CBC warns foreclosure changes could affect financial stability

The Central Bank of Cyprus (CBC) on Tuesday published its 2025 Financial Stability Report, warning that although Cyprus’ financial system remains resilient, elevated geopolitical tensions, global uncertainty and emerging risks continue to pose significant challenges to financial stability.

The annual report sets out the central bank’s assessment of the developments and risks affecting financial stability in Cyprus, focusing on the key medium-term risks facing the financial system, the resilience of the sector against adverse scenarios and the macroprudential measures adopted by the CBC to safeguard stability.

The report adopts a forward-looking approach, aiming to identify and assess potential risks at an early stage through severe but plausible scenarios, while stressing that such exercises do not imply that crises are expected to occur.

The CBC said the analysis and conclusions are presented in a balanced, prudent and evidence-based manner, an approach it described as particularly important at a time of heightened international uncertainty, rapid economic developments and growing geopolitical challenges.

The report also concludes that risks to financial stability remain elevated, despite the resilience demonstrated by the Cypriot economy and the domestic financial sector.

In a message accompanying the report, Head of the CBC’s Financial Stability and Resolution Directorate Pany Karamanou said that “geopolitical and economic tensions, coupled with elevated global uncertainty, are shaping the outlook for financial stability“.

“Against this backdrop, maintaining strong capital positions and adequate liquidity buffers remains essential to ensuring the resilience of the financial sector,” she added.

“Furthermore, the systematic incorporation of geopolitical, macroeconomic, climate-related and cyber risks into strategic decision-making, together with stronger corporate governance, constitutes a key prerequisite for safeguarding financial stability,” Karamanou stated.

According to the report, the Cypriot economy and domestic financial system continued to demonstrate significant resilience despite an exceptionally uncertain international environment and heightened geopolitical tensions.

The CBC pointed out that economic activity remained strong, public finances continued to improve and Cyprus maintained its creditworthiness, confirming the positive trajectory of the country’s economy in recent years.

The report said the banking sector remained highly resilient, supported by strong profitability, improved asset quality and adequate capital and liquidity buffers.

It added that the continued improvement in asset quality and the ongoing reduction in non-performing loans further strengthened the ability of credit institutions to absorb potential shocks and respond effectively to adverse developments.

The report also said that non-bank financial institutions have so far demonstrated a satisfactory degree of resilience against market volatility.

However, the central bank warned that this resilience continues to be tested by the conflicts across the wider Middle East, the ongoing war between Russia and Ukraine and growing geoeconomic fragmentation, all of which are sustaining an environment of heightened uncertainty.

According to the report, these developments could negatively affect international energy markets, supply chains, global trade and financial flows, while also weakening the outlook for both the global and Cypriot economies.

The CBC said that, as a small and open economy, Cyprus remains particularly vulnerable to external shocks, while the likelihood of adverse scenarios remains elevated.

It warned that any further deterioration in geopolitical conditions could intensify inflationary pressures, erode households’ real incomes and squeeze business profit margins.

Such developments, the report said, could weaken the ability of households and businesses to service their debts while increasing risks to financial stability.

The central bank added that the overall impact on economic activity and the financial system would depend largely on the intensity, duration and geographical spread of ongoing conflicts.

The report also highlighted cybersecurity as an increasingly important challenge for the financial sector.

It said the growing digitalisation of financial services has made cybersecurity a critical factor in ensuring operational continuity, particularly given the increasing frequency and sophistication of cyberattacks in a challenging geopolitical environment.

The report also pointed to the emergence of frontier artificial intelligence models as an additional factor increasing the complexity of cyber risks.

The CBC also devoted particular attention to recent amendments to Cyprus’ foreclosure framework, warning that the changes could have unintended consequences for financial stability.

Although the amendments are intended to protect borrowers, the report warned they could weaken the country’s payment culture, affect financial stability and reduce lenders’ recovery expectations.

The report added that the changes could also lead to stricter lending criteria and higher borrowing costs, potentially producing outcomes contrary to their intended purpose.

Against this backdrop, the CBC said it has continued to strengthen the macroprudential resilience of the financial system through a series of targeted measures.

These include raising the countercyclical capital buffer to 1.5 per cent from January 2026, revising capital requirements for other systemically important institutions, maintaining existing lending limits and further strengthening the Deposit Guarantee Fund.

According to the report, these interventions are intended to reinforce the resilience of the banking system against future shocks.

The CBC concluded that Cyprus’ financial system remains strong and well protected, despite an external environment characterised by heightened uncertainty and emerging risks.

The report said that maintaining strong capital positions and liquidity buffers, systematically integrating geopolitical, macroeconomic, climate and cyber risks into strategic decision-making, and strengthening corporate governance will remain essential for safeguarding financial stability.

Furthermore, continuing to implement a prudent fiscal policy will be crucial for ensuring the resilience of the Cypriot economy against future shocks.