Nicosia, Cyprus. Cyprus has emerged as an outlier in euro area financial networks, according to a European Central Bank working paper analysing sectoral interconnectedness across member states. The study finds that non-bank institutions and investment funds play a central role in Cyprus’s financial network.
Study and authorship
The working paper was authored by Antonio Sánchez Serrano. It analyses sectoral interconnectedness across euro area member states.
Cyprus as an exception to bank-dominated networks
The study found that banks dominate financial systems across most euro area countries, but Cyprus is among four exceptions where other financial institutions and investment funds are positioned at the core of the financial network. In Cyprus, these entities maintain strong links with the rest of the world but have limited connections to the domestic real economy.
Contrast with most euro area countries
In the majority of euro area countries, banks maintain extensive ties with other financial sectors and with households, companies and government activity.
Data and methodology
The findings are based on network analysis using who-to-whom financial data for the final quarter of 2024, covering exposures such as loans, deposits, debt securities and listed shares. The paper said network analysis helps map relationships between sectors, identify key nodes and understand how financial shocks may spread through the system.
Systemic risk and policy relevance
The paper said interconnectedness is a major source of systemic risk, making such analysis increasingly important for policymakers and macroprudential authorities.
Financial communities and cross-border role
Across the euro area, the study typically identifies two main financial communities: one centred on banks and the real economy, and another consisting of financial intermediaries and cross-border flows. In Cyprus, the second group appears significantly more dominant, reflecting the country’s role in facilitating international financial activity.
Role of foreign savings and investment flows
The study said investment funds and other financial institutions in Cyprus act as channels for foreign savings into foreign investments, rather than primarily supporting domestic economic activity.
How do you think Cyprus’s limited financial links to the domestic real economy could affect its exposure to external shocks?
