Bank of Cyprus and Cyprus Popular Bank, also known as Laiki Bank, were the largest banking groups in Cyprus in 2013. A combination of a low-tax regime, an accommodating attitude towards foreign capital and its geographical location close by the Balkans and Middle East, (whilst part of the EU) attracted deposit inflow from several countries. The expansion of the activities to Greece and the acquisition of Cyprus Popular Bank by the Marfin Investment Group led to unfettered growth.
A report by Alvarez and Marshall commissioned by the Central Bank of Cyprus and published in 2013 revealed that earlier inspections of Laiki Bank showed evidence of significant irregularities and mismanagement. A financial crisis in Cyprus fomented and the banking sector was heavily hit. The exposure to Greek sovereign debt and poor risk management in the domestic market triggered a downfall. The ECB granted short term funding via Emergency Liquidity Assistance to the Central Bank of Cyprus, who in turn provided liquidity to Bank of Cyprus and Laiki Bank against enough collateral. The downward spiral accelerated and within a few weeks, Bank of Cyprus and Laiki Bank became insolvent. A resultant resolution and restructuring plan that included bail-in of uninsured depositors, was installed.
The Memorandum of Understanding to restore financial, economic and social stability in Cyprus assigned the banking sector concerns and public debt as the two main challenges to solve. Foreign assets from Greece were sold to Piraeus Bank. Via a purchase and assumption procedure the Cypriot assets of Laiki Bank were taken over at fair value by Bank of Cyprus. Uninsured deposits stayed in the legacy company and Laiki was resolved with full contribution by shareholders, bondholders and uninsured depositors. Uninsured deposits were written off, but loans made to these same depositors sometimes were off-set, but still continued to exist. Strategic loan defaults climbed to 150% of GDP. Capital controls had to prevent a rapid outflow of cash to other countries.
There was public outrage and several court cases were filed. The Nicosia district court referred staff members of Laiki Bank in Greece to the criminal court on charges of mismanagement. In the Greek Supreme Court two Laiki bankers were charged with market manipulation and presenting false and misleading information. Two other senior bankers were also charged for conspiracy to defraud and false accounting. In the Limassol District Court depositors with loans and deposits argued that their legal right to off-set was not calculated correctly. Greek investors felt discriminated against when their claims were written-off, while public institutions in Cyprus were prioritized. They filed their claims with the International Centre for Settlement of Investment Disputes - the tribunal of the World Bank.