Questionable activities and performance of Cyprus banks

Banks need to do much more in supporting the local economy and society with their interest rate, lending and debt management policiesCyprus banking representatives recently visited European regulators in Brussels declaring that the island’s banks are “stronger than ever” citing impressive levels of key indicators on financial stability and profitability. And the governor of the Central Bank of Cyprus, Christos Patsalides has stated that Cyprus banks are performing well by highlighting frequently the resilience and prudent strategy of the banking sector. Moreover, major credit rating agencies have progressively upgraded the banks on the basis of resilient earnings, reduced NPLs, strong capital buffers, and favourable macroeconomic conditions. But, are banks using their ample financial resources and stability in contributing profoundly to the sustainable growth of the economy and in assisting society? Or are banks making large profits from unproductive activities with little consideration given to the social and environmental consequences of their funding, lending and debt management practices? Or more specifically how are banks using depositor’s money and borrower’s property in making profits for distribution to their shareholders? Some relevant data Firstly, banks obtain a considerable proportion of their funds from the deposits of households and businesses on which relatively low interest rates are offered, averaging less than 1.0 per cent compared with a higher 2.0 per cent average deposit rate for other euro area banks according to European Central Bank (ECB) data. Secondly, around one-third of depositor’s funds become excess liquidity of the banks, most of which is deposited at the ECB (in so-called overnight deposits) “earning” an interest rate (now 2.25 per cent) well above that paid to depositors. Thirdly, the liquidity of banks in the form of cash and cash balances at banks exceeds considerably that of most significant banks in the euro area because local banks use much lower proportions of their funds in limiting lending to businesses and households. In fact, at end-2025 banks held liquid assets and outstanding loans as proportions of their total assets of 28.7 per cent and 45.3 per cent, respectively. In marked contrast, the ratios of liquid assets and outstanding loans to total assets of significant banks in the euro area were 9.6 per cent and 61.5 per cent, respectively, in December 2025. Fourthly, Cyprus banks have profited by calling in and selling a huge amount of NPLs and related property collateral of borrowers to third parties. In March 2O15 NPLs of Cyprus banks had peaked at €27.6 billion or 46.1 per cent of gross loans. However, by March 2026 bank NPLs had been reduced strikingly to €0.8 billion or 1.6 per cent of gross loans. Fifthly, the profits of Cyprus banks remained very high in 2025 and totalled €1.025 billion. Indeed, reflecting a euro area-high net interest rate margin of 2.60 percentage points the return on equity of Cyprus banks was 14.25 per cent in 2025, which exceeded greatly that of the “significant banks” in the euro area of 9.85 per cent. Similarly, the rate of return on assets for Cyprus banks was 1.40 per cent in 2025, much higher than that for significant banks in the euro area of 0.67 per cent. And, sixthly, a sizable part of the profits of Cyprus banks are distributed as dividends to foreign shareholders (mainly investment companies and equity funds), that are the prime owners. For example, Eurobank Cyprus is entirely owned by the Greek banking group Eurobank SA, that in turn is owned largely by non-Greek shareholders, including 37 per cent by the Canadian company Fairfax Financial Holdings. In 2025 Eurobank Cyprus delivered a record net profit of €491 million that contributed substantially to the wider group’s profit of €1.365 billion. And Eurobank SA announced recently that that €256.7 million of its profits in 2025 will be distributed as dividends to its shareholders. It is contended here that these data reflect to a significant extent the policies and activities of Cyprus banks over the last decade. Notably, since 2015 when banks had restored capital and liquidity to adequate levels, bank activities have been concentrated on cleaning up their balance sheets by massively shifting NPLs to third parties and using their increasingly abundant excess liquidity to invest in risk-free overnight deposits at the ECB. Such bank behaviour has been at the expense of deploying their ample funds more in financing economically viable investments to drive sustainable economic development, in addressing climate change, and in supporting socially oriented projects. That is, banks have failed to fulfil their potential in contributing to advancing the economy, but, among other things, with their unproductive and anti-social debt management and property foreclosure procedures have continued to burden many businesses and households with financial problems and increasingly widen wealth inequalities in the process. Unfortunately, Cyprus bankers, the ECB and credit rating agencies seem to assess improvements in the quality of bank portfolios and often the health of the economy by the extent in which banks are removing NPLs off their balance sheets rather than in appraising the quality of the outstanding bank loans per se. Moreover, with the shifting of the NPLs of banks to third parties the associated debt of businesses and households is not reduced and the related selling and transfer of property collateral to rich companies and individuals only adds to surging wealth inequality in Cyprus. Challenges for the Cyprus authorities These data and observations clearly indicate that banks need to do much more in supporting the local economy and society with their interest rate, lending and debt management policies. In January 2025 Patsalides sent a message to the banks that they “should take into account both the social aspect and the enhancement of the competitiveness of the economy when formulating their pricing policy and warned against the risk of harming their image and risk to the reputation of the banking sector”. However, banks have not responded positively to his message and have kept deposit rates at pitifully low levels and loan rates at moderately high levels relative to counterpart banks in the euro area. Accordingly, the Cyprus authorities should exert pressure on banks to raise interest rates on fixed deposits at least in line with prevailing rate of inflation so that persons can obtain a real return on their savings. And the Central Bank needs to influence or even pressure banks to fundamentally change their lending practices and interest rates and other charges on loans more in line with the borrower’s ability to repay rather than on the collateral he or she provides. In particular, banks need to increase the financing of worthwhile investment projects and charge affordable loan rates so as to contribute to the economic viability of such projects and enhance the economy’s competitiveness in the process. However, such a change in lending practices would result in many, albeit already deprived low-income earners, not having the means to obtain bank credit and that a scheme should be set up to enable without bureaucratic difficulties such persons to be able to avail of subsidized loans. And apart from providing financial assistance to lower-income residents and vulnerable persons, the fiscal authorities need to use tax policies to induce banks to allocate their resources more in funding productive and social projects rather than in implicitly supporting inequitable wealth transfers with their questionable debt management and property foreclosure procedures. In addition, the Cyprus authorities need to reconsider and amend the rights of borrowers against banks in cases involving the calling-in of impaired loans and the sale of related property collateral at very discounted prices. Undoubtedly, if banks are making large profits from non-productive activities that are not benefitting the local economy and society then the government should levy an extraordinary tax on such profits and use the proceeds for social purposes including in subsidizing bank loans. Furthermore, to deter the excessive distribution of bank funds to certain sectors, such as for the construction and transfer of “luxury” properties, relevant taxes and fees should be raised substantially. Alternatively, banks could be allowed to fully deduct loan loss provisions and be offered tax exemptions on interest income on loans to priority projects, such as for the construction of energy infrastructure. Finally, the bottom line is that Cyprus banks with their operations over recent years have done well in safeguarding financial stability, but have come disappointingly short in using their potential to contribute to the balanced and equitable advance of the Cyprus economy and in improving the financial health of the bulk of society.