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In 2024 Cyprus banks continued to amass very large profits. However, their self-serving behaviour, particularly in conduct of interest rate and lending policies, has meant that banks fell far short in using their ample financial resources to provide adequate support to the economy and society. More specifically, Cyprus banks recorded a profit of €1.
21 billion and a spectacularly high rate of return on equity of 21.5 per cent in 2024. In marked contrast, the average return on equity of significant banks in 16 countries of the euro area was a much lower 9.
9 per cent. In addition, a large part of the profits of Cyprus banks as in 2023 was distributed as dividends to foreign shareholders. Cyprus banks have managed to retain their relatively high profitability by maintaining a margin between interest received on their assets, mainly loans to businesses and households and deposits at ECB, and interest paid on customer deposits, that was much larger than that of European banks.
For loans to corporations and households during 2024 Cyprus banks charged interest rates that were nearly one percentage point higher than the corresponding rates for virtually all other banks in the euro area. At the same time interest rates offered by Cyprus banks on corporation and household term deposits were in contrast around one percentage point lower than their euro area counterparts. In consequence, Cyprus banks enjoyed an interest rate margin of around two percentage points above that of the average for euro area banks, which in turn contributed most importantly to their relatively high profits.
And Cyprus banks have added substantially to profitability by depositing large amounts of their plentiful excess reserves at the ECB earning risk-free interest rates from 3 to 4 per cent during 2024, that is, at rates much higher than banks paid on their customer deposits. In total, the net interest income of Cyprus banks totaled over €2 billion in 2024 compared with €1.9 billion in 2023.
Despite their abundant financial resources Cyprus banks are failing in extending adequate amounts of affordable loans to corporations and households to support the economy and society . Notably, at end-2024 the proportion of assets of Cyprus banks in loans and advances was 37.7 per cent, whereas the corresponding ratio for significant banks in the euro area averaged a strikingly greater 60.
9 per cent. In truth, Cyprus banks have hoarded liquid assets amounting to €20.6 billion at end-2024, rather than engage in considerable lending to businesses and households in line with that of many European banks.
In fact, the ratio of cash and cash equivalents to assets of Cyprus banks was 31.4 per cent at end-2024, which compared with an average of just 10.9 per cent for significant banks in the euro area.
Furthermore, with most of the loans extended by Cyprus banks based on the collateral rather than the repayment capability of the borrower, many of these loans became non-performing and were sold to third parties. Thus, banks managed to remove a considerable amount of NPLs from their balance sheets and even profited immensely from the selling of related property collateral to third parties. And as a consequence of the collateral-based lending of Cyprus banks and the resultant impairment and selling of many loans, wealth has been transferred to banks and the richer segments of the population.
Moreover, not only have such lending practices promoted wealth inequality in Cyprus, but economic development has been kept much below potential by the inability of banks to finance productive investment projects. Against this background, bankers complain about the non-creditworthiness of many of their customers, yet the truth appears to be that they are unwilling and/or do not have the capacity to identify and finance worthwhile investment projects. Indeed, outside of the financing of contractors involved in undertaking property “development” it is difficult to point to any large-scale investment projects, which are being financed by banks.
Policy recommendations What can be done to induce or even force Cyprus banks to use their abundant financial resources to better support the economy and society of Cyprus? Unfortunately, in this respect bank supervisors focus too much on assessing the financial stability of banks with excessive focus on capital and solvency ratios, instead of whether banks are deploying their financial resources efficiently and productively. Indeed, the Cyprus financial crisis of 2012/13 resulted primarily from Cyprus banks wasting and inefficiently using their vast amounts of available funds. Lending practices and the handling of NPLs by banks should be fundamentally changed.
Banks should base their decisions to lend much more on the borrower’s repayment capability. And bankers should be trained to better evaluate the economic viability of proposed investment projects for financing as well as to productively restructure impaired loans. But, even if there is a fundamental change in the mindset of bankers and their competence in identifying worthwhile projects to finance, it would take time and probably do little to raise the role of banks in financing large-scale economic development projects.
Accordingly, as argued repeatedly by economist Savvakis Savvides and this author there is a compelling need for establishing an independent Development Finance Agency that would study and partly finance large scale investment projects, particularly for those involving the participation of the state. Most importantly, interest rate policies of Cyprus banks need to change so that businesses and households can be extended affordable loans and be offered real positive interest rates on their term deposits. Between September 2023 and February 2025 the ECB reduced its interest rates by 1.
25 percentage points. Yet over this period Cyprus banks only lowered loan rates for corporations and households on average by 1.01 and 0.
28 percentage points, respectively. Furthermore, ECB data shows that in February 2025 the interest rate on loans to corporations by Cyprus banks was 4.80 per cent, which exceeded the 4.
10 per cent charged by other euro area banks. And this February the interest cost of bank borrowing for house purchase by households in Cyprus averaged 4.25 per cent, which compared with corresponding average rate of 3.
33 per cent for other banks in the euro area. Interest rates on corporation and household term deposits at Cyprus banks have been steadily reduced since December 2023, suppressing such returns well below inflation rates. By February 2025 the interest rate on one-year deposits of households had fallen to 1.
50 per cent, quite below the corresponding deposit rate offered on average by other Eurozone banks of 2.21 per cent. Thus, from the perspective of euro area comparisons and making loans affordable and term deposits at least inflation-proof, interest rate margins of Cyprus banks should be reduced toward average Eurozone levels by lowering loan rates and raising term deposit rates substantially .
Finally, with much of the abnormal bank profits recorded in 2023 and 2024 being procured from the charging of unaffordable interest rates as well as from unproductive activity or rent seeking involving the receipt of much interest income from the ECB, it is recommended that an extraordinary tax be imposed on such bank profits. This tax should be similar to that proposed by Akel, that entailed a temporary fee of 5 per cent on the increased yearly net interest income of Cyprus banks, and, unfortunately, was narrowly defeated in a vote of the House of Representatives on December 12, 2024. Furthermore, with bank shareholders, mainly foreign investment and equity funds, benefitting handsomely from the making and distribution of very large bank profits at the expense of society , it is recommended that the proceeds of an extraordinary tax on bank profits be channelled to a Social Fund for subsidising bank loans to lower-income households.
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