Opinion of the European Central Bank of 12 June 2026 on the stay of foreclosures and the restructuring of loans and guarantees (CON/2026/18)

OPINION OF THE EUROPEAN CENTRAL BANK of 12 June 2026 on the stay of foreclosures and the restructuring of loans and guarantees (CON/2026/18) Introduction and legal basis

On 18 May 2026, the European Central Bank (ECB) received a request from the Cypriot Minister for Finance for an opinion on a law amending the Law on transfer and mortgage of immovable property of 1965 (N. 9/1965) (the ‘Law’) , (the law amending the Law hereinafter referred to as the ‘first amending law’) . The first amending law was approved by the Cypriot House of Representatives on 6 April 2026 but has not yet entered into force as it was referred by the President of the Republic of Cyprus to the Supreme Constitutional Court. The first amending law is part of a broader package of legislative proposals which have been considered by the House of Representatives; some have since been promulgated by the President and have entered into force, and others have been referred by the President to the Supreme Constitutional Court. The latter category includes (1) a law amending the Law which concerns the suspension of the foreclosure framework (the ‘second amending law’ , and together with the first amending law, the ‘foreclosure amending laws’), (2) a law amending the Law related to the writing-off of residual mortgage debt following a property sale or auction (the ‘third amending law’) ; (3) a law amending the Liberalisation of Interest Rate and Related 5 6 Matters Law of 1999 (the ‘fourth amending law’ , and together with the third amending law, the ‘debt restructuring amending laws’); and (4) two laws amending the Law which are related to the liability of guarantors (the ‘fifth and sixth amending laws’ , together the ‘guarantee restructuring amending laws’, together with the debt restructuring amending laws, the ‘restructuring amending laws’, and together with the foreclosure amending laws and the debt restructuring amending laws, the ‘amending laws’). The ECB has decided to deliver an own-initiative opinion on the amending laws. The ECB’s competence to deliver an opinion is based on Article 127(4), second paragraph, of the Treaty on the Functioning of the European Union, as the amending laws concern (1) the task of the European System of Central Banks (ESCB) to contribute to the smooth conduct of policies pursued by the competent authorities relating to the stability of the financial system pursuant to Article 127(5) of the Treaty, and (2) the ECB’s tasks concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. In accordance with

Article 17.5, first sentence, of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the amending laws

Purpose of the foreclosure amending laws

1.1 The Law contains a framework which must be followed when a borrower has defaulted on payments in respect of the mortgaged property for at least 120 days. In such a case, the creditor must first issue a formal default notice, inviting the borrower to settle the outstanding debt and to contact them to examine if the conditions for a debt restructuring are met. Thirty (30) days after the first notice is served, the creditor may serve another notice on the borrower, inviting the latter to repay the total debt within a deadline of not less than 45 days and informing them that if they fail to do so, the creditor may exercise the right to sell the mortgaged property through auction. In the event that the borrower fails to comply with the set deadline, the creditor has the right to serve notice on the borrower that the mortgaged property will be auctioned, providing relevant information. At this stage, the Law allows the borrower to file an application at the District Court to set aside the notice of intended sale on a number of grounds, including in relation to the content or serving of the prescribed notices or where the borrower has secured an injunction from the Court. 1.2 The first amending law revises the grounds upon which a borrower may have the notice of intended sale issued by the creditor set aside. In particular, it replaces the right to have the notice of intended sale set aside upon the issuance of an injunction by the District Court with the right to have the notice set aside in cases where the borrower, or any other interested party, has filed any legal action or appeal of a ruling in favour of a credit institution, a credit acquiring company or a credit servicer (1) disputing the original or remaining amount of the debt, (2) claiming the existence of unfair contractual terms in the loan or mortgage agreements, or (3) invoking any other illegality and/or grounds of invalidity of such agreements. In such an event, the notice of auction cannot be served until there is a final and irrevocable Court ruling. 1.3 The rationale behind the first amending law, as explained in its recitals, is to protect borrowers from unfair contractual terms and other ʻcontrolled banking practicesʼ, especially given the sharp increase in lending rates and high inflationary trends, which have resulted from what is referred to as the protracted economic crisis. 1.4 The second amending law amends the Law by introducing a suspension of the foreclosure procedure in respect of primary residences with a value of below EUR 350 000 until 31 December 2026.

