Despite a strong showing by Cyprus’s economy in 2024, the Central Bank of Cyprus (CBC) has issued a clear warning: intensifying geopolitical instability, particularly in the Middle East, and other external pressures are increasingly threatening financial stability. In its 2024 Financial Stability Report, released on Wednesday, the CBC calls for sustained vigilance, strategic foresight, and reinforced regulatory oversight to shield the country’s financial system from potential shocks.

Resilient Growth But Fragile Environment

The CBC notes that Cyprus recorded solid economic growth in 2024, accompanied by a marked improvement in inflation and financing conditions. Falling interest rates improved household and business creditworthiness, while private debt as a share of GDP declined, narrowing the gap with the eurozone average.

However, the country’s open, export-driven economy remains particularly vulnerable to global disruptions. The escalation of military tensions in the Middle East—notably the June 2025 airstrikes by the US and Israel on Iran—has heightened concerns over energy security and supply chains. Volatile oil prices are increasing the likelihood of renewed inflationary pressures worldwide.

The CBC stresses the importance of maintaining strong capital buffers, integrating geopolitical and climate-related risks into financial governance, and addressing vulnerabilities in critical sectors such as real estate and tourism. A potential slowdown in either could affect asset quality and bank solvency.

Bank Sector Health: Solid but Challenged

Cyprus’s banking sector is in good shape overall, but recent data suggests some softening in performance. Profitability dropped to €264 million in Q1 2025, down from €346 million a year earlier, largely due to a decline in net interest income. Still, total banking assets grew by €422 million to €66.03 billion, driven by increases in loans, advances, and debt securities.

Crucially, capital buffers improved further: the Common Equity Tier 1 (CET1) ratio rose from 24.7% to 26.0%—a historically high level, well above the sector’s 10-year average. Non-performing loans (NPLs) continued their downward trend, dipping to 6.1% in March 2025, although they remain above the eurozone average of 1.9%. The coverage ratio for NPLs also improved, rising to 60.5%.

While banks remain well-capitalized and liquid, the CBC cautions that the ECB’s normalization of monetary policy may erode interest-related revenues, especially given banks’ reliance on legacy loan portfolios and the reduced profitability of Credit Acquisition Companies (servicers).

Cyber Threats and Climate Vulnerability

Another growing concern highlighted in the report is cybersecurity. The CBC recorded a 200% increase in cyberattacks across the EU financial sector from 2020 to 2024, with 22% of incidents in 2024 deemed malicious. In Cyprus, nearly 13% of businesses with more than 10 employees were impacted by cyberattacks last year. The bank warns of systemic risks due to interdependencies among banks, technology providers, energy, and critical infrastructure.

Climate change is another long-term threat. Extreme weather events and water scarcity are already affecting key sectors of the Cypriot economy. The CBC urges financial institutions to align with green transition goals and improve digital and climate resilience.

Macroprudential Tools and Forward Planning

To bolster resilience, the Central Bank has activated macroprudential tools including capital buffers for systemically important institutions, loan-to-value and debt-service-to-income ratios, and a countercyclical capital buffer, which will increase to 1.5% from January 2026.

The CBC also emphasizes the growing role of non-bank financial institutions (NBFIs) in the Cypriot financial ecosystem. While these entities remain relatively insulated from geopolitical shocks, their exposure to sudden asset revaluations warrants closer supervisory scrutiny.

Executive Board Member Eugenia Christodoulou underlined that the Financial Stability Report is not predictive of crises but serves as a preventive tool. The report's objective, she said, is to monitor systemic risks and promote a robust, transparent, and sustainable financial system.

A Cautious Outlook

In summary, while Cyprus’s banking and financial sectors are currently robust—with low NPLs, rising deposits, and healthy capital levels—the CBC warns against complacency. External shocks, rising cyber threats, and climate-related challenges require a proactive, adaptive approach to financial governance.

The overarching message of the report is clear: resilience has been achieved, but stability is not guaranteed. Continuous vigilance, data-driven regulation, and a readiness to act preemptively are essential to maintaining Cyprus’s financial equilibrium in an increasingly unpredictable world.