The Central Bank of Cyprus has today published its Financial Stability Report (FSR) for 2017.
The FSR covers themes that are relevant for safeguarding the stability of the Cyprus financial system. It presents, amongst other things, the most important developments that impact financial stability, as well as the vulnerabilities of the Cyprus financial system.
Overview of developments affecting financial stability
In 2017 the economy of Cyprus continued to record a satisfactory expansion and to exhibit improved prospects. Growth stemmed mainly from the increase observed in private investment, private consumption and exports of services, particularly tourism. The labour market was also positively affected by the ongoing upswing in economic activity. The real estate market continued its gradual recovery, reflecting the positive developments in the macroeconomic environment. Demand for real estate continued its upward trend, facilitated by low interest rates and improved confidence in the property market.
Despite the perceptible improvement in macroeconomic conditions over the last three years, significant challenges remain for the financial sector of Cyprus.
The banking sector continues to be characterised by the very high level of non-performing loans and by negative profitability. Therefore, credit institutions need to intensify their efforts towards reducing non-performing loans by applying holistic and sustainable strategies. Furthermore, credit institutions should improve their profitability by expanding their revenue sources, and further reducing their operating expenses.
Domestic households and non-financial corporations remain heavily indebted, although the latest data indicate a gradual decline in their debt levels.
The insurance sector, overall, shows signs of stabilisation due to the improved macroeconomic conditions. However, the profitability of insurance companies, particularly life insurance companies, continues to be hampered by the prolonged low interest rate environment. A further challenge faced by the sector is its compliance with new legislation and regulations, especially the increased supervisory requirements provided by the Solvency II Directive.
The investment funds and investment firms sector has shown significant growth in recent years and, as such, is being closely monitored from a macroprudential perspective.
Main risks and vulnerabilities
The following vulnerabilities have been identified as the main sources of risk to Cyprus’s financial system:
The FSR is currently available in Greek. Τhe English edition will be published in June 2018.