Explanatory note accompanying the first amending law

1.5 The consultation request to the ECB is accompanied by an explanatory note from the Ministry of Finance and a letter from the Governor of the Central Bank of Cyprus to the Minister of Finance, dated 6 May 2026, which express a number of concerns regarding the first amending law. 1.6 In particular, the Ministry considers that the first amending law will increase the number of cases before the Cypriot courts, leading to multi-year delays in the issuance of judgments, which will consequently deprive creditors of the ability to recover debts within a predictable timeframe, thereby

undermining the repayment culture, financial discipline and the overall functionality of the foreclosure framework. 1.7 According to the Ministry, there is a strong conviction that the first amending law is expected to materially influence the stability of financial institutions. Considerations regarding the valuation of collateral and the capacity for its timely liquidation constitute fundamental elements in determining both the capital requirements of credit institutions and the provisioning levels for non-performing loans (NPLs). When it comes into force, the first amending law will impact the reliability and effectiveness of collateral as a credit risk mitigant, which may cause credit institutions to apply more conservative valuations to collateral, leading to an increase in risk-weighted assets and, consequently, higher regulatory capital requirements. At the same time, longer recovery horizons will result in elevated loss given default (LGD) estimates, necessitating higher provisions under applicable accounting standards. According to the Ministry, the impact on credit risk will also be reflected in the pricing of new lending, which, in turn, will lead to higher interest rates, raising borrowing costs and prompting a further tightening on lending criteria, thus restricting lending to the private non-financial sector. This development is expected to adversely affect the business models and income-generating capacity of credit institutions. More broadly, this may exert pressure on economic activity and economic growth, with secondary effects on financial stability and the Government’s fiscal planning. 1.8 The Ministry considers that the first amending law is expected to have direct implications for the generation of new NPLs given that a significant proportion of lending is secured by immovable property and the ability to recover the value of collateral in a timely and effective manner becomes critically important. 1.9 The Ministry expresses the view that the first amending law could materially affect the key indicators assessed by international credit rating agencies, such as public finances, the trajectory of public debt and the level of non-performing exposures (NPEs). According to the Ministry, an unstable framework leads to an increase in NPEs and burdens public debt, thus intensifying the risk of a downgrade of the country’s creditworthiness. These developments have broader implications for the country’s borrowing costs and its access to international markets. According to the Ministry, any weakening or delay in the foreclosure process is therefore expected to deteriorate asset quality, interrupt further NPL reduction and be viewed negatively by credit rating agencies. 1.10 The Ministry also considers that the first amending law may have implications for public finances in relation to the operation of KEDIPES, a State-owned entity established following approval by the European Commission in 2018 for the granting of State aid amounting to EUR 3,541 billion plus interest. With the possibility of suspending foreclosure procedures, KEDIPES’ ability to recover the remaining amount of the State aid will be impaired, thus impacting State budget revenues. 1.11 The Ministry is of the view that the first amending law could lead to general regulatory uncertainty, negatively affecting investor confidence and disrupting financial stability, with broader long-term consequences for the economy of the country. 1.12 Finally, the Ministry draws attention to recent warnings issued by the International Monetary Fund (IMF) in the context of the Article IV consultation process for the Republic of Cyprus that any

interventions in the existing foreclosure framework that slow down or weaken the process for resolving NPEs would seriously undermine repayment incentives, increase credit risk and further restrict access to financing . Furthermore, the Ministry considers that such a development does not merely constitute a financial risk but is transformed directly into a potential fiscal risk for the State through lower credit intermediation, weaker economic activity, reduced tax revenues and, under stressed conditions, an increased likelihood of indirect State involvement to support financial stability. The Ministry also notes that any legislative amendment deviating from the balance between the protection of vulnerable borrowers and the need for effective debt recovery, without a comprehensive impact assessment, would not only impair banking operations, but also expose the country to systemic and fiscal risks ultimately borne by taxpayers and affecting long-term fiscal sustainability. 1.13 Many of these concerns are reflected in the accompanying letter from the Governor of the Central Bank of Cyprus to the Minister for Finance.

