Nicosia: The Cypriot economy and the domestic financial system continued to demonstrate significant resilience in 2025, despite the particularly uncertain international environment and heightened geopolitical tensions, however, vigilance is required, as risks to financial stability remain elevated, the Central Bank of Cyprus said on Tuesday in a statement marking the publication of the annual Financial Stability Report (FSR) for last year.
According to Cyprus News Agency, the FSR focuses on the most significant medium-term risks to financial stability and assesses the factors underpinning the financial system's resilience to potential adverse developments, while setting out the macroprudential policy decisions and other measures taken by the CBC to safeguard financial stability.
As stated, the FSR's approach is precautionary and aims at the early identification and assessment of potential risks. In this context, the FSR examines the potential impact of extreme but plausible scenarios on the financial system, without prejudging the occurrence of crises. The FSR's balanced and evidence-based approach is particularly important in an international environment characterised by heightened uncertainty, rapid economic developments and intensifying geopolitical challenges, as further elaborated.
In a statement marking the publication of the FSR, the Head of the Central Bank of Cyprus' Directorate-General for Financial Stability and Resolution, Pani Karamanou, points out that geopolitical and economic tensions, combined with increased global uncertainty, are shaping the outlook for financial stability. 'Consequently, maintaining strong capital and adequate liquidity buffers is essential to ensuring the resilience of the financial sector. Furthermore, the systematic integration of geopolitical, macroeconomic, climate and cyber risks into the decision-making process, as well as the strengthening of corporate governance, are key prerequisites for maintaining financial stability,' she added.
With regard to the categories of risk, the CBC notes that the Cypriot economy and the domestic financial system continued to demonstrate significant resilience, despite the particularly uncertain international environment and heightened geopolitical tensions, however, vigilance is still required.
In particular, it is noted that economic activity remained strong, public finances continued to improve, and the country maintained its creditworthiness, confirming the positive trajectory of the Cypriot economy in recent years.
It is added that the banking sector continued to demonstrate a high degree of resilience and to contribute substantially to the maintenance of financial stability, supported by strong profitability, improved asset quality and adequate capital and liquidity buffers, whilst at the same time, further improvements in asset quality and the ongoing reduction in non-performing loans have strengthened credit institutions' ability to absorb potential shocks and respond effectively to adverse developments. Furthermore, non-bank financial institutions have so far demonstrated a satisfactory degree of resilience to market volatility.
However, this resilience is being tested by the ongoing conflicts in the wider Middle East region, the continuing conflict between Russia and Ukraine, and the intensifying trends towards geo-economic fragmentation, which are perpetuating an environment of high uncertainty, the CBC continues, noting that these developments may adversely affect international energy markets, supply chains, international trade and financial flows, as well as the prospects for the global and Cypriot economies.
'As a small and open economy, Cyprus remains particularly vulnerable to external shocks, whilst the likelihood of adverse scenarios materialising remains high. Any further deterioration in the geopolitical situation could intensify inflationary pressures, erode households' real incomes and squeeze corporate profit margins, adversely affecting their ability to service their debt and increasing risks to financial stability. The overall impact on economic activity and the financial system will depend to a significant extent on the intensity, duration and geographical scope of the conflicts,' it is further stressed.
It is added that the increasing digitalisation of the financial sector makes cybersecurity a critical factor in maintaining business continuity, particularly in light of the increasing frequency and complexity of cyber-attacks in a tense geopolitical environment and the development of advanced frontier AI models (FAIM).
Reference is also made to the challenges posed by amendments to the Foreclosure Framework, which, as noted, may adversely affect the payment culture, financial stability and credit institutions' recovery expectations, highlighting that although the amendments are intended to protect borrowers, they may lead to stricter lending criteria, higher borrowing costs - outcomes contrary to their intended purpose.
It is also stated that, in this environment of heightened challenges, the CBC has continued to strengthen the macroprudential resilience of the financial system by increasing the countercyclical capital buffer (CCyB) to 1.5 per cent from January 2026, revising the capital requirements for domestic systemically important institutions (O-SIIs), the maintenance of existing lending limits, and the strengthening of the Deposit Guarantee Fund as significant measures aimed at enhancing the banking system's resilience to future shocks.
'The Cypriot financial system remains strong and adequately shielded; however, the external environment continues to be characterised by heightened uncertainty and emerging risks. Consequently, maintaining strong capital and liquidity buffers, systematically incorporating geopolitical, macroeconomic, climate and cyber risks into the strategic decision-making process, strengthening corporate governance, and continuing to pursue a prudent fiscal policy are key prerequisites for safeguarding financial stability and the resilience of the Cypriot economy against future shocks', the Report concludes.