The Central Bank of Cyprus has today published the Greek language edition of its Financial Stability Report (FSR) for 2018. The FSR covers issues that are relevant for safeguarding the stability of the Cyprus financial system. It presents, among other things, the most important developments that impact financial stability as well as the vulnerabilities of the Cyprus financial system.
Key risks and vulnerabilities
The following vulnerabilities have been identified as the main sources of risk for the Cyprus financial system:
The high level of non-performing loans (NPLs) in the banking sector and the low asset quality of credit institutions. The high level of NPLs continues to pose significant risks to the stability of the financial system and remains the biggest obstacle to the further strengthening of the banking sector. It is imperative that credit institutions continue their intensive efforts to reduce NPLs by implementing holistic and sustainable strategies. Those NPLs that are now outside the banking sector continue to burden the real economy since the non-financial private sector remains heavily indebted.
The weak profitability of credit institutions. The profitability of credit institutions remains under pressure. Increasing their revenue, limiting their expenses and enhancing their operational efficiency, constitute major challenges for credit institutions. Credit institutions need to broaden their revenue base, to invest in technology and to focus on the quality and development of the services they provide to customers, seeking alternative sources of revenue in order to improve their profitability.
The excessive private non-financial sector debt. The over-indebtedness of households and non-financial corporations continues to pose risks for the economy. A potential increase in the level of interest rates or a sharp slowdown in economic growth, could lead to increased vulnerabilities in the private non-financial sector. The reduction in household and non-financial corporation debt needs to continue unhindered as it is a prerequisite for improving the stability of the financial system and for achieving sustainable economic growth.