Betweent the years 2012 amd 2013 one onf the biggest security scandals came to light when the two major banks of Cyprus anounced they would be suspending the
interest payments upon certain secutities they had sold to the public at large. That made the pubic suspicious about the real nature of these securities sold to them so
they turned to the regulatory authorities to investigate the matter further. The Cyprus Stock Exchange Commision and the the Central Bank of Cyprus opened u
an investigation into the bank’s affairs they issued a daming report documenting their findings. They found that in relation to the launching
if these securities breached not only had misrepresented their nature and breached a number of positive duties under the eMarkets in Financial Instruments Directive
(2004/39/EC) passed by the Eurpean legislative authors. The misrepresentations where that the investors where investing their lifesavings into five year fixed term
deposits htat they offered a yield from anywhere between the range of a whopping 7.5% interest rate to 5.5% depending on the kind of the deposit. That
this was going to be fixed for the first year and then they would be offering the normal euribor rate plus a certain spread sometimes they told them the
interest rate was going to remain the same throughout the five years), that they could take out a loan to invest in these securities and that they would
not be liable to pay back the loan or either its interest. They also misrepresented these loans as being part of the securities investment plan and
that when the principal sums would be returned they would the loan would be settled automatically . To that effect they where interest only loans to serve the purpose
of being paid automatically by the interest generated by the securities. Based on that arrangement, they could borrow to have access to their principal sum
knowing in their mind that they would not be accountable for these loans or depending on the case make a profit upon the difference between the interest rate
paid on the bonds the lower interest of the loan. They could even sell them on the stock exhange and profit from their rise in their price.
They also mistated to them that the primary reason the bank was giving such high yields
was that they decided to venture out and boost their profits and everyone would benefit.
These were all misrepresentations as theses securities where far from deposits. They where hybrid securities belonging to either first tier or second tier
capital meaning that if the bank was not performing well financially they could either suspend payment under these contract if they saw that the bank
was insolvent or going to be insolvent as a result of making such payments. As to the Bank of Cyprus securities that where issued in 2008 they belonged
to second tier capital and had a maturity date of ten years as opposed to being misrepresented as being for five years The 2009 and beyond series had no maturity date OR because they were considered perpetuitues. Since these
instruments belonged to the bank’s first tier and second tier capital their sole objective was to prevent the bank from ever becoming insolvent and continue to
pay its real depositors and all its other expenses that where included in senior debt. In case the bank faced liquidity problems then
it would resort to these very funds in order to continue to pay its obligations. First and second tier capital also hinged on the priority
of these investors in case the bank decided to liquidate its assets. Since first and second tier capital (less reliable form of capital and requires high threshold of losses for it to stop paying)
include hybrid securities and equity) these where unsecured subordinated debt, meaning the bank’s assets where not secured or pledged as collateral for the liabilities of such investors in their capacity as lender’s of the bank. The second tier capital securities were also considered as “senior unsecured debt” meaning
that they enjoyed a lower priority than senior debt but higher priority than other forms of subordinated debt. With first tier capital the bank did not even have to be insolvent to stop making payments.
