Cyprus: Laiki Bank Ad Hoc Emergency Liquidity Assistance, 2011

After Laiki Bank lost EUR 2.3 billion on its Greek government bonds following the EU decision to haircut Greek government bonds in October 2011, the bank requested ELA from the CBC, with the consent of the ECB. Up until this point, the bank had been able to provide sufficient ECB-eligible collateral to meet its liquidity needs through ECB operations. An internal CBC report from October 31, 2011, stated that the ELA being provided to Laiki Bank was temporary and not meant to be a permanent source of funding but was needed to ensure prompt responsiveness to the bank’s current needs, including deposit withdrawals (CBC 2013b; EC 2012; NYT 2014e).

According to the governor of the CBC, if the bank had not received the state support when it did, the bank would have lost its operating license. The governor argued that terminating ELA provision and revoking the operating license of both Laiki Bank and Bank of Cyprus (the two largest banks in Cyprus) was the only other option—which would have meant the liquidation of both banks and the bankruptcy of Cyprus when the deposit insurance scheme was called to protect both banks’ insured depositors (CBC 2013b; Demetriades 2013).

Following the resolution of Laiki Bank in 2013, the new president of Cyprus launched a study on what caused the collapse of the Cypriot economy. The study concluded that Laiki Bank had been insolvent before the haircut of Greek bonds. It also discusses a viability assessment made by the CBC in April 2012, noting that the assessment was “glaringly unreliable,” as it “was not based on any scientific instrument, except for wishful thinking" (NYT 2014e, 20-21). A statement from the CBC in June 2013 disagreed, stating that the bank remained solvent until March 25, 2013. The CBC acknowledged the capital shortfalls at Laiki Bank and Bank of Cyprus but argued that, nonetheless, “these banks were considered solvent because of the prospect of recapitalisation through the financial assistance programme” (CBC 2013c). The statement specifically cited a preliminary memorandum of understanding from November 2012 that included EUR 10 billion for the recapitalization of Cypriot banks (CBC 2013c; NYT 2014e).

In December 2011, when the EBA estimated the bank’s capital shortfall at EUR 1.97 billion, the CBC required Laiki Bank to provide a plan for how it would reach a core Tier 1 ratio of 9% by June 2012. In January 2012, the bank submitted a plan that involved privately raising EUR 1.8 billion in new capital, converting EUR 600 million of debt into equity, and further boosting capital by the equivalent of EUR 400 million by shedding risky assets. When the bank was unsuccessful in attracting private investors, it asked the government to inject EUR 1.8 billion into the bank in the form of an unfunded sovereign bond in return for new common shares. The government agreed in May 2012 to recapitalize the bank via an injection of government bonds and, on June 30, 2012, became an 84% shareholder (CBC 2011; CBC 2013b; EC 2012; Laiki Bank 2012b; Laiki Bank 2012a; Noonan 2013). For more information on the capital injection, see Schaefer-Brown (2024b).

From October 2011 to the resolution of the bank in March 2013, the bank received ELA from the government of Cyprus; it received loans from the ECB from October 2011 through June 2012 (CBC 2013b; EC 2012).

The provision of ELA is at the discretion of the CBC subject to the consent of the ECB’s Governing Council. The CBC provides ELA to solvent banks upon the presentation of adequate collateral. ELA is not granted as a part of monetary policy, meaning the costs and risks are incurred by the central banks and not the ECB (NYT 2014e). The CBC has said that it “evaluates the seriousness of the situation and acts as a lender of last resort” (CBC 2013c).

As a member of the EU, Cyprus must comply with the prohibition on monetary financing contained in Article 123(1) of the Treaty on the Functioning of the European Union (TFEU),^FNThe TFEU, itself based on the Treaty of Maastricht of 1992, is one of the EU’s two foundational treaties (the other being the Treaty on European Union). It sets out in detail the principles and objectives of the EU and the scope and functional responsibilities of EU institutions (the Treaty on European Union in contrast defines the EU’s purpose and lays out its institutions and form). As a technicality, before the Lisbon Treaty came into effect in 2009, TFEU Article 123 was Article 101 of the Treaty Establishing the European Community, but the content was unchanged when the Lisbon Treaty relocated the article. which reads (emphasis added):

TFEU Article 123 prohibits the extension of liquidity to insolvent firms (at least without a state guarantee), which is considered a public undertaking (in other words, one that should be supported with state resources). While the ECB has its own implementing agreements and procedures to ensure compliance with TFEU Article 123 within the Eurosystem (see Key Design Decision No. 5, Governance), they are not legally binding;^FNThat is to say that those agreements and procedures implement EU law but are not themselves legally enforceable. Any legal actions resulting from a violation of the monetary financing prohibition would be enforced as EU law and, in practice, the issues are raised by the European Commission. See (Arnold 2025). the monetary financing prohibition—including its application to emergency liquidity—is EU-level law, and thus applies even to those nations that are member states of the EU but not members of the Eurosystem. For more on the application of the monetary financing prohibition to ELA, see Arnold (2025).

