The financial sector in Cyprus has experienced a turbulent history, especially in the wake of the 2012-2013 financial crisis. Banks operating in the jurisdiction face risks such as exposure to external economic shocks and market volatility. It is crucial for retail depositors and small businesses to be aware of these risks and understand the importance of bank deposit insurance.

Bank deposit insurance plays a critical role in protecting retail depositors and small businesses in case of a bank’s failure. It helps maintain the stability of the financial system and public confidence in the banking sector by providing a safety net.

The Deposit Guarantee Scheme (DGS) in Cyprus is administered by the Deposit Guarantee and Resolution of Credit and Other Institutions Scheme (DGSRCIS), located in Nicosia. The legal framework governing the DGS is established by the Business of Credit Institutions Law and the Deposit Guarantee and Resolution of Credit and Other Institutions Scheme Law.

The Deposit Guarantee Scheme of Cyprus is activated when a credit institution is declared unable to meet its obligations, or is placed under liquidation, resolution, or bankruptcy. In such cases, the DGSRCIS is responsible for compensating eligible depositors up to the coverage limit, which is currently set at 100,000 euros per depositor per bank. Temporarily high balances, such as those arising from real estate transactions, inheritances, or insurance payouts, may be covered up to 500,000 euros, but only for three months from the date of the deposit.

Eligible depositors include individuals, small businesses, non-profit organizations, and local governments. However, there are some exclusions to the coverage, such as deposits made by credit institutions, financial institutions, or investment firms, and deposits related to money laundering or terrorism financing.

Claims must be filed within a specific timeframe, usually between 3 and 24 months from the date of the DGSRCIS’s notification. In case of a rejected or ineligible claim, depositors can seek legal remedies through the courts or explore alternative options, such as the sale of their claims to third parties.

If the claim filing period has ended and there are still unclaimed or unsecured surplus deposits, the resolution authority may take further action to address the situation. This could involve selling the bank to another party, or liquidating and winding up the operations of the bank. In such cases, the remaining funds may be distributed to the depositors and other creditors in accordance with the priority of claims established by the resolution authority. It is essential for depositors to stay informed about the ongoing developments and follow the instructions provided by the resolution authority in order to maximize the recovery of their unsecured surplus deposits.

In the last decade, Cyprus has witnessed several bank failures, most notably in 2012-2013. The two largest banks, Bank of Cyprus and Laiki Bank, faced severe financial difficulties due to their exposure to Greek debt and a downturn in the local property market. The crisis resulted in the resolution of Laiki Bank and the recapitalization of Bank of Cyprus through a bail-in of uninsured deposits. The event was a turning point for the Cypriot banking sector, leading to the implementation of stricter regulatory measures and the establishment of a more robust deposit guarantee scheme.

The lessons learned from the crisis underscore the importance of sound risk management practices and the need for continuous improvement of the regulatory framework. The enhanced deposit guarantee scheme in Cyprus has helped restore confidence in the financial system and offers better protection to depositors in the event of future bank failures.

Understanding the Deposit Guarantee Scheme of Cyprus is essential for retail depositors and small businesses, as it offers financial protection and contributes to the stability of the financial system. By staying informed about the DGS’s activation process, coverage limits, claim procedures, and past bank failures, depositors can make better decisions and safeguard their financial future.