Panayiotis Rougalas
Markets are volatile, the war in the Middle East shows no sign of ending, and inflation continues to rise. The energy crisis is deepening concerns, while the prices of goods and fuel remain high. Against this backdrop, Cyprus’ banking regulator has decided it is time to put another safeguard in place.
The Central Bank of Cyprus has introduced a 1% systemic risk buffer (SyRB), up from zero. It comes on top of the 1.5% countercyclical capital buffer (CCyB) on domestic risk-weighted assets that has been in place since January 2025. The decision reflects persistent threats to Cyprus’ financial stability, including global uncertainty, a large banking sector with similar business models, a high concentration of loans backed by property, and growing cybersecurity risks.
Central Bank Governor Christodoulos Patsalides had signaled that measures to strengthen financial stability were on the way when he appeared before the House of Representatives to present the 2027 budget. He said the way these risks interact, combined with the high concentration of the domestic banking sector, was a central concern for the Central Bank as it monitored risks to the financial system as a whole. He told lawmakers the bank was considering activating a systemic risk buffer and expected a decision in early November. That decision has now been made.
The Central Bank already requires a 1.5% countercyclical capital buffer on domestic exposures, equivalent to €230 million in capital requirements. It has also set an additional €440 million in buffer requirements based on the systemic importance of individual credit institutions.
Four reasons for the new buffer
Under the decision, the 1% systemic risk buffer will apply to all exposures of all licensed credit institutions in the Republic of Cyprus from Dec. 31, 2026. The aim is to help banks absorb losses and keep supporting households and businesses if conditions deteriorate. The Central Bank identified four main risks.
1. Shocks from abroad. The international environment remains a significant source of risk to financial stability. Cyprus is a small, open economy, so shocks in the global economy or international financial markets can spread relatively quickly to the island.
2. Banks with similar business models. Cyprus’ banking sector is large relative to the size of its economy, and many of its credit institutions operate in much the same way. The Central Bank sees that lack of diversity as a structural risk to the system as a whole.
3. A heavy reliance on property as collateral. The property market is closely tied to the banks and the wider economy. A large share of loans is secured against real estate, leaving the banking sector exposed at every stage of the financial cycle. Cyprus has one of the highest concentrations of property-backed lending in the European Union, a significant vulnerability for its banks.
4. Growing cybersecurity threats. Patsalides has repeatedly raised this issue in recent speeches. A cyber incident can spread beyond a single institution, disrupting operations at several banks at once, causing financial losses and undermining confidence in the wider financial system. The Central Bank says rapid advances in artificial intelligence and increasingly sophisticated cyber threats could make attacks more complex, more widespread, and harder to detect.
What could make these risks worse
The Central Bank says these vulnerabilities could deepen if geopolitical tensions escalate, the global economy splinters further into rival blocs or countries put up more trade barriers.
“Because such developments can bring underlying systemic risks to the surface, maintaining a resilient banking sector remains essential, particularly when economic and financial conditions are favorable,” the Central Bank said.
How the countercyclical buffer works
The existing countercyclical buffer is designed to build up a capital cushion that banks can draw on to absorb losses during a crisis or downturn. That helps banks weather difficult periods and continue lending to households and businesses, supporting the broader recovery.
Cyprus’ banks hold substantially more capital and liquidity than regulators require. As a result, the countercyclical buffer does not weaken their overall capital position or have an immediate adverse effect on lending to households and businesses. Banks still factor the requirement into their capital planning.
