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Document Type

Case Study

Case Series

Resolution and Restructuring

JEL Codes

G01, G29

Abstract

In 2011, Cyprus’s second-largest bank, Marfin Popular Bank—later renamed Cyprus Popular Bank but commonly known as Laiki Bank—lost billions of euros on Greek government securities when the European Union decided to haircut Greek government bonds. This damaged Laiki Bank’s equity and shut its access to market liquidity. In late 2011, supervisors estimated the bank’s capital shortfall at EUR 3.1 billion. As Laiki Bank faced severe liquidity problems from depositor withdrawals, the Central Bank of Cyprus (CBC) began to extend emergency liquidity assistance (ELA) to the bank in October 2011. In January 2012, the bank submitted a recovery plan to the CBC that included EUR 1.8 billion of capital raised from private investors; when Laiki Bank was unable to raise private capital, it asked the government to inject EUR 1.8 billion. The government agreed and, on June 30, 2012, acquired EUR 1.8 billion in new common shares by issuing an unfunded sovereign bond to Laiki Bank. As a result, the government held 84% of Laiki Bank’s share capital. Without the government bond, Laiki Bank would have reported negative equity. In 2013, to satisfy the conditions for sovereign aid from the European Central Bank (ECB), European Commission, and International Monetary Fund, and after the ECB implemented a decision to cease providing ELA to Laiki, the CBC put the bank into resolution. In resolution, the bank transferred most of its assets, insured deposits, and some uninsured deposits to the Bank of Cyprus, the country’s largest bank, which the government also restructured. The bank sold its Greek assets and deposits to Piraeus Bank, one of the largest Greek banks. The government also seemingly wrote off its entire EUR 1.8 billion investment in Laiki Bank. The government had to resolve and restructure Laiki Bank because the ECB’s decision would have put it into bankruptcy, and neither the existing Cypriot Deposit Protection Scheme nor the government itself was equipped to cover all of Laiki’s insured depositors. In January 2017, the Bank of Cyprus fully repaid its ELA and was admitted to listing and trading on the London Stock Exchange. As of 2021, the liquidation of Legacy Laiki appeared to still be in progress.

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