Cyprus banks among EU’s strongest for capital buffers

Cyprus’ banking sector continued to demonstrate strong capitalisation and asset quality in the second quarter of 2026, with local credit institutions maintaining capital buffers well above European Union averages, according to figures published by the European Central Bank (ECB) on Friday. Cyprus recorded a Common Equity Tier 1 (CET1) ratio of 21.5 per cent in June, placing it fourth among EU member states and comfortably above the EU average of 16.43 per cent. The ratio measures banks’ highest-quality capital against their risk-weighted assets and provides an indication of their ability to absorb financial losses. The difference highlights the strength of the capital position of Cyprus’ banking sector, with its CET1 ratio approximately five percentage points higher than the European benchmark. Non-performing loans remain below EU average Cyprus also recorded a relatively low non-performing loans (NPL) ratio of 1.77 per cent in June 2026, compared with 1.99 per cent across the EU. The indicator measures the proportion of loans that are not being repaid as agreed, making it an important measure of banks’ asset quality. The comparatively lower figure suggests that Cypriot banks have maintained progress in addressing legacy problem loans, an issue that weighed heavily on the sector following the country’s financial crisis. Strong liquidity and lending position Other indicators also point to substantial liquidity within the domestic banking sector. The Liquidity Coverage Ratio (LCR) stood at 309.86 per cent in the second quarter, indicating that banks held liquid assets equivalent to more than three times their projected net cash outflows over a 30-day stress period. Meanwhile, the loan-to-deposit ratio stood at 55.91 per cent, reflecting a relatively conservative relationship between lending and customer deposits. Together, these indicators provide an additional perspective on the sector’s funding and liquidity position. Profitability remains positive Cyprus’ domestic banks recorded a return on equity of 8.27 per cent in the second quarter, while their return on assets stood at 0.84 per cent. The annual return on equity for 2025 was 16.40 per cent. The ECB’s EU-wide figures showed an aggregate return on equity of 5.31 per cent in June 2026. However, this represents the return for the first six months of the year and is not annualised, so it should not be directly compared with Cyprus’ quarterly or full-year figures. EU banking sector continues to expand At European level, the aggregate assets of EU-headquartered credit institutions increased by 5.18 per cent year-on-year, reaching €34.99 trillion in June 2026, compared with €33.27 trillion a year earlier. However, the bloc’s aggregate NPL ratio edged up by 0.03 percentage points over the same period to 1.99 per cent. The EU-wide CET1 ratio stood at 16.43 per cent, highlighting the comparatively strong capital position of Cyprus’ banks. The ECB’s latest consolidated banking dataset covers 336 banking groups and 2,283 standalone credit institutions, as well as non-EU-controlled subsidiaries and branches operating within the bloc, representing nearly the entire EU banking sector balance sheet. The figures provide a broad overview of profitability, efficiency, liquidity, funding, asset quality and capital adequacy across European banking. CBC introduces 1 per cent systemic risk buffer Meanwhile, the Central Bank of Cyprus (CBC) recently introduced a 1 per cent systemic risk buffer for all authorised credit institutions operating in Cyprus, effective from December 31, 2026, as part of efforts to strengthen 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 restricted to particular banks or categories of lending. The CBC said it had identified several structural vulnerabilities within the domestic banking system which could contribute to the accumulation of systemic risks and potentially 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 effects of adverse economic and financial shocks. The measure adds another layer to the sector’s existing capital safeguards, with banks required to maintain the additional buffer alongside their other regulatory capital requirements.