EU competition regulators Tuesday approved a Cypriot government plan to inject around EUR3.5 billion ($4 billion) in state aid to Cyprus Cooperative Bank, which is undergoing liquidation.
The plan includes the sale of some of the bank's assets and deposits to Hellenic Bank PCL and doesn't constitute aid to the latter.
Cyprus tried to restructure the island's second-largest lender in 2014, but it failed to recover much money from its very significant portfolio of nonperforming loans, partly due to its own governance issues and partly due to legal issues, according to the European Commission.
The commission said the state-aid measures include a counter-guarantee to the guarantees provided by CCB to Hellenic Bank related to the sale, including an asset protection plan.
The transaction "will remove about EUR6 billion of nonperforming loans from the Cypriot banking sector and thereby contribute to its recovery," the commission said.
CCB's liquidation is part of three-pronged strategy, the Cypriot government announced earlier this month, to accelerate the reduction of NPLs in Cypriot banks.
The other parts are a program that will help cooperative borrowers affected by the crisis and the strengthening of Cyprus's foreclosure and the sale-of-loans law. Both the IMF and European creditors pushed for the tighter foreclosure law.
Write to Nektaria Stamouli at nektaria.stamouli@wsj.com