Cyprus’ Banking Sector Emerges Stronger Post-Crisis, but Regulatory Shift Needed Across EU

The Cypriot banking system has significantly strengthened since the 2013 financial crisis, becoming more resilient, internationally aligned, and digitally advanced, according to Wim Mijs, Director General of the European Banking Federation (EBF).

In an exclusive interview with the Cyprus News Agency (CNA), Mijs commended the sector’s progress while stressing that the broader European regulatory framework must evolve to support investment and economic growth.

“The transformation of the Cypriot banking sector since the 2013 crisis has been profound,” Mijs stated. “Cypriot banks have become significantly stronger, more resilient, and better aligned with international best practices,” he added.

He pointed to a dramatic reduction in non-performing loans—from nearly 50 per cent at the peak of the crisis to below 9 per cent today—as a critical milestone. This, he noted, was achieved through a combination of targeted restructurings, improved supervisory practices, and enhanced risk management systems.

He also praised Cyprus’ upgraded anti-money laundering (AML) framework, which has earned favorable international evaluations, including those from Moneyval, and contributed to the country's improved standing on the Basel AML Index. “As a result, Cypriot banks now enjoy more correspondent banking relationships than ever,” he said.

Digital transformation was another achievement Mijs underscored, noting that most banking services in Cyprus are now offered online. “Today, the banking sector in Cyprus plays a key role in supporting financial stability and credit provision,” he explained. “It has contributed meaningfully to Cyprus’ steady economic growth in recent years, despite regional and global challenges,” he said.

Yet despite these accomplishments, Mijs cautioned that considerable risks remain. Chief among them are cyber threats, which he described as a growing concern that requires ongoing investment in security infrastructure. He also flagged geopolitical instability and economic uncertainty in the broader region as additional threats to financial stability.

“The growing competition from large technology companies, particularly in retail services and payments, also stands out as a strategic challenge,” Mijs warned.

On global trade tensions, especially those linked to shifting U.S. policies, he noted that European banks must remain adaptable. “While markets appear to have responded maturely to the risks associated with recent global trade developments,” he said, “this shift contributes to a more uncertain global environment, with potential surprises and possible slowdowns in macroeconomic growth.”

Mijs commended the resilience displayed by the European banking sector in recent years.

He referenced key stress events including the Covid-19 pandemic, Russia’s invasion of Ukraine, and the banking sector turbulence in March 2023. “In this highly demanding environment, the European banking system maintained stability, provided meaningful solutions, and collaborated with policymakers to mitigate the impact on businesses and citizens,” he said.

This endurance, he emphasized, is the result of strong institutional frameworks established in the wake of the last financial crisis. He credited the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) as vital pillars of stability. “We do not focus solely on managing short-term shocks, but on how the banking sector can support Europe’s long-term recovery and strategic competitiveness,” he said.

Turning to current macroeconomic conditions, Mijs acknowledged tightening credit across the euro area, despite falling inflation and declining interest rates by the European Central Bank. He argued that Europe’s dependence on bank financing remains high and that regulatory constraints are limiting banks’ ability to drive investment.

He elaborated that while regulatory reforms introduced after the financial crisis did bolster bank resilience, they also made the framework overly complicated. “As a result, banks in Europe operate under extremely high capital requirements and face a labyrinth of rules and regulations,” he said.

To address this, Mijs urged a change in regulatory mindset. “To allow banks to fuel the European economy through loans and investments, we need a change in regulatory mindset, from an overly defensive posture to a more proactive approach that promotes growth, sound risk-taking, and investment as essential components of prosperity,” he stated.

He outlined two immediate actions needed: a reduction in excessively conservative capital buffers that limit lending capacity, and a revival of Europe’s securitisation market to unlock more capital.

Furthermore, he stressed the importance of simplifying regulatory design, arguing that complex frameworks—especially in retail banking, digital finance, and cybersecurity—are hampering banks’ ability to support small and medium-sized enterprises (SMEs) and drive forward the EU’s broader economic transformation.

As the EU pushes to advance the Capital Markets Union and mobilize private capital for defence, digital, and green objectives, Mijs called on policymakers to take tangible steps. He referenced proposals by Mario Draghi and Enrico Letta as promising developments and supported Letta’s vision for a Union of Savings and Investment, which incorporates the CMU. “We need real incentives that make investment attractive,” Mijs said.

He argued that the EU must create an investment-friendly ecosystem, especially one that is accessible to ordinary citizens. Mijs pointed to Sweden’s pension and capital market system as an example of a model that effectively channels household savings into productive investment.

Reviving the European securitisation market remains a priority for the EBF, he said, as it would enhance banks’ lending capabilities and provide institutional investors with safer and more diverse options for managing portfolios.

He acknowledged that the complexity of current regulations presents a particular challenge for smaller nations like Cyprus. “Europe’s regulatory framework has become increasingly complex, making it more difficult for banks—particularly in smaller countries like Cyprus—to operate and support economic growth,” he said.

Mijs criticized the previous European Commission term for layering sector-specific and horizontal digital policies onto the financial sector, thereby increasing compliance burdens. In response, the European Commission has now prioritized reducing regulatory complexity and enhancing competitiveness during its current legislative cycle.

This includes the introduction of "Omnibus packages," designed to streamline existing rules and cut administrative overhead. Mijs welcomed these efforts, saying, “especially those that seek to align regulation with competitiveness and sustainability objectives.” He added, “the next step should involve reducing complexity in digital regulation as well.”

He further explained that the EBF is committed to ensuring these new regulatory packages are tailored to meet the needs of all European banks. He cited the recent adoption of the Digital Operational Resilience Act (DORA) as a step in the right direction, as it consolidated fragmented requirements into a unified framework.

However, he raised concerns about the proposed Cyber Resilience Act (CRA), which overlaps with DORA and imposes additional requirements on banks—even though many of the digital products it covers are already regulated under DORA. This overlap, Mijs said, creates unnecessary burdens, especially for smaller institutions, undermining regulatory efficiency.

On the topic of sustainable finance, Mijs emphasized that banks are closely connected to the real economy. He acknowledged that many SMEs struggle with data collection and compliance obligations but urged that they not be excluded from access to financing. He stressed that the EU is actively working to make sustainability reporting more accessible to SMEs.

With this combination of post-crisis strength and emerging challenges, Mijs concluded that the time is ripe for both a rethinking of regulation and a renewed commitment to competitiveness, growth, and innovation across the European banking sector. 

By fLEXI tEAM