Purpose of the restructuring amending laws

1.14 The third amending law amends the Law to provide that any amount of debt remaining after the sale or auction of the property is automatically written off. In essence, the third amending law deems the debt to be fully repaid out of the proceeds of the sale and discharges the debtor from any further obligations in connection therewith. 1.15 The fourth amending law amends the Liberalisation of Interest Rate and Related Matters Law of 1999 by imposing a requirement on credit institutions to stop charging interest once the total outstanding amount of a credit facility, including charges, reaches twice the amount of the original debt. 1.16 Last, the guarantee restructuring amending laws primarily aim at limiting the liability of guarantors. In particular, the fifth amending law provides that where a creditor proceeds to auction or recovery of the mortgaged property, the liability of the guarantors must be limited to the amount of the original loan. This limitation does not apply if the guarantor is also a primary debtor, or in the case of a dispute on the amount of the debt, in which case the creditor must await a court ruling before pursuing the guarantors. In the same vein, the sixth amending law prohibits creditors from taking action against guarantors until a court ruling has been delivered against both the principal debtor and the guarantor. Moreover, it limits the liability of the guarantor to the initial amount of the guarantee, without any subsequent interest and charges, from which the proceeds of the sale of the mortgaged property and the instalments already paid by the principal debtor must be deducted. In the case of a mortgage securing multiple facilities, the proceeds of the sale must be credited as a priority to the credit facility with guarantors and, in the case of multiple credit facilities with guarantors, the proceeds must be credited in a chronological order. The provisions of the sixth amending law apply retroactively.

2. General observations

2.1 The appropriate time to consult the ECB The amending laws were approved by the Cypriot House of Representatives on 6 April 2026, but the legislative procedure is not yet complete pending the ruling of the Supreme Constitutional Court following the referral by the President and the potential eventual promulgation by the President . The ECB must be consulted at an appropriate stage in the legislative process . The ECB has emphasised on several occasions in its opinions that even in cases of particular urgency, or where the proposed legislation has reached an advanced stage, the national authorities are not relieved of their duty under Article 127(4) of the Treaty to consult the ECB regarding any draft legislative provision in its fields of competence such to allow sufficient time for (1) the ECB to examine the draft legislative provisions and (2) the relevant national authorities to take the ECB’s opinion into consideration before the provisions are adopted . Based on this, the ECB should have been consulted on the amending laws when these were in draft form prior to their approval by the Parliament . 2.2 Need for impact assessment It is primarily for the national legal order to balance the interests of the parties in a default or foreclosure situation as fundamental property rights and other socio-economic interests will be at stake . At the same time, the amending laws are being introduced without the benefit of any financial and economic impact assessment. The ECB stresses the critical importance of thoroughly assessing beforehand the impact of the amending laws on the capital adequacy and financial position of credit institutions in the short and medium term, as well as the effects of the amending laws on the functioning of the financial system and the economy, also taking into account moral hazard risks, as further described in paragraphs 3.1.3 and 5.1.1 below. This is reinforced by the fact that, as a result of the first amending law, the foreclosure framework will revert to where it stood prior to 2018 when amendments were introduced by the Cypriot authorities which aimed at addressing the financial crisis and resolving the significant volumes of NPLs in the Cypriot economy.

3. Observations on the foreclosure amending laws

3.1 Effects on financial stability 3.1.1 The first amending law introduces a wider scope of grounds for suspending the foreclosure procedure over an extended period of time upon the filing of a court application. In addition, the first amending law does not prescribe any specific eligibility criteria to limit the scope of borrowers, or

