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Document Type

Case Study

Case Series

Ad hoc Capital Injection

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 when the Greek government restructured its sovereign debt, decimating its equity capital and shutting its access to market liquidity. In late 2011, supervisors estimated the bank’s capital shortfall at EUR 3.1 billion. In January 2012, the bank submitted a plan to the central bank that included EUR 1.8 billion of capital raised from private investors and EUR 1 billion of capital increases through debt-to-equity swaps and deleveraging. However, Laiki Bank was unable to raise private capital and 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. The government paid by issuing to Laiki Bank an unfunded sovereign bond rather than cash, since it lacked access to capital markets. The bank would have reported negative equity on June 30 in the absence of the government capital injection. 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 withdrew its approval of emergency liquidity assistance to Laiki Bank, the Cyprus government put the bank into resolution. In resolution, the bank transferred its insured deposits and some uninsured deposits to the Bank of Cyprus, the country’s largest bank, which the government also restructured, and sold its Greek assets and deposits to Piraeus Bank, one of the largest Greek banks. The legacy Laiki Bank retained some assets and received an 18% stake in the Bank of Cyprus. The government retained its investment in the legacy bank as it sought to sell the legacy bank’s remaining assets.

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