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The Central Bank of Cyprus (CBC) has released its 2023 Financial Stability Report, stating that the country's financial sector remains strong and capable of handling unexpected challenges. Despite this resilience, the CBC emphasizes the need for banks to show greater social responsibility in their pricing and business operations, especially given current economic pressures.
By demonstrating sensitivity in their (the banks) pricing and lending practices, they can help reduce the burden on struggling households and businesses while maintaining financial stability.
Resilient Financial Sector
The report highlights that despite significant global challenges—such as two regional wars, sanctions, and issues in the U.S. and Swiss banking sectors—the Cypriot economy continued to grow in 2023. Although the growth rate slowed to 2.5% from 5.1% in 2022, the economy remained adaptable. Inflation dropped significantly to 3.9%, down from 8.1% the previous year, primarily due to restrictive monetary policies from the European Central Bank (ECB) and rising interest rates.
Risks to Financial Stability
While the financial sector remains resilient, the CBC warns of challenges arising from high prices and increased lending rates. These pressures particularly affect households with variable-rate loans, as well as businesses facing increased debt levels. Despite a positive trend of decreasing overall debt, these sectors remain vulnerable to economic shocks.
Given these conditions, the CBC is urging credit institutions to adopt more socially sensitive pricing and business practices. Specifically, they want banks to consider the impact of higher interest rates on borrowers and ensure their operations do not unnecessarily strain households and businesses already under financial pressure.
Non-Performing Loans and Real Estate Exposure
The CBC also raises concerns about potential increases in non-performing loans (NPLs) due to rising interest rates. Although no significant problems have surfaced yet, the possibility of more NPLs could affect banks’ profitability and capital strength in the future. Smaller banks are particularly encouraged to clean up their loan portfolios to safeguard financial stability.
Moreover, the banking sector's exposure to the real estate market is another potential vulnerability. While real estate prices have been stable, any significant downturn could negatively affect banks' liquidity and profitability.
Emerging Risks
The report also mentions emerging risks from climate change, cyber threats, and escalating geopolitical tensions. These global factors could pose additional challenges to the financial sector, and the CBC calls on banks to integrate these risks into their overall management strategies.
Call for Social Sensitivity
Despite a strong performance overall, the CBC’s central message is clear: Cypriot banks must take greater social responsibility. By demonstrating sensitivity in their pricing and lending practices, they can help reduce the burden on struggling households and businesses while maintaining financial stability. The CBC’s call reflects growing concerns about the broader impact of rising costs and debt repayment challenges on Cypriot society.
[With info from CNA]
