What can the CBC require of a bank that breaks the rules or runs into trouble?

The CBC's powers arise where an ACI fails to comply with its licence, the Law or the CRR; where, in the CBC's opinion, its liquidity or the value of its assets has deteriorated; where it may be unable to meet its obligations promptly; where depositors or creditors need protection; and where the supervisory review calls for action. The powers also apply where the CBC has evidence that an ACI is likely to breach its requirements within the next 12 months; the ACI must then act early. For a significant bank, the ECB uses the same powers under the SSM Regulation.

The CBC may require immediate remedial measures or impose licence conditions. A condition may oblige the ACI to take particular steps or avoid a course of action; limit its deposit-taking, lending or investments; prohibit it from soliciting deposits, generally or from specified persons or classes of persons; prohibit other transactions; require the removal of any member of the management body, the managing director or any manager; require extra own funds, stronger arrangements or a specific provisioning policy; or limit its business or reduce its risks. The chair is a board member, so the chair can be removed too; replacements need prior approval. Conditions may be varied or withdrawn.

Before imposing a condition or remedial measure, the CBC must give the ACI a report and invite its comments. The exam material says the ACI has three days from delivery to reply. The Law has made three days a minimum since it was passed in 1997: the CBC sets the period, which cannot be shorter.

The CBC may also consult other credit institutions; take over the management of the business and run it in the ACI's place for as long as the CBC thinks necessary; require a share-capital increase; restrict or prohibit distributions; and require a plan to restore compliance, the retention of net profits, extra reporting or specific liquidity requirements. Transferring deposits to another institution is a resolution tool, not one of these powers.

Three powers in the exam material work differently today. Law 21(I)/2016 deleted the CBC's power to demand a recovery plan and resolution-plan information on 18 March 2016, when it brought in the recovery and early-intervention rules of the Bank Recovery and Resolution Directive. Recovery plans are now a standing duty, and resolution planning is a matter for the resolution authority. The power to limit advisers' and executive directors' pay was replaced on 30 January 2015 by Law 5(I)/2015 with a power to limit variable remuneration, as a percentage of net revenues, where it is inconsistent with a sound capital base. Revocation stays in the Law, but since 4 November 2014 the ECB withdraws licences, on its own initiative or on the CBC's proposal; third-country branches stay with the CBC.

The CBC may require an ACI incorporated in Cyprus to increase its share capital by a set deadline and on set terms, stating the minimum increase needed to meet the capital requirements. Within 3 days of notice of the decision, the ACI tells the CBC the measures it intends to take and files a timetable for the CBC's approval. The management body then convenes an extraordinary general meeting (EGM) at a time the CBC decides, with written notice to shareholders within 3 days. Within 7 days of the resolution, the bank notifies the Registrar of Companies. Each board member who fails to convene the EGM or notify the Registrar faces a fine of up to €100,000.

The exam material calls the ACI's filing a recovery plan. In the Law it has been a statement of measures with a timetable since the power was created in March 2013, and it comes before the EGM.

Today every ACI must be covered by a recovery plan: its own or, in a supervised group, the group plan. The plan is updated at least yearly and never assumes extraordinary public financial support. The management body approves it before submission; the CBC (the ECB for a significant bank) assesses it within 6 months and may demand a revised plan within two months (three if extended) and specific changes.

The exam material's recovery-plan procedure largely comes from the old section 30B, repealed on 18 March 2016. It says the board approves the final plan and keeps it confidential, that plans do not bind the CBC, and that execution can be demanded only by the CBC as resolution authority. Today the management body approves the plan and professional secrecy protects it; the Law is silent on plans binding the CBC, and resolution is a separate process under Law 22(I)/2016.

Early intervention, for an ACI that breaches or is likely soon to breach its requirements, lets the CBC (the ECB for a significant bank) require recovery-plan measures, an action programme, a shareholders' meeting, a debt-restructuring plan, changes to strategy or structure, or the removal of senior management or the whole management body.

No one may serve as a board member, senior executive or key function holder without the CBC's prior approval (the ECB's for a significant bank). Bankrupts, and persons convicted anywhere of an offence involving fraud or dishonesty or convicted of an offence under the Law, are barred, subject to the bankruptcy and rehabilitation-of-offenders laws. Even when a bar lapses, every appointment still needs prior approval. At least two persons must effectively direct the business. For the board's anti-money-laundering duties, see What are the Board's responsibilities for AML compliance?.