CBC moves to strengthen Cyprus banks against financial shocks

Cyprus banks face new 1 per cent systemic risk capital bufferThe Central Bank of Cyprus (CBC) has introduced a 1 per cent systemic risk buffer for all authorised credit institutions in Cyprus, effective from December 31, 2026, in a move aimed at strengthening the banking sector’s resilience against structural vulnerabilities and potential financial shocks. The decision was taken under the Macroprudential Oversight of Institutions Law of 2015, as amended, with the CBC acting as the designated authority responsible for implementing macroprudential measures. The buffer will apply to all exposures across all authorised credit institutions operating in the Republic of Cyprus, rather than being limited to specific banks or categories of lending. The CBC said it had identified several structural vulnerabilities within the Cypriot banking system which could contribute to the build-up of systemic risks and threaten financial stability. “Maintaining and further strengthening the resilience of the banking sector remains important for safeguarding financial stability,” the central bank said, explaining that such vulnerabilities could amplify the impact of adverse shocks. The measure is intended to improve banks’ capacity to absorb losses and continue supporting the real economy in the event of adverse developments. The CBC said the decision reflected its assessment that existing macroprudential measures do not adequately address the identified structural systemic risks. Among the principal concerns is Cyprus’ exposure to international developments, given its status as a small and open economy. The central bank said global economic and financial developments could be transmitted relatively quickly to the domestic market, making the external environment a material source of risk to financial stability. It also highlighted the size of the domestic banking sector relative to the economy and the considerable similarities between credit institutions’ business models. The limited diversity of banks’ business models was identified as a structural source of systemic risk, since institutions with similar activities and exposures could be affected simultaneously by adverse developments. Real estate remains another major source of systemic vulnerability, owing to its close links with the banking sector and the wider economy. The CBC said the high concentration of loans secured by real estate collateral represented a structural weakness which persisted irrespective of the stage of the financial cycle. Cyprus is among the European Union member states with the highest concentration of loans secured against property, a factor the central bank described as a significant vulnerability for the banking sector. The CBC also warned that cybersecurity risks remain elevated, with cyber incidents potentially extending beyond individual institutions and causing simultaneous operational disruptions, financial losses and damage to confidence across the financial system. The rapid development of artificial intelligence and increasingly sophisticated cyber threats could further amplify these risks by enabling more complex, scalable and harder-to-detect attacks. These underlying vulnerabilities could be intensified by adverse events, including heightened geopolitical tensions, geo-economic fragmentation and rising trade barriers. The CBC said maintaining a resilient banking sector was particularly important during periods of favourable economic conditions, when the build-up of systemic risks might otherwise go undetected. The buffer is intended to address vulnerabilities which are structural in nature, persist throughout the financial cycle and are common across the banking sector. Because they are broad-based, these risks could affect several credit institutions simultaneously and create wider threats to financial stability. The CBC said applying the measure uniformly across banks and their exposures would help ensure that institutions maintained sufficient capacity to absorb losses during periods of stress. The 1 per cent rate was determined following a comprehensive assessment incorporating quantitative and qualitative indicators, statistical analysis and expert judgement. The assessment included indicators relating to the structural characteristics of the Cypriot economy, the size and funding structure of the banking sector, banks’ dependence on net interest income and deposit funding, and vulnerabilities associated with the property market. It was also supported by stress-testing exercises examining the banking sector’s ability to withstand adverse macro-financial shocks. The CBC said it would continue to monitor developments in systemic risks and structural vulnerabilities, reviewing the appropriateness of the buffer on a regular basis. Under the law, the rate will be reviewed at least every two years to ensure its continued relevance, adequacy and effectiveness. The buffer will remain in force unless and until the CBC decides otherwise.