Article 14.4 of the Statue of the European System of Central Banks and of the European Central Bank (ESCB) authorizes the ECB’s Governing Council to, with a two-thirds vote, prohibit the provision of ELA by a national central bank if it “[interferes] with the objectives and tasks of the ESCB” (EU 2009a). The ESCB, by virtue of being annexed (as Protocol No. 4) to the TFEU in 2009,^FNBefore the Lisbon Treaty, in Protocol No. 3 of the Treaty Establishing the European Community, as amended in 1997. has the same legal character as the TFEU. That is to say, although the ECB Governing Council may, from time to time, publish non-legally-binding procedural guidance, its authorization to prohibit or suspend national central bank activities under Article 14.4 of the ESCB is legally binding and statutory in nature. In practice, the ECB Governing Council has cited suspected TFEU Article 123 violations when suspending ELA provision by a national central bank (see Arnold [2025]; Key Design Decision No. 5, Governance).

The CBC provided ELA to the bank at its discretion from October 2011 through March 2013. This ELA was subject to the consent of the ECB. The ECB allowed the ELA up until March 2013 when, on March 21, the ECB announced it would stop allowing the provision of ELA to the bank as of March 25, with a requirement to repay by March 26 (CBC 2013b; CBC 2013c). According to the CBC, while providing ELA, the CBC assessed and valued collateral on an ongoing basis using “appropriate valuation haircuts” determined by the type of collateral (CBC 2014, 71).

The ECB allowed ELA to be provided to Laiki Bank from October 2011 through March 25, 2013. The ECB chose to terminate the ELA “due to the lack of clear and binding policy decisions on behalf of the Cypriot side to implement a preliminary agreed financial assistance programme” (CBC 2013c; CBC 2013b). Throughout the duration of the ELA, the CBC and the ECB were in communication regarding the ELA provision. The ECB raised questions about the capital levels of Laiki Bank and the collateral being used, and the CBC responded by insisting that the ELA provision was “absolutely vital” for Laiki Bank and the Cypriot banking sector (NYT 2014b; NYT 2014c; NYT 2014d).

Pursuant to Article 14.4 of the ESCB, the ECB Governing Council can, with a two-thirds vote, prohibit ELA provision by a national central bank (see Key Design Decision No. 3, Legal Authority). During the Global Financial Crisis and the European Sovereign Debt Crisis, the ECB Governing Council made that determination, variously suspending national central bank ELA and conditioning further approval for it on policy changes in the country in question (Arnold 2025). 

Although the ECB Governing Council’s ability to suspend national central bank ELA has existed since well before the official publication of any guidelines, the ECB began to publicize non-legally-binding guidance on its ELA expectations in 2013. At that time, it published its ELA Procedures, which outlines numerous ex post reporting requirements, including, inter alia, amount, interest rate, collateral, supervisory assessment, and motivating reason (ECB 2013b). Further, if ELA exceeds EUR 500 million, the relevant national central bank must alert the ECB Governing Council of the extension of ELA as soon as possible before the fact. Under the ELA Procedures, any ELA exceeding EUR 2 billion will be automatically reviewed by the ECB Governing Council to ensure that it does not merit suspension or alteration resulting from its interference in ECB tasks and responsibilities as outlined in ESCB Article 14.4 (ECB 2013b). 

In 2017, the ECB published its Agreement on Emergency Liquidity Assistance, which provided further guidance on the ECB’s policies regarding ELA and replaced the earlier 2013 ELA Procedures (ECB 2017b). In the 2017 agreement, the ECB added language that clarified the limitations of the prohibition on monetary financing, noting that: “this document acknowledges that ELA must be in compliance with the prohibition of monetary financing (Art. 123 of the Treaty of the Functioning of the European Union [TFEU])” (ECB 2017a). It added further guidance to ELA procedures, requiring, inter alia, a funding plan within two months of the first extension of ELA, a letter to the president of ECB regarding the ELA if provided for more than six months, compliance with various solvency requirements, and a penalty interest rate. The ECB revised its ELA agreement in 2020 and most recently in 2024.

Up until March 2013, there was little communication specifically regarding ELA. Communication ramped up after March 21, when the ECB announced its decision to terminate approval for the CBC provision of ELA to Laiki Bank as of March 25. Both the ECB and the CBC released multiple statements regarding the resolution of Laiki Bank and the ELA that had been provided up until that point. On March 30, the CBC released two statements justifying the aid it had provided to Laiki Bank and explaining the resolution of Laiki Bank and restructuring of the Bank of Cyprus (CBC 2013a; CBC 2013b; CBC 2013c; ECB 2013c; ECB 2013a). An additional statement released by the CBC on June 17 specifically addressed the ELA provided to Laiki Bank. This statement explained the CBC’s position that Laiki Bank had been solvent until March 25 “because of the prospect of recapitalisation through the financial assistance programme” (CBC 2013c).

