Lower yields on central bank deposits have prompted Cypriot financial institutions to redeploy their vast capital reserves into active market investments.
According to the 2025 Monetary Policy Implementation Report released by the Central Bank of Cyprus (CBC), the total excess liquidity held by commercial banks fell to €17.4 billion by the close of 2025. This represents a €1.1 billion decline from the €18.5 billion recorded at the end of 2024, signaling a distinct shift toward corporate lending and sovereign bond portfolios.
Rate Cuts Stifle Central Bank Deposit Appeal
The reallocation of funds was triggered directly by a structural shift in Frankfurt. Over the first half of 2025, the European Central Bank (ECB) Governing Council initiated four consecutive adjustments to its deposit facility rate, lowering it from 3% at the end of 2024 to 2% by June 2025 through successive cuts in February, March, April, and June.
Designed to foster a more accommodative financial climate as Eurozone inflation began to normalize, this policy slide systematically reduced the financial incentive for commercial lenders to keep passive funds parked at the CBC. Desiring higher returns, Cypriot banks turned their focus to driving credit expansion and purchasing debt securities.
Lending Booms While Liquid Cash Edges Down
The impact of this capital migration is visible in the structural composition of the banking sector’s asset portfolio. Total loan volumes across the country expanded by more than 14.8% over the 12-month period.
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Total Outstanding Loans: Climbed from €27.6 billion in late 2024 to €31.7 billion by the end of 2025.
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Deposits and Cash Equivalents: Contracted slightly, down from €20.4 billion to €19.8 billion.
Despite the marginal drop in liquid cash components, the overall sector remained highly liquid. Total banking liabilities rose from €59.4 billion to €63.1 billion over the year, an expansion powered heavily by incoming capital from local households and non-financial corporations.
Central Bank Balance Sheet Holds Steady
On the regulatory front, the Central Bank of Cyprus’s total asset sheet hovered in place, edging up slightly from €28.6 billion to €28.7 billion by the end of 2025. The central bank’s assets remain dominated by Intra-Eurosystem claims within the TARGET system and legacy monetary-policy portfolios.
The total value of these specific monetary portfolios shrank by €0.77 billion during the year, settling at €5.7 billion down from €6.5 billion. Simultaneously, standby emergency refinancing operations set aside for local financial institutions went entirely unused throughout the reporting period, proving the organic strength of local bank capitalizations.
Finally, minimum reserve requirements for eligible financial institutions ticked up slightly to €553 million. To satisfy regulatory criteria, commercial entities primarily backed their requirements using a mix of government bonds, additional credit claims, and covered bonds.
Source: Stockwatch.com.cy