Central Bank of Cyprus (CBC) governor Christodoulos Patsalides has called for an urgent and substantial reform of the bank’s governance model, arguing that the current structure is obsolete and no longer fit for the demands of a modern central bank within the Eurosystem.

In a comprehensive piece of analysis, Patsalides detailed his proposal for a major overhaul, including legislative amendments, that would move the CBC towards a more flexible, collective, and efficient operation, mirroring the successful structure of the Deutsche Bundesbank, the German central bank.

The CBC was established in 1963, “shortly after the declaration of the Republic of Cyprus’s independence, based on the Central Bank of Cyprus Law of 1963 and related articles of the Cypriot Constitution”, Patsalides pointed out.

“Since then”, he continued, the “legislative framework governing the CBC’s operation was substantially amended twice for compatibility with the Treaty on the Functioning of the European Union and the Statute of the European System of Central Banks and of the European Central Bank (ECB): in 2002 with Cyprus’s accession to the European Union and in 2007 with its entry into the euro area.”

The governor emphasised that these amendments primarily aimed to align the legal framework with European requirements, particularly ensuring institutional independence, but they had a limited focus on the bank’s operational efficiency.

“Developments in the global economy throughout time, as well as the accelerating pace of technological development, the upgrading of European institutions, as well as the strengthening and expansion of the ECB’s role, have highlighted the structural weaknesses of the CBC’s governance model,” he stated.

He was direct in his assessment of the current situation. “As a result, the current governance model is now obsolete and does not satisfactorily meet the requirements and obligations of a modern central bank member of the Eurosystem (that is, the network of national central banks of the euro area and the ECB),” Patsalides said.

Moreover, the governor pointed to significant weaknesses and institutional dysfunctions.

“I refer to substantive weaknesses and institutional dysfunctions,” he said. “I refer, among other things, to the excessive powers and obligations concentrated in the governor, without the possibility of delegating them, even partially.”

Furthermore, Patsalides highlighted the limitations of the current governing board.

“I also refer to the Governing Council (which is predominantly non-executive), which lacks the ability to manage Eurosystem issues, while the CBC’s responsibilities as a member of the Eurosystem are constantly expanding,” he explained.

The governor also outlined the substantial and growing commitments the CBC has at the European level.

“It is noted that today, more than 25 per cent of the CBC’s human resources participates in the committees and working groups of the ECB with the continuous support and contribution of executives from all general directorates of the bank,” he said.

Beyond this, CBC representatives are involved in numerous critical European bodies.

“In addition, representatives of the CBC participate in the Supervisory Board of the Single Supervisory Mechanism as well as in the administrative boards of related European institutions, such as the European Banking Authority, the European Systemic Risk Board, the Single Resolution Mechanism and the new European Anti-Money Laundering Authority and the Financing of Terrorism,” he added.

The CBC is tasked with a weighty and multifaceted role for the economy and society.

“By undertaking its dual mission, it serves the public interest of Cyprus and contributes to the formulation of the single economic policy of the Eurozone,” Patsalides said.

He continued to list the bank’s wide-ranging functions. “Specifically, the governor of the CBC participates in the Governing Council of the ECB which shapes monetary policy in the euro area,” he said.

In addition, he confirmed the CBC’s role as a member of the Single Supervisory Mechanism, which exercises the ECB’s banking supervisory duties, with the participation of national supervisory authorities.

“The CBC acts as the Macroprudential Authority to ensure financial stability, as well as the Resolution Authority,” he mentioned.

“It has jurisdiction over the licensing and supervision of financial entities such as electronic money institutions, payment institutions and credit managers,” he added.

“In this context, it also acts to combat money laundering,” he explained.

“At the same time, it manages the foreign exchange reserves of the Republic, performs the duties of the banker of the Republic, oversees the smooth operation of payment and settlement systems and collects, processes and distributes statistical data,” he conitnued.

He also mentioned that the CBC “promotes financial ethics and financial literacy and education”.

Patsalides views the Eurosystem membership as a privilege but one with unmet potential and significant responsibilities.

“The participation of the CBC in the Eurosystem is a privilege that offers significant benefits and opportunities, which the Bank has not yet fully exploited,” he said.

“At the same time, it creates obligations for the fulfilment of which there is significant room for development,” he added.

Furthermore, he explained that “geopolitical, economic and technological developments, as well as the deepening of European integration, require the CBC to have quick reflexes and flexibility“.

The governor underlined that the CBC’s scope of responsibilities is “continually expanding through new European legislation and the assignment of additional responsibilities at the country level”.

All these factors, according to the governor, necessitate “the need for a substantial reform of the CBC into a modern central bank, through the adoption of a governance model that ensures flexibility, collectivity, and more effective operation”.

Indeed, Patsalides recently addressed the nation’s leadership, outlining the details of his proposal on the CBC’s modernisation during a session of the House finance committee.

The proposal includes legislative amendments to build a governance structure that will allow the CBC to respond adequately to its institutional role and mission and to act with strategic foresight, foresight and effectiveness in the face of challenges.

“The proposed governance model is based on the lean and effective structure of the Deutsche Bundesbank, the Central Bank of Germany,” he said.

“The proposed reform provides for a six-member executive board as the highest administrative body in which decisions are taken collectively, by majority,” Patsalides added.

“The governor is the chairman of the board, with the deputy governor as vice-chairman,” he stated.

The members of the board, meanwhile, will have a seven-year, non-renewable term.

“Based on the provisions of the Treaty on the Functioning of the European Union, the governor is a member of the ECB’s Governing Council, as is the case today,” he pointed out.

The benefits of this change are clear. “The essential advantages of this model are the collective, yet lean, composition of the highest administrative body, as well as its executive nature,” Patsalides explained.

“This characteristic allows for the functional distribution of powers and responsibilities, and the more effective participation in decision-making within the institutions of the Eurosystem,” he added.

Patsalides wrapped up his statement with a forceful call to action, stressing that “the bank is now in its seventh decade of operation”.

“The need for substantial reform is not just timely, but imperative,” he stated.

“This initiative is a decisive step in strengthening the Institution, in order to respond more effectively to the challenges and prospects shaped by the future,” he continued.

“The ultimate purpose is the timeless presence of the Central Bank of Cyprus as a pillar of stability and development for the Cypriot economy, and as a reliable and valuable partner in the Eurosystem,” Patsalides concluded.