Cyprus banking recovery built on firm oversight, says supervisor

Cyprus’ banking sector recovery after the 2013 crisis reflects “the coherent and consistent functioning of two essential pillars, banks’ commitment to act and supervisors’ firm oversight,” said George Ioannou, member of the European Central Bank (ECB) supervisory board and director of supervision of credit institutions at the Central Bank of Cyprus (CBC).

In an interview published by the European Central Bank (ECB), he noted that “the road to recovery was anything but smooth”.

“Towards the end of 2013, while still mitigating the effects of the crisis, the largest European banks were engaged in the comprehensive exercise – the Asset Quality Review – conducted at the onset of the Single Supervisory Mechanism,” he said.

“From that point onwards, the focus sharpened on addressing legacy issues and strengthening those institutions’ balance sheets,” he added.

Cypriot significant institutions, he explained, “responded decisively to the push of the supervisors”.

He explained that “they undertook large-scale disposals of non-performing loan portfolios, implemented viable restructurings, enhanced their internal governance arrangements and refined their business models”.

“These steps were not just technical adjustments, they were instrumental,” he said, adding they “helped stabilise the system, restore confidence, and ultimately reposition the Cypriot banking sector on far firmer ground”.

Without “the consistency and discipline of banks, paired with the rigorous and effective supervision of the Central Bank of Cyprus and ECB Banking Supervision, this progress would simply not have been achieved,” he added.

At the same time, Ioannou said “the discipline embedded in banks’ underwriting standards since the 2013 crisis is evident”. The CBC introduced directives that “became the foundation of a more prudent underwriting framework”.

“This framework hasn’t faded with time; it has become part of the DNA of local banks,” he said, adding that “more importantly, it has worked”.

He pointed out that Cyprus recorded “record-high new lending activity in 2025, while loan quality is solid,” meaning “banks have not only learned the lessons of the past, they’ve institutionalised them”.

The result, he said, is “a more resilient, stable banking system that can support growth without compromising on prudence”.

Despite geopolitical pressures, “the asset quality of the Cypriot banking sector remains robust,” he said, stressing that “we are not observing any signs of distress; on the contrary, NPLs are continuing their downward trend”.

However, he noted that less significant institutions “face higher levels of NPLs compared with larger peers as their resolution takes longer owing to structural challenges, greater complexity, the smaller size of portfolios and resource constraints”.

In this context, he described 2025 as “an important milestone” as the CBC became the first national supervisor to implement the provisioning calendar for LSIs, with full coverage expected by 2027, earlier than the ECB’s 2028 target.

As for larger banks, Ioannou said “the substantial progress achieved in recent years means the sector is no longer constrained by the NPL legacy pressures that once dominated the supervisory agenda,” allowing simplification, while stressing that “prudence remains at the core of the framework” and “simplification does not equate to deregulation”.

Turning to consolidation, he said cross-border mergers reflect “a broader euro area trend, as banks strive to strengthen their competitiveness, scale their operations and deliver greater value to shareholders”.

Cyprus, he added, “has positioned itself within this landscape, with two large-scale transactions completed in the past year” and is “increasingly viewed as a gateway for European banking activity, leveraging on regulatory rigour, solid macroeconomic fundamentals and strong international connectivity”.

Consequently, the banking system shows “high solvency and liquidity ratios – among the highest in the euro area – which naturally attracts foreign interest and reinforces trust in the system”.

Still, he cautioned that “being an open economy Cyprus must remain vigilant and proactive, especially in an environment of heightened geopolitical uncertainty”.

“In this context, cross-border cooperation is not just beneficial, it is essential,” he said, while consolidation “boosts competitiveness, operational efficiency and market depth”.

To unlock these benefits fully, he added that “it is essential for Europe to complete the banking union”.

Reflecting on more than a decade in the Single Supervisory Mechanism, Ioannou said “harmonised supervision and a level playing field have ensured the consistent application of prudential standards” and have “materially strengthened and improved banks’ resilience”.

Cooperation with the ECB gives “access to advanced methodologies, technical expertise and supervisory tools,” which “has accelerated knowledge transfer, fostered a more robust risk culture and reduced regulatory arbitrage”.

However, he noted that “local specificities must be taken into account, while resource constraints continue to pose an ongoing concern,” and effective coordination “requires strong communication and continuous alignment of supervisory actions”.

Looking ahead, he said “enhancing the supervisory culture and promoting greater integration remain pivotal”.

This includes “ensuring consistent and clear communication across European supervision, promoting common behaviours and training, and facilitating staff exchanges between the ECB and national supervisors to strengthen collaboration” towards “a stronger and better European supervision”.