Who resolves a failing CIF, which tools can it use, and what does CySEC do?

Resolution is the orderly handling of a failing institution by a public authority, using special tools instead of ordinary insolvency. Under Law 22(I)/2016 the resolution authority is the CBC, whose Board needs the Finance Minister's approval before a decision with a direct fiscal impact or systemic implications. Law 20(I)/2016 adds CySEC's tasks when the institution is a CIF.

Cyprus is in the banking union. For significant banks, which the ECB supervises directly, and cross-border groups, the Single Resolution Board (SRB) draws up resolution plans and adopts resolution decisions, which the CBC implements; for other banks the SRB adopts the scheme whenever the Single Resolution Fund is used. A stand-alone CIF is outside the SRB's remit unless covered by the ECB's consolidated supervision of a parent, so its resolution is national. Its resolution financing arrangement is the Resolution Fund under Law 5(I)/2016, to which in-scope CIFs contribute; shareholders and creditors bear losses first.

Three conditions must all be met. First, the institution is failing or likely to fail: for example, it has breached or will breach its authorisation requirements, its assets are below its liabilities, it cannot pay its debts as they fall due, or it needs extraordinary public financial support. For a CIF, CySEC makes this finding after consulting the resolution authority, which may also make it after consulting CySEC. Second, no private-sector or supervisory measure, early intervention included, would prevent failure in time. Third, resolution is in the public interest. Prior early intervention is not required. Because needing extraordinary public support is itself a sign of failure, and protecting public funds is an objective of resolution, there is no bail-out tool.

Law 22(I)/2016 has four tools, named by where the business goes. Sale of business moves shares or other ownership instruments, or assets, rights or liabilities, to a purchaser that is not a bridge institution. The bridge institution tool moves them to an entity owned wholly or partly by public authorities and controlled by the resolution authority; the bridge keeps critical functions going until a sale. The asset management company tool moves assets, rights or liabilities to a publicly owned vehicle that manages them for maximum value; it may be used only with another tool. Bail-in means the resolution authority writing down or converting liabilities, to recapitalise the institution or to reduce or convert claims transferred under another tool.

The exam material calls the bridge institution tool 'the asset separation tool'. In the BRRD, which Law 22(I)/2016 has transposed since 18 March 2016, that name belongs to the asset management vehicle tool; the Cyprus law uses neither label. The exam material also lists write-down or conversion as a fifth tool; in law, since 18 March 2016, it is a power, usable alone or together with resolution action.

Write-down and conversion follow a fixed order: Common Equity Tier 1 first, in proportion to losses; then Additional Tier 1 and then Tier 2, each written down, converted into CET1 or both (see What counts as own funds, and which capital ratios and buffers must be met?). Since 7 May 2021 (Law 96(I)/2021, transposing BRRD2), certain eligible liabilities have come next; the exam material stops at Tier 2. BRRD2 also reshaped MREL, the minimum requirement for own funds and eligible liabilities. MREL itself dates from the original BRRD. The 'daisy chain' rules for groups followed on 6 December 2024 (Law 144(I)/2024). BRRD2 added a retail safeguard too. After a suitability test, a retail client whose portfolio is €500,000 or less may put no more than 10% of it into subordinated eligible liabilities, investing at least €10,000 initially. In Cyprus the same limits also cover other own-funds instruments and bail-inable liabilities.

When a business is sold, CySEC checks that the purchaser holds the authorisation it needs and deals promptly with any application. It assesses any qualifying holding the transfer creates or increases in time not to delay the tool. If that assessment is still open on the transfer date, the transfer has immediate legal effect anyway, but the purchaser's voting rights are suspended and vested in the resolution authority; CySEC then tells the resolution authority and the purchaser in writing whether it approves or opposes, and opposition can lead to an order to divest. The same regime applies when bail-in or conversion creates or increases a qualifying holding. At the resolution authority's request, CySEC may also license a bridge institution for a short start-up period without full compliance with the Investment Services Law, stating the period.

If resolution is not in the public interest, a failing CIF goes into normal insolvency. Preferential payments under section 300(1) and (2) of the Companies Law, such as certain taxes and employees' wages, come first. Law 20(I)/2016 then ranks ordinary unsecured claims, then non-preferred senior debt, then claims from capital instruments and other subordinated debt. Since 7 May 2021 (Law 92(I)/2021), claims from own-funds items have ranked below every other claim. The exam material says section 300 covers verifying and classifying claims, with special provisions for unsecured claims. In law, section 300 lists the preferential debts, and since 21 May 2019 the ranking of unsecured claims has come from Law 20(I)/2016 itself.