Cyprus' banking sector enters the coming years from a position of significant strength, supported by robust capital buffers, high liquidity levels and a dramatic reduction in non-performing loans (NPLs). However, both the Central Bank of Cyprus and the Ministry of Finance warn that important structural and emerging risks remain.
The assessment emerges from remarks by Central Bank Governor Christodoulos Patsalides to the House Finance Committee and from the government's September 2026 Fiscal Risks Report, published alongside the 2027 state budget.
The common message is that safeguarding financial-sector resilience will require continued supervision, effective management of problematic loans and the preservation of a credible legal framework governing foreclosures and insolvency.
Strongest capital position to date
According to the Central Bank governor, Cyprus' banking sector currently enjoys the strongest capital position in its history.
Banks' capital adequacy ratios rank among the highest in the European Union, while liquidity levels are well above both regulatory requirements and the EU average. Profitability is close to the eurozone average, largely reflecting current interest-rate conditions.
The Fiscal Risks Report shows that at the end of 2025:
- Total banking-sector assets stood at €69.9 billion, equal to 192 per cent of GDP.
- The capital adequacy ratio reached 29.4 per cent.
- Customer deposits increased to €58.72 billion.
- Loans totalled €27.12 billion.
This strong position allows banks to continue financing the economy, but authorities caution that resilience cannot be taken for granted. Geopolitical tensions, energy-price volatility, climate risks and disruptions in international financial markets could still affect economic activity and loan quality.
Significant progress on bad loans
One of the most notable improvements has been the sharp decline in non-performing loans.
According to the Fiscal Risks Report, NPLs held by banks fell from €5.14 billion in 2020 to €839 million by the end of 2025.
As a share of total lending, NPLs dropped from 17.7 per cent to 3.1 per cent, while the ratio based on the methodology of the European Banking Authority fell to 1.6 per cent.
The figures demonstrate substantial progress, but authorities stress that the issue has not disappeared. Further work is required, particularly on problematic loans held outside bank balance sheets and managed by credit-acquiring companies.
Patsalides argued that maintaining a strong repayment culture depends on an effective foreclosure and insolvency framework.
"The chronic problem of non-performing loans has now fallen below the European average," he said, adding that repayment discipline functions as a public good for both the financial system and society.
The report nevertheless notes that smaller banking institutions continue to face challenges in managing troubled loans, while exposure to the property market remains a source of risk despite significant capital safeguards.
Market concentration and systemic risks
Beyond NPLs, officials identify the high concentration of Cyprus' banking market as an important concern.
With a large share of banking activity concentrated in a small number of institutions, any disruption affecting a major player could have broader consequences for the financial system.
To strengthen resilience, the Central Bank has activated a 1.5 per cent countercyclical capital buffer on domestic exposures, representing additional capital requirements of approximately €230 million.
A further €440 million has been set aside because of the systemic importance of major banking institutions.
Authorities are also considering the activation of an additional systemic-risk buffer, with decisions expected in early November.
Cyber threats and artificial intelligence
The Central Bank has also highlighted growing operational risks arising from rapid technological change.
The expansion of artificial intelligence, increasing cyber threats, geopolitical instability and climate-related risks all feature prominently among supervisory concerns.
Banks are being encouraged to maintain strong capital and liquidity positions while upgrading their risk-management systems, technological infrastructure and cybersecurity capabilities.
Digital competition reshaping the sector
At the same time, digital transformation is changing the competitive landscape.
The growing presence of digital banks and payment providers is increasing pressure on traditional lenders to modernise services and invest in new technologies.
According to Patsalides, Cyprus currently hosts 41 licensed electronic-money and payment institutions, while interest from new applicants remains strong.
In response, the Central Bank updated its regulatory framework, supervisory methodologies and oversight tools during 2026, while also strengthening staffing levels and cooperation with European regulators.
Digital euro on the horizon
The development of the digital euro is expected to become another major factor shaping the sector.
Pilot testing is scheduled to begin in 2027, with technology and payment-system developments likely to influence future competition and require additional investment by financial institutions.
For now, Cyprus' banks appear well equipped to absorb potential shocks. The challenge will be maintaining that strength while adapting to a rapidly evolving financial and technological environment.
