Maintaining strong liquidity and capital positions remains a key priority for Central Bank of Cyprus in an increasingly uncertain global environment, its governor Christodoulos Patsalides has said.
In an article published on Sunday, Patsalides warned that the ongoing conflict in the Middle East poses a serious threat to the global economic system.
“In an already fragile international environment, the continuation of the conflict could have cascading and long-term effects on the global economy,” he said, adding that Cyprus’ banking sector is now in a significantly stronger position compared with previous periods.
Stronger sector, but risks remain
The improved resilience of Cypriot banks reflects sustained efforts by credit institutions to strengthen and clean up their balance sheets, alongside decisive supervisory and macroprudential measures introduced in recent years.
Banks have also benefited from higher deposit rates offered by the European Central Bank, making effective use of surplus liquidity built up during balance sheet restructuring and the gradual return of confidence.
Despite these gains, Patsalides stressed that reinforcing the system’s resilience remains an “irrevocable and paramount priority” for safeguarding financial stability.
He noted that Cyprus’s characteristics as a small, open economy - with a relatively concentrated banking sector that is large compared with the domestic economy - heighten systemic risks.
As a result, Cypriot banks are required to maintain higher capital and liquidity buffers than their European peers operating in lower-risk environments.
Additional safeguards introduced
The central bank has already taken steps to strengthen the financial system, including increasing the countercyclical capital buffer and raising contributions to the deposit guarantee scheme.
“As the authority responsible for safeguarding financial stability, we have examined a range of calibrated measures and intend to activate additional macroprudential tools,” Patsalides said, aiming to limit the build-up of systemic risks and further enhance resilience.
He added that the high concentration of the banking sector can support stronger earnings and capital generation, facilitating the implementation of stricter regulatory measures to ensure the uninterrupted flow of credit and protect depositors.
Call for prudent growth strategies
The governor emphasised that banks’ ambitions must align with the structural characteristics and scale of Cyprus’s financial system.
Institutions are expected to strengthen risk management practices and adopt sustainable business models that support long-term resilience, in full compliance with the requirements of the Single Supervisory Mechanism.
Investments in new products, activities and markets—whether domestic or international—should be based on prudent risk-taking, effective diversification and long-term planning.
Profitability, he added, must be maintained on a balanced basis, taking into account all stakeholders to preserve financial stability.
Focus on technology and digital transition
Patsalides also highlighted the importance of technological development, urging banks to adopt forward-looking strategies on digital transformation and competitive pricing.
“Younger generations are increasingly turning to digital banks for everyday transactions, short-term deposits and small-scale investments,” he said, warning that these relationships are likely to deepen as such institutions expand into lending.
On the potential introduction of a digital euro, he said banks must be prepared not only to offer it to customers but also to develop innovative services linked to it, in order to sustain and expand their retail banking operations.
CNA