A worsening geopolitical environment in the Middle East, climate change, cyber threats and recent changes to Cyprus’s foreclosure framework make up the main risk landscape for the country’s financial stability, the Central Bank of Cyprus said in its Financial Stability Report, published Tuesday.
Overall, the report concluded that the Cypriot financial system remains strong and adequately shielded, though the external environment continues to be marked by heightened uncertainty and emerging risks.
As a result, the report said, safeguarding financial stability and the resilience of the Cypriot economy against future shocks depends on:
- Maintaining strong capital and liquidity reserves
- Systematically factoring geopolitical, macroeconomic, climate and cyber risks into strategic decision-making
- Strengthening corporate governance
- Continuing a prudent fiscal policy
The Central Bank said the intensification of conflicts in early 2026 caused serious disruptions to maritime transport through the Strait of Hormuz, along with attacks on energy infrastructure. These events drove sharp volatility in international oil markets and a rise in energy prices. According to the report, these developments strengthened inflationary pressures, weighed on economic growth prospects, and increased uncertainty in international financial markets.
Despite a preliminary agreement between the US and Iran on June 16, 2026, the Central Bank estimated that the situation remains fragile, since the implementation and sustainability of the agreement remain uncertain and attacks continue to occur, acting as a catalyst for the materialisation of systemic risks.
As a result, the report noted, the overall impact on the economy and financial stability will largely depend on the intensity and duration of the conflicts, as well as the extent of their indirect and secondary effects.
Climate change and water scarcity
Beyond geopolitical risk, the report also highlighted emerging risks linked to climate change. These risks come through two channels: natural phenomena, and the transition to a more sustainable growth model. Both are becoming more significant, the report said, both in Cyprus and across the EU. These developments are shaping a more complex and uncertain risk environment, with potentially negative implications for financial stability.
The report said water scarcity remains a key dimension of physical risk in Cyprus, despite a temporary improvement in hydrological conditions in early 2026. Extreme weather conditions in 2025, including prolonged drought and intense heatwaves, contributed among other things to natural disasters such as the wildfires in Limassol province. These events, the report said, once again showed that extreme weather can directly affect the value of collateral, insurance claims, and the financial position of affected households and businesses, increasing risks to financial stability.
Heatwaves in Europe
The report also referred to recent developments in Europe. Recent episodes of extreme temperatures in Europe once again showed that heatwaves are now among the most significant physical risks, with potential effects on economic activity, productivity, infrastructure, energy consumption and insurance claims.
The report said this underlines that in an environment of accelerating climate change, adapting to new climate conditions is becoming increasingly important for assessing physical risks and their potential effects on financial stability.
Particular attention was given to recent changes to the foreclosure framework. These changes, the report said, may negatively affect payment culture, financial stability and the recovery expectations of credit institutions. Although the amendments aim to protect borrowers, they may lead to stricter lending criteria and higher borrowing costs, an outcome opposite to their intent.