other parties entitled to initiate legal proceedings, which thereby significantly widens the range of parties able to trigger a suspension. This may result in a high number of foreclosure procedures being suspended for prolonged periods of time. The negative financial impact would lead to an undue reduction in bank profitability and increase uncertainty. A slower resolution of existing NPLs and potentially higher inflows of NPLs will limit banks’ ability to retain earnings, erode existing capital buffers and negatively affect their resilience to negative economic shocks. Against this background, and considering the importance of portfolios collateralised by residential real estate in total bank assets, the first amending law may have a potentially significant negative impact on the credit institutions affected, as well as implications for financial stability . 3.1.2 The suspension of foreclosure proceedings for primary residences valued at up to EUR 350 000, as envisaged by the second amending law, does not contribute to resolution of the underlying structural issues. Rather, it prolongs them without substantiated justification, disregarding the established borrower protection mechanisms already operative within the Cypriot legal framework. Specifically, the Mortgage-to-Rent scheme provides a structured and targeted avenue through which vulnerable borrowers facing the loss of their primary residence may obtain debt relief. The availability of this instrument, alongside complementary schemes such as the Estia scheme , demonstrates that the Cypriot legal order already possesses proportionate tools capable of addressing the hardship of financially distressed borrowers without necessitating a blanket suspension of creditor enforcement rights. 3.1.3 Furthermore, the second amending law extends the suspension of foreclosures to all borrowers with a primary residence falling below the EUR 350 000 property value threshold, without prescribing any eligibility criteria linked to actual financial vulnerability. The absence of such criteria may incentivise mortgaged borrowers falling within its scope to strategically delay their repayments regardless of their actual repayment capacity, thereby giving rise to moral hazard and eroding the overall credit discipline of borrowers. A risk of contamination for currently performing loans and a broader undermining of the overall payment culture cannot therefore be excluded . 3.1.4 The foreclosure amending laws may give rise to material adverse consequences for credit servicers active in Cyprus, which hold a significant volume of NPLs secured by immovable property. As foreclosure proceedings constitute one of the main enforcement mechanisms available to creditacquiring companies for the resolution of NPLs, any material elongation of recovery timelines risks

impairing the cash flow assumptions underpinning their business models, with material consequences for LGD estimates, performance and investor confidence in Cyprus-originated NPL portfolios. Consequently, a deterioration in the performance of such structures risks undermining the broader NPL resolution framework in Cyprus, with attendant implications for financial stability. 3.2 Effects on banking sector 3.2.1 In the context of its direct responsibility for the supervision of significant credit institutions in the euro area, the ECB directly supervises four significant credit institutions in Cyprus. The level of NPLs remains one of the key areas of focus and is being closely monitored from a supervisory perspective. As at end-2025, Cyprus had reduced NPLs within the banking system to approximately EUR 0,83 billion, corresponding to 3.2 % of gross bank loans (excluding central bank loans and loans to credit institutions), and to 1.6 % under the broader EBA Risk Dashboard methodology — which for the first time since 2014 fell below the EU average of 1.8% . However, a much larger legacy stock remained outside bank balance sheets. Credit acquiring companies held approximately EUR 18,2 billion of NPLs on a contractual-value basis, out of a total loan portfolio of EUR 19,35 billion, with a net book value of EUR 3,4 billion , together with approximately EUR 0,95 billion of real estate assets across 8 603 properties, while major banking groups continued to hold foreclosed properties on their own balance sheets. On this broader systemic basis — encompassing both bank NPLs and distressed assets transferred outside the banking sector — the level of identified problematic exposures and foreclosed properties remains significant. 3.2.2 The first amending law could have adverse effects on credit institutions, particularly in areas such as capital adequacy, provisioning requirements and asset quality. These institutions may need to reassess the valuation of their loan portfolios, particularly in cases where exposures are secured by collateral whose realisation may be subject to delay, which could result in significant changes to their provisioning levels and capital reserves. Where foreclosure processes become less effective or more prolonged due to legal or procedural constraints, the expected value to be recovered from such collateral is likely to diminish and become more uncertain. This, in turn, would typically require credit institutions to recognise higher levels of provisioning to adequately reflect the heightened risk of loss. A key factor influencing this impact is the estimation of the LGD parameter, which is heavily dependent on the valuation of real estate collateral. Specifically, banks determine the appropriate ‘haircuts’ on these assets by factoring in variables such as the time required for sale, associated transaction costs, and constraints stemming from legal and market illiquidity. These adjustments may pose considerable challenges and financial pressures for credit institutions. 3.2.3 From a capital perspective, higher provisioning has a direct impact on banks’ capital position, as it reduces profits and, consequently, their capital base. At the same time, loans that remain unresolved for longer periods continue to weigh on balance sheets and may require more capital to be held against them, particularly if the value or enforceability of collateral is weakened. This combination of higher provisioning requirements and increased capital demands may adversely affect capital adequacy ratios and constrain banks’ capacity to extend new lending to the economy.

