I previously committed to keeping the House up to date on the events in Cyprus as the situation developed, in particular the structure of the final bailout package, and the implications for the UK.
As I previously outlined, the Republic of Cyprus requested a programme of financial assistance from its fellow members of the eurozone and the International Monetary Fund. On 25 March 2013, the Eurogroup reached an agreement on Cyprus, which included the resolution of Cyprus Popular (Laiki) Bank and the restructuring of Bank of Cyprus, imposing losses on senior unsecured creditors and some uninsured deposits, including in the case of Bank of Cyprus the exchange of some deposits over €100,000 for equity stakes in the bank.
Britain is not part of the eurozone and was not party to the negotiations. There is no contribution from the United Kingdom through the European financial stabilisation mechanism (EFSM) or bilaterally.
The Eurogroup agreement welcomes a contribution by the IMF to the programme, but no formal proposal has yet been put forward to the IMF’s executive board. The UK will assess and vote on any programme put to the IMF’s executive board on the basis of its own merits, as it has always done. UK support for the IMF does not add to our debt or deficit, and no one who has provided money to the IMF has ever lost that money.
The financial envelope agreed by the Eurogroup is €10 billion, which will cover bonds coming to maturity, deficit financing and the recapitalisation of the other domestic banks. The Greek branches of Hellenic, Bank of Cyprus and Laiki were sold to Greek banks as part of the deal. There will be no contribution from the programme to the recapitalisation of Bank of Cyprus. This will instead be funded by using existing debt holders and some uninsured deposits. Cyprus Popular (Laiki) Bank has been put into resolution and split into a “good” bank, which has been transferred to Bank of Cyprus, and a “bad” bank which will be wound down.
Cyprus is an important and longstanding ally of the UK and a member of the Commonwealth. Therefore, while not part of the eurozone negotiations, HM Government immediately offered to make available technical assistance to the Government of Cyprus during what was a very difficult period for them, which they accepted. This included a team of UK officials going to Cyprus to provide this assistance first hand. The Government of Cyprus have since conveyed their appreciation for this assistance which they found to be very helpful. Officials have since returned to the UK.
In addition, my officials also worked with the Cypriot authorities to develop a solution for deposits held in the UK branch of Cyprus Popular Bank. There was very close and effective co-operation between the Treasury, the Bank of England and its new regulatory arm the Prudential Regulation Authority, and the Financial Conduct Authority. This reflects the working of the new regulatory system that came into legal existence during the management of the crisis in Cyprus.
On 1 April, Cyprus Popular Bank reached an agreement with Bank of Cyprus UK to transfer all customer deposits in their UK branch to the UK subsidiary of Bank of Cyprus. This included some 15,000 accounts with approximately £270 million of deposits. The transfer was accompanied by matching cash assets.
The transfer agreement between Bank of Cyprus UK and Cyprus Popular Bank was given effect by a transfer decree made under Cypriot law. It was subsequently approved by the Prudential Regulation Authority and the Financial Conduct Authority under our new regulatory system. HM Treasury officials assisted in discussions with the Cypriot authorities and also provided some assistance in the legal processes around the transfer.
Unlike Bank of Cyprus UK, which is a UK supervised subsidiary, Cyprus Popular Bank UK operated here as a branch of its Cypriot parent company. Under EU law, primary responsibility for the supervision and resolution of Cyprus Popular Bank UK therefore rested with the Cypriot authorities. Had the transfer not been agreed, the deposits in the UK branch of Cyprus Popular Bank would have been included in the Cypriot bank restructuring with all of the uncertainty that this would have brought with it. That will not now be the case.
The deposits are now with Bank of Cyprus UK, which will continue to operate as a UK subsidiary, regulated and supervised by the Prudential Regulation Authority and the Financial Conduct Authority. All eligible deposits, including those transferred from Cyprus Popular Bank, will now benefit from the coverage of the UK’s financial services compensation scheme up to £85,000.
This has all been achieved without any material recourse to public funds.
More widely, state benefit payments to accounts in Cyprus, which were previously on hold while the banks in Cyprus remained closed, have resumed following their reopening.
As was previously stated, those who have been sent to Cyprus to serve our military or our Government, and their families, will be protected in full from losses on their personal deposits. Ministers from the Ministry of Defence will keep the House updated on this issue.
The Government continue to monitor the situation in Cyprus closely.