CBC to increase countercyclical buffer rate to 1.5% from 14 January 2026

The Central Bank of Cyprus has decided to increase further the countercyclical buffer rate (CCyB) from 1% to 1.5% with effect as from 14 January 2026.

In a press release, the CBC notes that during its quarterly assessment of the intensity of the cyclical systemic risk and the appropriateness of the CCyB rate for the Republic, identified increased cyclical systemic risks.

At the same time, and despite the positive outlook for the economy, the likelihood of materialisation of potentially severe tail events in the global economy that would significantly affect the domestic macroeconomic environment, and consequently the banking sector, has increased, according to CBC, mainly due to geopolitical developments and turbulence.

Specifically, the possible escalation of the conflict in the Middle East, the further globalisation of the war in Ukraine, as well as the trend for increased protectionist measures, which is expected to lead to significant new trade restrictions, are identified by the CBC as downward risks to the macroeconomic environment, and subsequently, could also have adverse consequences for the domestic banking sector. In addition to the aforementioned cyclical systemic risks, which have been taken into consideration in the decision to increase the CCyB rate, the CBC notes the increasing reputational risk.

Furthermore, at European Union level, both the European Systemic Risk Board (ESRB) and the European Central Bank (ECB) in relevant publications during the fourth quarter of 2024, conclude that, overall, risks to EU financial stability have increased over the past three months amid high political uncertainty and geopolitical tensions.

The General Board of the ESRB, in its press release dated 5 December 2024, emphasised that the changing environment requires the EU to redefine its own needs and recommended, among others, the continuing build up of the resilience of the EU financial system. The ECB in its Financial Stability Review, highlighted that ensuring resilience of the financial sector in times of headwinds and uncertainty remains essential and in particular by ensuring that banks have sufficient capacity to absorb losses.  

Based on all the above, the CCyB rate of 1% was considered low and the CBC proceeded with its increase to 1.5%. By increasing the CCyB rate, part of banks' profitability is channelled towards strengthening their resilience, creating a larger buffer of loss-absorbing capital in times of crisis and stress, thereby ensuring the uninterrupted supply of credit to the real economy, CBC notes.

The CBC's decision was made on 10 January 2025, it said.

(Source: CNA)