Central Bank Governor Patsalides warns over emerging risks to financial stability

The Governor of the Central Bank of Cyprus (CBC), Dr. Christodoulos Patsalides has warned that "new risks that have been cultivated in recent years in the environment of economic uncertainty that we are experiencing will increasingly affect the financial stability of banks and the wider economy."

Addressing the ‘Credit Risk Management Conference – ESG Impact on Credit Risk: Navigating Through Challenges,’ in Nicosia on 4 November, the Governor presented an analysis of the challenges and opportunities arising from credit risk restructuring as prolonged economic uncertainty continues to affect the banking system.

The new conditions require a more comprehensive credit assessment framework, where parametres such as environmental, social, and cyber security risks become prominent.

Patsalides emphasised that the analysis of emerging risks is now a critical element in decision-making for banks.

The need for comprehensive inclusion of all parametres is vital, as lessons from the past remind us of the importance of analysing not only traditional risks, but also those emerging from contemporary challenges.

For example, how a business's profitability is affected by its environmental footprint, or by geopolitical and supply chain disruptions, are factors that directly affect its long-term sustainability.

To the integration of these parametres in credit risk management, the risk of cyber-attacks should be added, an area in which the banking system must be adequately prepared.

"A cyber attack can have devastating consequences for a business's turnover, which highlights the importance of protecting against such threats," said Patsalides, stressing that strengthening cyber security is a key priority for the viability of the banking sector.

Analysing the importance of social factors and governance, the Governor underlined that these also play a decisive role in credit assessment. Banks need to review their corporate governance structure and practices, as a lack of stability and transparency can pose serious risks to both their financial stability and reputation.

At the same time, geopolitical unrest can affect wider business activity and increase risk for the banking sector.

Patsalides presented the economic uncertainty as a multiple challenge, which changes the criteria of credit risk. For example, borrowers are directly affected by factors such as cyclical fluctuations in economies, technological changes and the increase in climate risks.

However, he recognised that integrating these factors into the risk management process also offers significant opportunities for banks to strengthen their stability.

Concluding his presentation, the Governor emphasised that the adaptation of the banking sector to the new risks is of vital importance for the economic stability of Cyprus.

"The new risks that have been cultivated in recent years in the environment of economic uncertainty that we are going through, will increasingly affect the financial stability of banks and the wider economy," he said.

Incorporating these new parameters into credit control is not only necessary, but offers the opportunity to create a more resilient and flexible banking sector that will be ready to face the challenges of the future, Patsalides concluded.

(Source: InBusinessNews)