The Central Bank of Cyprus (CBC) will require all banks to hold an extra capital buffer of 1 per cent from 31 December, as a permanent safeguard against structural weaknesses in the Cypriot economy, it announced on Monday.
The measure activates what is known as the systemic risk buffer (SyRB). It applies to all banks and to all types of lending and investment exposures. It has no expiry date, and the CBC must review it every two years.
The central bank says its existing tools are not enough to deal with permanent risks building up beneath the surface, whether or not the economy is doing well today. It is acting now, while economic conditions are favourable, so that the system has a cushion if and when difficulties arise.
The risks
The CBC based its decision on four areas of risk. Cyprus ranks among the highest in the EU for the concentration of loans secured by property mortgages, which poses a permanent risk. As a small, open economy, it can feel the effects of developments in the global economy and international financial system relatively quickly. Its banking system is very large relative to the size of the country, and all banks follow almost the same business model of deposits and domestic lending, with no real diversification. Cyber attacks are also becoming more complex and dangerous because of artificial intelligence, and a serious attack could trigger a chain of operational problems and shake depositors’ confidence.
The CBC says the 1 per cent level was set after a comprehensive assessment of quantitative and qualitative indicators, statistical analysis and expertise. The assessment covered the economy’s structural features, the size and funding of the banking sector, banks’ reliance on net interest income and deposits, and property-related vulnerabilities. It was backed by stress tests of the sector’s ability to withstand adverse macro-financial shocks.
Impact on banks and borrowers
Banks cannot pay out the buffer as dividends to shareholders, and must hold it in reserves as core capital, mainly Common Equity Tier 1 (CET1). Because they must hold more capital for the same volume of lending, their return on equity is likely to come under slight pressure. They may become more selective about new lending, asking for more collateral, particularly property. Analysts do not rule out some banks passing part of the cost of holding the extra capital on to interest rates on new loans, making borrowing slightly more expensive.
CBC Governor Christodoulos Patsalides had told the House Finance Committee recently, during a discussion of the central bank’s 2027 budget, that the measure would be announced in early November, but gave no details.
