The Central Bank of Cyprus (CBC) has taken significant steps in the past two years to strengthen the financial resilience of the nation’s banking system.

These measures, detailed in its 2023 macroprudential policy report to parliament, aim to mitigate systemic risks and ensure stability in the financial sector.

In 2024, the CBC introduced updated capital requirements for Cypriot banks identified as Other Systemically Important Institutions (O-SIIs).

The adjustments are part of a broader strategy to safeguard the financial system against potential vulnerabilities.

Five major banks—Bank of Cyprus, Hellenic Bank, Eurobank, Astrobank, and Alpha Bank—have been designated as O-SIIs and are required to maintain specific capital reserves over the next three years.

The revised reserve requirements, effective from January 2024, specify that the Bank of Cyprus must maintain a reserve of 1.875 per cent for 2024, which will rise to 1.9375 per cent in 2025 and further increase to 2 per cent in 2026.

Hellenic Bank is required to hold 1.25 per cent in 2024, with incremental increases to 1.50 per cent in 2025 and 1.75 per cent in 2026.

In addition, Eurobank’s reserves are set at 0.75 per cent for 2024, 0.875 per cent for 2025, and 1 per cent for 2026.

Meanwhile, Astrobank and Alpha Bank are required to maintain a consistent reserve rate of 0.25 per cent across all three years.

The CBC also reassessed the countercyclical capital buffer (CCyB) to respond to evolving systemic risks.

In June 2023, the CCyB was increased from 0.5 per cent to 1.0 per cent, with implementation set for June 2024.

What is more, a further increase to 1.5 per cent was decided by January 2025, effective from January 2026.

These adjustments reflect the CBC’s recognition of heightened systemic risks due to global economic uncertainties, geopolitical tensions, and their potential impact on Cyprus’ macroeconomic environment.

“The aim is to channel a portion of banks’ profits towards resilience, creating larger reserves to absorb potential losses during crises,” the CBC stated.

Following a collaborative review with the Cyprus Securities and Exchange Commission, the CBC concluded that no Cypriot Investment Firms (CIFs) qualify as O-SIIs for 2024.

The review determined that CIFs do not meet the thresholds set by the EU’s Capital Requirements Directive (CRD) and Regulation (CRR).

“As a result, no CIFs fall under the O-SII framework,” the CBC clarified in its parliamentary report.

The CBC chose not to implement certain macroprudential measures adopted by other EU countries.

For instance, Belgium’s decision to impose a 6 per cent systemic risk buffer on retail banking exposures and Portugal’s sectoral buffer of 4 per cent were deemed unnecessary for Cyprus.

Similarly, Denmark’s measure to introduce a 7 per cent buffer for non-financial entities in real estate and construction was also excluded.

The CBC emphasised the importance of a proactive approach to financial stability in its report.

While the Cypriot financial system remains resilient, the CBC highlighted the need for vigilance due to persistent uncertainties in the global and domestic macroeconomic environment.

“The CBC continues to monitor the sector and will implement additional measures if required to safeguard financial stability,” the report noted.

The CBC’s analysis also focused on the increasing likelihood of severe global economic disruptions that could affect Cyprus.

Despite positive economic projections, geopolitical developments and market volatility pose significant challenges.

“The probability of extreme events impacting the Cypriot banking sector has risen due to global uncertainties,” the CBC warned.