The deterioration of the geopolitical environment in the Middle East, climate change, cyber threats and recent changes in the legal framework of foreclosures make up the main scenario of risks to the financial stability of Cyprus, according to the Financial Stability Report of the Central Bank of Cyprus, published on Tuesday.
Overall, the report concludes that the Cypriot financial system remains strong and adequately shielded, yet the external environment continues to be characterised by increased uncertainty and emerging risks.
Therefore, the maintenance of strong capital and liquidity buffers, the systematic integration of geopolitical, macroeconomic, climate and cyber risks into the strategic decision-making process, the strengthening of corporate governance, as well as the continuation of a prudent fiscal policy are key conditions for safeguarding the financial stability and resilience of the Cypriot economy against future shocks.
The Central Bank points out that the intensification of conflicts in early 2026 caused severe disruptions to maritime transport through the Strait of Hormuz and attacks on energy infrastructure, leading to intense volatility in international oil markets and a rise in energy prices. These developments, according to the report, have strengthened inflationary pressures, weighed on economic growth prospects and increased uncertainty in international financial markets.
Despite the preliminary agreement between the US and Iran on 16 June 2026, the CBC assesses that the situation remains fragile, as the implementation of the agreement and its sustainability remain uncertain, as attacks continue to occur, acting as a catalyst for the implementation of systemic risks.
Therefore, it is noted, the overall impact on the economy and financial stability will depend to a large extent on the intensity and duration of conflicts, as well as on the extent of their indirect and second-round effects.
Climate change and water scarcity
At the same time, it is noted that the newly emerging risks related to climate change, both through natural phenomena and through the process of transition towards a more sustainable development model, are increasing their weight, both in the domestic environment and at the level of the European Union. These developments are creating a more complex and uncertain risk environment, with potentially negative implications for financial stability.
The report states that in Cyprus, water scarcity continues to be a key dimension of the natural hazard, despite the cyclical improvement in hydrological conditions at the beginning of 2026. The extreme climatic conditions that prevailed in 2025, including prolonged drought and severe heatwaves, which contributed, inter alia, to the occurrence of natural disasters, such as the fires in the Limassol district, highlighted once again that extreme natural events can directly affect the value of collateral, insurance claims and the financial position of affected households and businesses, risks to financial stability.
Heatwaves in Europe
The report also refers to the latest developments in Europe. Recent extreme temperature episodes in Europe have once again highlighted that heatwaves are now among the most important natural hazards, with potential impacts on economic activity, productivity, infrastructure, energy consumption and insurance claims.
These developments underscore that, in an environment of accelerating climate change, adaptation to new climate conditions is becoming increasingly important for assessing physical risks and their potential impact on financial stability.
Particular attention is paid to recent changes in the divestiture framework, which may negatively affect the payment culture, financial stability and recovery expectations of credit institutions. Although the amendments aim to protect borrowers, they may lead to stricter lending criteria, higher borrowing costs, results contrary to their intended purpose.