3.2.4 The first amending law may also have an adverse effect on loan sales and securitisations as it affords legal protection to a wide range of debt, including business debt . It may act as a disincentive to future NPL sales and securitisation transactions. In this respect, the first amending law may constrain credit institutions’ ability to access securitisation markets and execute asset disposals as tools for risk transfer and balance sheet deleveraging. This could, in turn, limit their capacity to generate liquidity, manage NPLs effectively and support the extension of credit to the real economy. 3.2.5 The ability of credit institutions to effectively manage credit risk depends on a reliable, predictable and stable legal framework that adequately balances the interests of both creditors and debtors. However, the foreclosure amending laws introduce changes that may adversely affect the ability of lenders to give effect to the agreed terms of secured credit in Cyprus, which could undermine legal certainty and the adequate management of credit risk in credit institutions. In this respect, it is important to carefully consider the impact of the foreclosure amending laws, especially of the first amending law, on credit agreements in order to ensure legal certainty and avoid undue interference with the contractual and property rights of credit institutions, and to prevent moral hazard from arising in the relationship between creditor and debtor .

4. Observations on the restructuring amending laws

4.1 Effects on financial stability 4.1.1 The third amending law, by providing for the automatic writing-off of any residual debt following the sale or auction of the mortgaged property, gives rise to material concerns from a financial stability perspective. It may constitute a material obstacle to the effective resolution of NPLs and disincentivise credit servicers from acquiring NPL portfolios from credit institutions. Well-functioning secondary markets support the timely resolution of NPLs and facilitate the transfer of the risks of NPLs off credit institutions' balance sheets, thus supporting new lending. Where secondary market activity is curtailed as a result, the presence of significant volumes of NPLs on credit institutions' balance sheets adversely affects their capital adequacy, provisioning levels and capacity to extend credit to the real economy. Consequently, it is essential that the legislative framework preserves the conditions necessary for the efficient transfer of NPL portfolios off the balance sheets of credit institutions . 4.1.2 Additional potential concerns about the impact on credit institutions, which should be assessed, are related to: (1) the retroactive effects of the fourth and sixth amending laws, to the extent that the scope of the fourth amending law extends to existing commercial agreements; (2) reduced interest income stemming from credit facilities as a result of the cap on interest accruals under the fourth amending law; (3) the implications for prudential requirements for credit institutions in relation to mortgages on residential property in order to appropriately reflect the riskiness of related portfolios; and (4) the negative consequences on new lending, with implications for residential real estate market transactions and valuations.

4.2 Effects on the banking sector 4.2.1 The exact impact on the banking sector is unknown since the amending laws did not undergo any impact assessment. However, the restructuring amending laws may potentially have negative implications for credit institutions, with a potential impact on profitability, capitalisation, future lending capacity, and the functioning of the financial system, as well as on the overall cost and conditions of credit . 4.2.2 Moreover, the fourth amending law may affect credit institutions insofar as it affects existing commercial agreements. In such a case, it could have a negative impact on the profitability, capitalisation and future lending capacity of the banking sector. The third amending law could also interfere with commercial agreements between credit institutions and the purchasers of loans and limit the interest that can be accrued.

5. Economic aspects

5.1 Effects on the transmission of monetary policy 5.1.1 From the perspective of borrowers, the amending laws risk reducing the incentives for prudent borrowing and repayment. In particular, the foreclosure amending laws extend the means by which borrowers unable to honour their mortgages can challenge their creditors in foreclosure processes, fostering moral hazard risks, including possible strategic defaults. The third amending law and the guarantee restructuring amending laws, which are not targeted exclusively at debtors or guarantors in need of social protection, but rather grant general rights, may also lead to widespread moral hazard. Existing borrowers will be better off in the short term, as the amending laws, which also include retroactive clauses, reduce the likelihood of entering a foreclosure procedure. However, by reducing the consequences of default, the amending laws may encourage new borrowers to take on more risks. 5.1.2 From the perspective of the lenders and the financial actors involved in residential real estate, the amending laws, by themselves and through the implied changes in the behaviour and incentives of borrowers, increase the credit risk related to real estate lending – both in terms of the severity of actual and potential losses, and in terms of the breadth of affected cases. First, the potential LGD attached to a mortgage increases, especially for the most financially fragile borrowers, as the time to recovery is delayed and the eventual recovery value is subject to greater uncertainty. Indeed, the amending laws provide an incentive for borrowers, or any interested party, to file a legal action against a foreclosure or appeal a ruling in favour of the lender. Second, the number of mortgages at risk may also increase among existing mortgages and, absent any commensurate supply side response of the banks to the changes in behaviour on the demand side, also among new mortgages. 5.1.3 Moreover, lenders face an increase in uncertainty surrounding such credit risk, which is difficult to measure and arises from the uncertain scope, duration and outcome of legal processes. Unstable legislation increases uncertainty, which can lead to negative outcomes, especially in the area of

