### Formal powers of supervisors (CP 22)
- ASDCS retains exclusive sanctioning powers and thus carries full responsibility.
- Recommendation: reconsider the range of sanctions available; the “middle section” between symbolic fines and hard enforcement actions seems weak.

### Cross-border banking (CPs 23–25)
- Principles on cross-border banking not applicable currently:
  - no entities of foreign banks under ASDCS supervision
  - no Cyprus CCIs have entities in foreign countries
- Ongoing mergers could make CCIs larger and more competent to enter foreign countries in the future.

### Key recommendations (summary extracted from Table 1)
- CP 1.1 Objectives: An evaluation of the approach to banking supervision should be take place as soon as possible.
- CP 1.2 Independence: Continue to advance the depth of staff expertise and skills.
- CP 2 Permissible Activities: To increase transparency of the cooperative sector the ASDCS should publish a list of CCIs they supervise.
- CP 3 Licensing: Develop more comprehensive criteria on the fit and properness of the board and senior management.
- 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 13 Other Risks: Finalize the regulatory decision on the implementation of the ICAAP and SREP.
- CP 14 Internal Control and Audit: Finalize decision on level of CCB support for internal control and risk management to affiliated CCIs.
- CP 16 On-site and Off-site Supervision: Evaluate the effectiveness of the new capital regime. Enforce plans for full scope on-site examinations.
- CP 22 Remedial measures: Develop a more comprehensive system of monetary penalties.

### Recommended action plan 2005 (status as of 2008) — selected items and exact figures
- CP 1.1 Objectives:
  - Recommended action: Manage changes during the transitional period through a global change committee.
  - Status 2008: Since 2005 a comprehensive transitional regulatory and supervisory system has been completed that requires every CCI to conform to the EU banking directives from the end of 2007.
- CP 1.2 Independence:
  - Recommended action: Full government support of supervisory strengthening capacity.
  - Status 2008: When the recent recruitment process is completed, staff numbers will stand at 76 compared to 56 in 2005.
- CP 6 Capital Adequacy:
  - Recommended action: Mandatory semi-annual reporting on each CCI’s compliance with capital requirements regime.
  - Status 2008: A regulative decision has been introduced requiring 6 monthly reporting of capital adequacy positions.
- CP 7 Credit Policies:
  - Recommended action: Strengthen supervisory capacity. Enhance the supervisors’ capacity to evaluate loan policies.
  - Status 2008: Twenty additional staff have or are in course of being recruited since 2005 and increased training on supervisory matters have also been strengthened.
- CP 8 Loan Evaluation:
  - Recommended action: Strengthen supervisory capacity. Provide for additional prudential reporting.
  - Status 2008: Following the introduction of new software, ASDCS has now access to a wide range of data for monitoring purposes.
- CP 9 Large Exposure Limits:
  - Recommended action: Strengthen supervisory capacity.
  - Status 2008: Twenty additional staff have or are in the course of being recruited and there has been a significant increase in the number of inspections over the three year period.
- CP 10 Connected Lending:
  - Recommended action: Strengthen supervisory capacity. Facilities to connected persons should not be granted on terms more favourable than those used in the normal course of business.
  - Status 2008: Article 41KD provided by the amended law 37(I)/2007, prohibits the granting of credit facilities to the members of the CCIs’ Committee and Supervision Board, to the Secretary/Director and to the rest staff members and their connected persons on more favourable terms.
- CP 12 Market Risks:
  - Recommended action: Adjust and develop expertise to supervise new risks.
  - Status 2008: CCIs are not currently exposed to market or foreign exchange rate risk. Nonetheless, staff have attended seminars and received training on the matter.
- CP 13 Other Risks:
  - Recommended action: Strengthen supervisory capacity. Organize accelerated access to centralized reporting system regarding interest rate risk.
  - Status 2008: The ability to acquire information on a regular basis and analyze such information has been, or is in the course of being, introduced. This will include information on interest rate risk.
- CP 14 Internal Controls:
  - Recommended action: Strengthen supervisory capacity. Undertake efforts to encourage mergers favouring critical mass and organizational capabilities of CCIs.
  - Status 2008: There have been a considerable number of mergers since 2005.
- CP 15 Money Laundering:
  - Recommended action: Update guidance note.
  - Status 2008: A revised directive has been introduced.
- CP 16 On-site and Off-site Supervision:
  - Recommended action: Strengthen supervisory capacity.
  - Status 2008: Additional staff and increased training have been introduced to address this issue. In addition, it is proposed to carry out an on-site inspection of all CCIs in 2009/2010.
- CP 17 Bank Management Contact:
  - Recommended action: Impose mandatory and timely communication of material changes in activities and adverse developments.
  - Status 2008: A regulative decision was issued in 2008 requiring all CCI’s to notify the Commissioner of all material changes in activities and adverse developments.
- CP 18 Off-site Supervision:
  - Recommended action: Strengthen supervisory capacity. Accelerate direct connection to central data server.
  - Status 2008: The ASDCS’s computerized project is almost complete which will provide it with full access to all CCI’s databases.
- CP 19 Validation of Supervisory Information:
  - Recommended action: Strengthen supervisory capacity.
  - Status 2008: This has been facilitated by the recruitment of the additional staff referred to in Principle 1.2 above.

*Source: _cr09168 - 33.  In 2005 the mission proposed that the ASDCS should require reporting on CCIs’*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09168.pdf_