Cyprus has emerged as an outlier in euro area financial networks, according to a European Central Bank (ECB) working paper analysing sectoral interconnectedness across member states.

The study, authored by Antonio Sánchez Serrano, found that banks dominate financial systems across most euro area countries, but Cyprus is among four exceptions where other financial institutions and investment funds play a central role.

In Cyprus, these entities are positioned at the core of the financial network, maintaining strong links with the rest of the world but limited connections to the domestic real economy.

This contrasts with the majority of euro area countries, where banks maintain extensive ties both with other financial sectors and with households, companies and government activity.

The findings are based on network analysis using who-to-whom financial data for the final quarter of 2024, covering exposures such as loans, deposits, debt securities and listed shares.

The paper explained that network analysis helps map relationships between sectors, identify key nodes and understand how financial shocks may spread through the system.

It also highlighted that interconnectedness is a major source of systemic risk, making such analysis increasingly important for policymakers and macroprudential authorities.

Across the euro area, two main financial communities are typically identified, one centred on banks and the real economy, and another consisting of financial intermediaries and cross-border flows.

However, in Cyprus, the second group appears significantly more dominant, reflecting the country’s role in facilitating international financial activity.

The study further stated that investment funds and other financial institutions in Cyprus act as channels for foreign savings into foreign investments, rather than primarily supporting domestic economic activity.

This structure results in large cross-border financial exposures, which distinguish Cyprus from most other euro area economies.

At the same time, the paper pointed out that such characteristics may increase vulnerability to external shocks, given the strong links with international markets.

The analysis also suggested that some smaller financial sectors can act as transmitters of shocks, depending on their level of interconnectedness and exposure.

In this context, the findings underline the importance of monitoring not only large institutions but also smaller, highly connected sectors.

The research further indicated that pension funds tend to be less central within financial networks, meaning they are less likely to transmit shocks across the system.

By contrast, sectors with closer connections to both domestic and international markets may play a more active role in spreading financial stress.

The study emphasised that Cyprus and Malta show the strongest interconnections between other financial institutions and the rest of the world, suggesting the use of specialised financial entities by multinational groups.

This reinforces Cyprus’ position as an international financial hub, while also highlighting structural differences compared with other euro area economies.

From a policy perspective, the paper stressed the need for strong regulatory frameworks and cross-border coordination, particularly in countries with significant non-bank financial activity.

It also pointed to the importance of ensuring that all parts of the financial system are considered in policy discussions, even those that may appear relatively small.

The findings come amid growing attention on financial system resilience and systemic risk, especially in the context of global economic uncertainty.

They also provide a foundation for further analytical work, as policymakers seek to better understand how financial networks evolve and how risks can be managed effectively.