Sins: Those of Omission and those of Commission

9 May 2015

On 21 July 2014 at 11 o’clock in the evening, the Central Bank of Cyprus announced the imposition of resolution measures on the Cyprus branch of FBME Bank. As we know, Resolution is a preferred route for taking over the affairs of a bank going bankrupt, but it has not been used before for a healthy, liquid bank such as the Cyprus branch of FBME. In turning to this measure, the Central Bank failed to coordinate – or even inform – the supervisors of the head office of FBME Bank, the Bank of Tanzania. From that day to this, the CBC has still failed to link its actions to those of the superior authority in Tanzania or even to pay much attention to the rules and laws of Cyprus and the EU.

One of the fictions pedaled in off-the-record briefings by CBC officials was that the Resolution Committee, comprised of the Governor and its two Executive Directors, had no choice. This is just not true. They had an alternative approach recommended by the directors and management of FBME Bank to which they never responded, and there were certain other avenues, too.

Another fiction was that correspondent banks immediately refused to transact with FBME bank, which again was not true.

A third fiction was that the decision to place these measures on the Cyprus branch of FBME Bank was made by the Resolution Authority. We know from the resignation of Stavros Zenios from the Board of CBC in March, that this wasn’t so. He was a member of the Resolution Authority at the time and has stated publicly that he wasn’t consulted. Afterwards he recommended an investigation be conducted into what the Committee was doing, which was rejected by the three Committee members.

This led to a series of ‘Sins of Omission’, where core principles from the Basel Committee on Banking Supervision and the EU Bank Recovery and Resolution Directive were ignored.

The EU Directive has this to say about the use of Resolution on a bank: the aim should be to “… 1) safeguard the continuity of essential banking operations, 2) protect depositors, client assets and public funds, 3) minimise risks to financial stability, and 4) avoid the unnecessary destruction of value.” Little or no regard has been paid to that by the CBC.

The Basel Guidelines say Resolution should be developed only for weak banks (Executive Summary), “Under normal circumstances,” the Guidelines say, “it is the responsibility of the board of directors and senior managers of a bank, not a supervisor, to determine how a bank should solve its problems” (Guideline 106).

“Home (in this case BoT) and host (CBC) supervisors of cross-border groups,” should “share information and cooperate for effective supervision of the group and its entities as well as coordinate the supervisory response for effective handling of crisis situations,” (guideline 251).

Guideline 94 says, “The supervisor in correlation with the resolution authority where one exists needs to prepare detailed and comprehensive plans for dealing with weak banks in order to respond promptly in a crisis.” No one has yet seen such a plan from CBC or its Administrators, detailed or otherwise.

“The bank and the supervisor should take prompt action to prevent the problems growing and exacerbating the financial weakness of the bank,” (Guideline 108). CBC’s actions have had quite the contrary effect.

Another omission is the failure of the CBC to cooperate with an investigation launched by the Cyprus Parliament. The list goes on.


Now for the sins of commission: those things the CBC and its Administrator Dinos Christofides have done.

They should never have co-opted a law for a bankrupt bank, specifically designed for Laiki Bank, and tried to foist it on a liquid healthy bank.

They should not have closed the Cyprus branch of FBME by preventing the making of any and all transactions from 24 July until 2 September 2014 when Cyprus law says they may do so for only four working days.

Christofides should not have represented himself in writing and in other ways with having responsibility over the whole bank (in order to claim access to FBME deposits), when he was appointed Administrator only of the Cyprus branch.

When he reopened the branch for transactions from 2 September 2014 with the backing of CBC, Christofides should have explained why he restricted depositors to only EUR 10,000 a day, then reduced this to EUR 5,000 a day and in stages to the current level of EUR 200.

Christofides froze access to some 300 accounts in September, then in November unfroze them, both without explanation.

The CBC commissioned a number of investigations into FBME’s Cyprus branch during the course of 2014. Some were carried out by the international firm PwC and others by the CBC’s own staff. None of the results have been published. If they had, they would have helped address the original FinCEN allegations. The CBC’s Administrator also opposed the work of the US forensic accountants and international lawyers commissioned to investigate the Bank by the FBME owners.

Now, the CBC has appointed a second Administrator. Another investigation has been launched with much fanfare and intimidation, this time by Kroll, DLA Piper and Georgiades & Pelides. After getting nowhere in nine months, what seems to be happening now is a repeat of the CBC formula, only now at much greater expense. Though FBME Limited seriously questions the approach adopted in holding another review, it will nevertheless offer full cooperation.

Apart from threatening FBME staff and causing the loss of a number of jobs in associated and client companies, that’s about it. After nine months’ work, during which lots of harm has been inflicted, that’s all they have to show.