Central Bank of Cyprus (CBC) governor Christodoulos Patsalides has said that the central bank is examining the activation of a systemic risk buffer, while warning that strong current performance should not lead to complacency in the face of mounting risks.

Speaking at the annual general meeting of the Association of Cyprus Banks (ACB), Patsalides said the Cypriot banking sector currently enjoys the strongest fundamentals in its history, with capital adequacy, liquidity, profitability and asset quality all showing significant improvement.

He explained that Cypriot banks rank among the strongest in the European Union in terms of their Common Equity Tier 1 (CET1) capital ratios, while liquidity levels are substantially above both regulatory requirements and the European average.

He added that profitability has recovered strongly, largely reflecting the monetary policy environment created by the European Central Bank (ECB).

At the same time, non-performing loans, once regarded as the banking sector’s chronic weakness, have declined to levels aligned with those of Cyprus’ European partners.

However, the governor cautioned that unforeseen events can emerge suddenly and produce disproportionate consequences.

“The black swans do not announce their arrival,” he said.

“They emerge precisely where we consider them structurally impossible and, when they appear, their consequences are unfortunately disproportionately enormous,” he added.

Patsalides stressed that the high concentration of Cyprus’ banking sector, the highest in the eurozone according to the Herfindahl-Hirschman index published by the ECB, represents both a strength and a vulnerability.

While concentration brings economies of scale and investment attractiveness, he warned that shocks in such systems can be amplified.

He also highlighted the similarity of business models among banks, saying that common revenue streams and funding structures could intensify the transmission of risks during periods of stress.

The governor further pointed to heavy reliance on short-term funding and immediately accessible deposits as another factor that could magnify systemic risks.

Against this backdrop, Patsalides said the CBC, in its role as macroprudential authority, places particular emphasis on strengthening the resilience of the banking system.

He described resilience as a dynamic rather than static concept and said macroprudential policies must continuously adapt to changing conditions.

In this context, he announced that the central bank is already examining the activation of the Systemic Risk Buffer.

Patsalides said the measure should be viewed as an essential macroprudential tool designed to absorb shocks, limit contagion and safeguard financial stability.

He also pointed out that the CBC recently strengthened the countercyclical capital buffer and increased contributions to the deposit guarantee scheme.

According to the governor, resilience is built during periods of strength and profitability rather than during crises.

The CBC governor also warned about reputational risks facing the banking sector.

He stated that public concerns regarding low deposit rates remain strong and that many depositors perceive banks’ profitability as being supported by the imbalance between lending and deposit rates.

Whether or not these perceptions fully reflect economic realities is open to interpretation, Patsalides said, but he stressed that social sentiment cannot be ignored.

“The risk to reputation is not fed by whether criticism is justified or unjustified,” he said.

“It is fed by perception, and when perception is ignored, it eventually evolves into reality,” he added.

Patsalides said boards of directors have an asymmetric responsibility that extends beyond regulatory compliance and requires strategic awareness and a thorough understanding of risks affecting institutions’ sustainability and reputation.

He also warned lawmakers against underestimating the impact of legislative interventions affecting the banking sector.

Referring to the ECB opinion issued earlier in June, the central bank fully shares Frankfurt’s concerns over recent amendments to the foreclosure framework.

According to Patsalides, the ECB concluded that the changes could weaken payment discipline, undermine financial stability and public finances, and lead to stricter lending criteria and higher mortgage rates.

Although the amendments aim to protect borrowers, he warned they may ultimately produce the opposite effect.

Beyond traditional banking risks, the governor identified geopolitical tensions, climate change, the green transition, cybersecurity and artificial intelligence as increasingly important threats to financial stability.

He said advanced artificial intelligence models represent both major opportunities and complex risks, particularly in relation to cybersecurity.

According to Patsalides, these technologies are compressing the time needed to identify and exploit vulnerabilities, increasing both the frequency and impact of cyberattacks.

He added that smaller financial institutions in particular must invest more heavily in infrastructure and technological capabilities to maintain operational resilience and customer trust.

The governor also highlighted growing competition from companies outside the traditional banking sector.

He said customers no longer compare banks solely with other banks but with digital experiences offered across all aspects of modern life.

“The customers can no longer be regarded as a given,” he said.

Patsalides stressed that trust must be cultivated continuously through transparency, reliability and customer-focused practices.

Turning to the future of money, the governor underlined the strategic importance of the digital euro.

He said the digital euro is not a cryptocurrency but the digital form of central bank money and will serve as a pan-European public means of payment complementary to existing solutions.

“The question is not only how we pay, but who controls the infrastructures through which money circulates,” he said.

Patsalides argued that the digital euro is important for strengthening Europe’s strategic autonomy and reducing dependence on non-European payment systems.

He also referred to the ECB’s Pontes and Appia projects, which aim to create a new settlement architecture based on tokenised assets and central bank money.

According to the governor, these developments could enable faster, cheaper and safer settlement processes and reshape competition within European financial markets.

Moreover, Patsalides urged banks to prioritise long-term resilience over short-term gains.

“The banks that will remain sustainable and competitive will not necessarily be those that maximised short-term benefits, but those that chose in time to invest in their ability to withstand, adapt and evolve,” he said.