Panayiotis Rougalas
The news that the Central Bank of Cyprus is considering activating the Systemic Risk Buffer came as a “bombshell” for local banks and, as expected, has divided opinion.
At the 2026 Annual General Meeting of the Cyprus Bankers Association, the speech by Central Bank of Cyprus Governor Christodoulos Patsalides stood out, as he indicated that the regulator is considering requiring Cypriot banks to hold additional capital buffers, with the ultimate goal of further strengthening financial stability.
On the same day that the Central Bank governor made his policy statement, the International Monetary Fund (IMF), as part of its Article IV consultation for Cyprus, pointed out that the banking sector appears resilient, with solvency and liquidity indicators among the highest in the European Union.
The IMF noted that, following the increase of the countercyclical capital buffer (CCyB) from 1% to 1.5%, effective January 2026, Cyprus’ macroprudential policy framework is appropriately calibrated.
However, the IMF warned that, “given that capital and liquidity buffers are already high, any further tightening of macroprudential policy should be carefully weighed against the potential impact on credit growth and financial deepening.”
It is clear that the IMF’s position is completely opposite to the direction being considered by local supervisors, a disagreement that has now become the main topic of discussion among banking circles in Cyprus.
Cyprus’ banks are informally aligned with the IMF’s position on the issue, as it would be in their interest to avoid having to create additional capital buffers imposed by supervisors.
This position is understandable, despite the fact that banks currently show very strong indicators across the board and could potentially handle some additional tightening.
The key question now is whether the Central Bank of Cyprus’ position is fully aligned with that of European supervisors, whose decision will ultimately prevail.
International lenders, after all, do not have the authority to implement or restrict banking supervisory policies.
The 1.5% buffer remains in place
For now, under the Macroprudential Supervision of Institutions Laws of 2015 to 2022, the Central Bank of Cyprus has deemed it appropriate to maintain the countercyclical capital buffer (CCyB) at 1.5%, effective from January 14, 2026.
According to the Central Bank governor’s remarks at the Bankers Association’s annual general meeting, in addition to the existing capital buffer for other systemically important institutions (O-SII buffer), the decision was recently made to strengthen both the countercyclical capital buffer and contributions to the Deposit Guarantee Scheme.
“Both fall under the same preventive philosophy. Resilience is not built during a crisis but during periods when the system has the strength, profitability, and capital capacity to prepare for the unexpected,” Patsalides said.
A resilient banking sector
According to the IMF, Cyprus’ banking sector is resilient, with strong capital and liquidity buffers and improving asset quality.
Although risks appear to be under control, the Fund noted that significant links with the real estate sector require continuous monitoring.
From a structural perspective, legacy non-performing loans (NPLs) outside the banking system remain high, while banking intermediation remains limited in a system with a high degree of concentration.
The IMF said systemic financial risks are currently under control.
The continued deleveraging of non-financial corporations and relatively low overall credit levels reduce the risk of a serious macro-financial imbalance.
Non-bank financial institutions serve a mostly stable and wealthy customer base and hold geographically diversified assets, limiting direct effects on banks and the wider economy.
Significant exposure to real estate
The housing market has shown signs of slowing down, reducing concerns over possible overvaluation.
However, banks’ exposure to the real estate sector remains significant, requiring continued vigilance.
This exposure is both direct, through mortgages and lending to non-financial companies in the sector, and indirect, through loans secured against property.
The IMF stressed that the framework for monitoring risks should continue to develop in order to strengthen the assessment of vulnerabilities.
Limited banking momentum
Although the IMF does not believe Cyprus’ banks require additional capital buffers, it continues to identify areas of concern.
The Fund noted that despite the strong recovery achieved over the past decade, the banking sector continues to show limited momentum.
Bank lending remains restricted, with the loans-to-deposits ratio standing at around 50%, compared with an average of more than 105% across the European Union.
At the same time, bank profits have been among the highest in Europe since 2023, as banks have benefited from wide interest rate margins and limited transmission of policy rate increases to deposit rates.
