Nicosia, Cyprus. The International Monetary Fund said Cyprus’ banking sector remains resilient but shows limited vigour, warning that changes to the foreclosures framework could slow the clearing of bad loans and increase borrowing costs.
IMF mission and assessment
The IMF issued its concluding statement on Monday after completing a mission to Cyprus from April 22 to May 4. In the statement, IMF mission chief for Cyprus Alex Pienkowski said the banking sector is supported by strong capital and liquidity buffers and improving asset quality.
The IMF said bank solvency and liquidity ratios are among the highest in the European Union, supported by strong profitability.
Asset quality and real estate risks
The IMF said asset quality has improved through a steady reduction in non-performing loans. It added that property markets do not appear overvalued, but real estate remains systemically important in the banking sector and should be carefully monitored.
Limited dynamism and credit indicators
Despite a recent recovery of credit, the IMF said the banking sector shows limited dynamism. It noted that the sector’s loan-to-deposit ratio is 50%, compared with an EU average of over 100%.
Foreclosure framework warning
The IMF advised that changes to the foreclosure framework that slow the resolution process should be resisted, saying the existing framework broadly strikes the right balance between debtors and creditors to support debt resolution.
It said some recently proposed legislative changes would significantly slow resolution and increase administrative costs, potentially undermining borrower incentives, increasing credit risk, and reducing access to finance. The IMF said future borrowing, including for first-time homebuyers or small businesses, would become harder.
The IMF was likely referring to changes to the foreclosures legislation passed by parliament in April.
How could potential changes to the foreclosure framework affect your access to borrowing in Cyprus?