financial contracts such as mortgages. Thus, the severity and breadth of the potential losses are themselves uncertain, adding to the need for lenders to compensate the incurred increase in credit risk, both for sound risk management and for regulatory reasons. 5.1.4 To account for the increased credit risk and the uncertainty surrounding its measurement, creditors would be likely to tighten their lending conditions – including by increasing the required downpayment to mitigate negative effects on LGD –, raise mortgage rates for new borrowers, and reduce their credit supply . The effects even overcompensate for the actual ex post increase in credit risk, given the need to account for increased legal uncertainty surrounding the enforcement of foreclosures. In this respect, the ECB’s bank lending survey shows that banks tend to tighten their credit standards when uncertainty rises. 5.1.5 As a further consequence of the increased borrowing costs and tightened lending conditions, mortgagees would be more financially constrained in general, creating potentially new fragile mortgagees or barring access to the housing market for potential buyers who would have been able to obtain a mortgage at the conditions absent the amending laws. 5.1.6 Through those channels, the amending laws would adversely affect the transmission of monetary policy. Financial systems with weaker creditor rights tend to be associated with less pronounced monetary transmission, especially through the bank lending channel. Moreover, monetary transmission could be affected in an asymmetric way. The amending laws would affect the price and quantity of credit akin to a monetary policy tightening, possibly exacerbated by the increase in uncertainty. While monetary policy could still ease borrowing costs, lenders may be reluctant to extend credit to riskier borrowers under the amending laws, thereby risking an asymmetric effect on monetary transmission. 5.1.7 Overall, while the amending laws probably aim to protect vulnerable households struggling to repay their mortgages, they could have unintended effects and possibly achieve the opposite to their stated purpose of protecting borrowers in their access to housing. Banks would compensate the implied increase in credit risk by tightening financing conditions and reducing credit supply, thereby ultimately making it harder and more costly for households to access residential property. This would adversely affect the transmission of monetary policy to the Cypriot economy. 5.2 Effects on public finances 5.2.1 There may be direct effects for public finances, most notably in relation to the operation of KEDIPES, the Cyprus asset management company, whose aim is to recover, for the benefit of the Cypriot taxpayer, the State support received by the ex-Cyprus Cooperative Bank. The foreclosure amending laws risk impairing KEDIPES’ ability to recover the remaining amount of the State aid, thus impacting State budget revenues. 5.2.2 Potential fiscal risks can also arise as any weakening of the financial system can adversely affect economic activity, which in turn translates into weaker public finances. A fragile financial system can raise contingent liabilities for the State, increasing the possibility of the need for State support to

financial institutions, especially during times of crisis. A perception of an increased risk of adverse feedback loops between the banking system and the sovereign can also impinge on the sovereign credit rating. 5.3 Other economic aspects The potential for interference with lenders’ ability to give effect to the agreed terms of secured credit in Cyprus, by suspending the foreclosure procedure, limiting the liability of guarantors and writing off residual debt, might render the secured lending market less attractive, discouraging new entrants. This could stifle competition in financial services in Cyprus due to a perceived increase in legal and regulatory uncertainty, which is also reinforced by frequent and multiple amendments to the legal framework, especially the foreclosure framework . Moreover, if risks to the proper functioning of the credit channel were to materialise, potential negative effects on the economy would be likely . Consequently, as noted in paragraph 2.2 above, the ECB suggests that the Cypriot authorities carry out a thorough analysis of the possible effects of the amending laws on the Cypriot economy .

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 12 June 2026.

[signed]

The President of the ECB

Christine LAGARDE