A Financial Times article from March 20, 2013, described the ELA provided to Cypriot banks as “like fight club, the first rule of ELA is you do not talk about ELA” (Steen 2013).

In October 2011, Laiki Bank began to receive ELA from the CBC. Up until this point, Laiki Bank had had adequate collateral to conduct monetary policy operations directly with the ECB. The amount channeled through the ELA mechanism continued to increase until Laiki Bank’s resolution in 2013 (CBC 2013b).

At the time the Cypriot authorities resolved the bank in March 2013, the CBC’s outstanding ELA to Laiki Bank was at EUR 9.1 billion. These obligations were transferred to the Bank of Cyprus during the resolution process (CBC 2014).

Research revealed little information on any rates and fees of the ELA provided to Laiki Bank. The CBC annual report for 2013 said that ELA provision was interest bearing with a rate that was higher than the rate applied by the Eurosystem for the marginal lending facility, the margin determined by taking into consideration recommendations made by the Governing Council of the ECB (CBC 2014).

The rate on the marginal lending facility (the ECB’s standing contingent liquidity facility, which offers overnight credit to banks against collateral at predetermined interest rates) during the time the Laiki Bank’s ELA was in effect ranged from 1.5% to 2.3% (ECB n.d.).

Laiki Bank began requesting ELA from the CBC in October 2011, following the EU decision to haircut Greek government bonds (CBC 2013b; EC 2012). The CBC wrote that because ELA is granted in exigent circumstances for banks facing temporary liquidity problems, “the inherent duration of ELA is short” (CBC 2014, 71). However, it also added that, “in the event of protracted need, the provision of ELA is renewed at regular intervals of approximately 15 days” subject to the conditions and frameworks of the original ELA (CBC 2014, 71–72).

In January 2013, the ECB extended the ELA deadline for Laiki Bank until March 21, 2013. Previously, from July 2012 through January 2013, the CBC had been working to reach an agreement with the troika. The troika and government of Cyprus intended to sign a memorandum of understanding following a diagnostic check of Cypriot banks by PIMCO. PIMCO submitted its findings in January 2013, but at this point Cyprus was in a pre-election period, so the troika elected to abstain from any actions that could be interpreted as political intervention. This prompted the ECB’s January decision to extend the ELA deadline. When the March 21, 2013, deadline came, the ECB’s board of directors implemented the decision to cease the provision of ELA to Laiki Bank as of March 25 (CBC 2013b; ECB 2013c).

The ECB had to approve collateral pledged to the CBC for the bank to receive ELA. This requirement proved an issue when the Cypriot government recapitalized the bank with an unfunded sovereign bond because the ECB did not allow this to be used as collateral to receive ELA. The CBC also agreed to provide the ELA only on the condition that the government would counter-guarantee the loans, due to their substantial size and credit risk (Honohan 2024; Noonan 2013).

After the ELA became public, the CBC argued in its June 17, 2013, public statement that the bank had been solvent on a pro forma basis that excluded provisions for losses that an external consultant had predicted the bank would experience under an adverse scenario. The CBC also noted in that statement that its solvency analysis assumed the bank would receive new capital through a financial assistance program that the federal government had agreed to in a preliminary memorandum of understanding from November 2012; that MoU included EUR 10 billion for the recapitalization of Cypriot banks but was not executed before the bank’s resolution in March 2013 (CBC 2013c).

On June 25, 2012, the Republic of Cyprus was downgraded by Fitch, making Cyprus government bonds no longer acceptable collateral for the ECB’s monetary policy operations. After this, the bank’s EUR 2.6 billion debt to the ECB was transferred to the CBC’s ELA mechanism (CBC 2013b).

Between 2011 and 2013, Laiki Bank pledged every building it owned as well as batches of loans and bonds as collateral. Acceptable collateral included marketable and nonmarketable securities, credit claims, and real estate. The valuation of collateral by the ECB was based on market prices from financial information vendors, or, if these market prices were unavailable or unreliable, theoretical prices were used based on prices of similar securities or the assessment of the underlying assets. Haircuts were applied based on residual maturity and coupon type; when ratings fell below the Eurosystem threshold, additional haircuts were added depending on the rating shortfall and liquidity category. An additional 10% haircut was added for securities denominated in US dollars (Noonan 2013; NYT 2014a).

Research has not revealed additional impact on monetary policy transmissions.

During the timeframe of the ELA, the government imposed several conditions as part of an ad hoc capital injection provided, which is the subject of another case study (see Schaefer-Brown [b2024]).