CENTRAL BANK OF CYPRUS

25/02/2011

A BRIEF HISTORY OF THE CENTRAL BANK OF CYPRUS

 

The Central Bank of Cyprus was created in 1963, after Cyprus gained its independence in 1960, as an autonomous Bank, in accordance with the Central Bank of Cyprus Law 1963 and the relevant articles of the Constitution. Today the Cyprus Central Bank is governed by the Central Bank of Cyprus Laws 2002-2007, which ensure the Bank’s independence as well as obedience with the relevant provisions of the Treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank.   The law’s amendment in March 2007 paved the way for the legal integration of the Bank into the Euro system in January 2008.

 

The main functions of the Central Bank include:

 

·         Implementing the European Central Bank’s monetary policy decisions; 

·         Holding and managing the official international reserves; 

·         Supervising banks; 

·        Ppromoting, regulating and overseeing the smooth operation of payment and settlement systems; 

·         Safe guarding the stability of the financial system.  

During the early years of its operation, the Central Bank, took over fully the functions of banker to the government of Cyprus and the management of international reserves.

 

Very soon the Bank organised its internal structure and prepared the regulatory organization for banking supervision, also setting up the operational framework for the implementation of monetary policy.

 

In the late 1960s and early 1970s, monetary policy became more active, while bank supervision was widened. During this period Stocks for the Government of Cyprus were first issued.

 

Following the economic disaster caused by the Turkish invasion in 1974, the Central Bank of Cyprus, was actively involved in the reactivation of the economy. Thus, the Bank pursued an expansionary monetary policy and facilitated the financing of the housing needs of the refugees and the replenishment of lost capital stock and infrastructure. The role of the Cyprus Central Bank was crucial in the achievement of a fast improvement of the economic conditions that took place subsequently.

 

A great historical point in time is the liberalization process of the financial sector and  the abolition of the statutory interest rate ceiling on 1st  January 2001. 

 

On 2 May 2005 the Cyprus pound joined the Exchange Rate Mechanism II (ERM II) at the pre-existing central parity of €1=CY£0,585274, unchanged from the parity at which it had been unilaterally pegged to the euro since 1999.  The standard fluctuation margins of + 15% were maintained, although in  practice the pound  fluctuated within the narrower range of  +2,25, both before and after ERM II entry. 

 

On 1 January 2008 Cyprus joined the euro area thus bringing to fruition the island’s goal of becoming a fully integrated member of the EU.  The conversion rate between the euro and the Cyprus pound was set at CY£0, 585274 by the ECOFIN Council on 10 July 2007, in other words the same rate at which the Cyprus pound joined ERM II.

 

What Banking in Cyprus is like?

 

One of the primary objectives of the Central Bank of Cyprus is to ensure a safe and stable financial system that would preserve public confidence and foster economic stability and growth. This objective is satisfied by maintaining an effective mechanism of bank regulation and supervision.

 

To this effect, the Central Bank of Cyprus grants a license to carry on Banking Business and exercises supervision, the main objective of which is to minimize systemic risk and preserve the stability of the banking system so as to retain public confidence and to protect depositors.

 

The Central Bank of Cyprus has always been guided in its supervisory role by the recommendations of the Basle Committee on banking supervision and the EU Directives on banking regulation while following up closely new developments and having its prudential functions under constant review to take account of these developments and changing circumstances.

 

Supervision is exercised by both off-site monitoring and on-site examination. Off-site monitoring entails the submission by banks of an extensive range of periodic returns which cover numerous aspects of banking operations. Any areas of concern revealed through the returns are taken up promptly with the bank involved for remedial action.

 

On-site examinations are carried out with a view to assessing the current financial position and soundness of a bank and its future prospects at a given time. In this respect, the following main areas are covered:

  • the quality of the management of the bank, including internal control aspects and procedures;  
  • the bank’s loan portfolio, with emphasis on credit risk management, the quality of the loan portfolio and the adequacy of the provisions for bad and doubtful debts;  
  • costs and the assessment of the returns achieved;  
  • the compliance with the conditions of the bank’s license and with Central Bank of Cyprus directives, regulations and instructions on capital adequacy, large exposures, etc.;  
  • Adherence to the requirements of the anti-money laundering legislation and guidance notes.

Supervision is exercised by the Central Bank of Cyprus, on a consolidated basis.

 

A Cyprus Economy Review

 

Cyprus as member of the E U and the Euro area, is successfully meeting the challenge of being part of the enlarged European family and the Central Bank of Cyprus is making sure that is always respected.  Cyprus`s economy is characterised by robustness and macroeconomic stability, which is evidenced by the favourable evaluations and comments of the European Commission, the I M F and other international institutions. 

 

IN the period of 2000-2006 according to the statistics of the Central Bank of Cyprus, real GDP grew by an at least of 3,6% per annum, which is favourable with the EU average.  This was accomplished in an environment of full employment conditions, low inflation and a stable and strong currency.  In 2006 Cyprus’s per capita GDP reached about 93,7% of the EU-27 average.  In addition, it should be pointed out that important structural reforms within the context of the Lisbon Strategy are in progress in order to further modernise and liberalise its market-oriented economy, with a view to enhancing its international competitiveness and EU compatibility.  These structural reforms, together with macroeconomic stability, provide a strong foundation for the successful participation of the island in the euro area. 

 

Currency of Cyprus is the Euro 

 

On 1 January 2008 Cyprus adopted the euro, the single European currency. More than 310 million people in the 15 EU member states that have adopted the euro now share the benefits of the single currency.

The adoption of the euro after the recommendation and involvement of the Central B ank of Cyprus has brought considerable benefits for Cyprus. Price transparency in the single market of the European Union facilitates price comparability, helps competition and leads to prices which are lower than average. The wiping out of the exchange rate risks helps the trade transactions, thus also leading to lower prices. Travelling and buying goods and services in the euro area countries is now much easier, because citizens will not have the burden of changing currencies every time they travel , and are better able to compare prices since they can use their own currency everywhere. Travelling and buying goods and services outside the euro area is also easier, since the euro is now an international currency and therefore freely accepted in a lot of countries , particularly in tourist destinations. Also, both savers and investors can take a great advantage of many more opportunities for saving and investments, which appear in the unified financial market of the European Union!

 

25/02/2011