Coming elections put banks back in the spotlight, KNEWS

Cyprus’ banks have reported strong profits since 2022. Although that momentum slowed during 2025, the European Central Bank’s interest rate increases in 2026, introduced in response to renewed inflationary pressures, are expected to give earnings another boost.

Investments in insurance companies and other activities capable of generating income beyond interest earnings will further strengthen their position. By the end of 2026 and into 2027, however, that profitability is likely to fuel fresh demands in Parliament for higher taxation and changes to laws affecting the banking sector.

German credit rating agency Scope made a similar observation this week, saying the May 2026 parliamentary elections had reshaped Cyprus’ political landscape, producing a more fragmented Parliament and, consequently, a more complicated policymaking environment.

Scope warned that the new parliamentary balance could make it more difficult to push through reforms, as broader consensus will be required to approve important legislation.

When Parliament resumes work in September, lawmakers are expected to revive proposals for a windfall tax on banks, based largely on the profits generated through interest income.

Supporters of the measure argue that part of those earnings should be returned to society, whether through housing initiatives, assistance for people hit hardest by inflation, or other forms of support.

At the same time, proposals to amend the foreclosure framework could also return. Although the legislation has been revised several times over the years, its current form still fails to satisfy all sides.

As a result, the end of 2026 and much of 2027, a year that can easily be described as part of the next pre-election period, are likely to bring new attempts by Parliament to impose conditions affecting bank profitability and the process through which lenders recover collateral securing unpaid loans.

This is hardly new. Similar demands have resurfaced every year since 2023.

Banks may be prepared to discuss certain changes to the foreclosure system, which comes under review in one form or another almost every year. When it comes to taxation, however, they appear to have something of an “allergy” to change.

Proposal already on the table

A proposal to impose a windfall tax on banks has already been submitted by the opposition, meaning its return to the parliamentary agenda is not merely a hypothetical possibility.

In June, AKEL formally announced that it would seek to revive the bill once Parliament resumed its work.

“AKEL will request that the proposal to tax banks’ windfall profits be brought back with the reopening of Parliament,” the party said.

Its statement followed figures from the Central Bank of Cyprus showing that the country has some of the lowest deposit rates in the eurozone while continuing to maintain comparatively high lending rates.

“This reveals the extent to which society is being exploited by Cyprus’ banking oligopoly,” AKEL said.

“Even more worrying is the deafening silence of the government and the banking lobby in Parliament in the face of the sector’s unchecked behavior. Are the government and the banking lobby in Parliament concerned about the enormous financial burden being carried by households and businesses? Will they continue to block every effort to support society?”

The return of interest rates to higher levels creates the conditions for another period of strong profitability. For parties supporting a windfall tax, this will form the central argument for requiring banks to return part of those profits to society.

Banks are also facing risks from several directions. However, their move to develop alternative sources of profit beyond lending has been crucial to their current position.

Insurance, wealth management, acquisitions of smaller banks, and partnerships with fintech companies are expected to strengthen their earnings further. That will almost inevitably lead Parliament to demand that part of those profits be channelled back into the Cypriot economy.

A landscape requiring vigilance

The Central Bank of Cyprus’ Financial Stability Report, published in late July, warned that maintaining the resilience of the country’s financial sector will require greater vigilance and the early identification and assessment of systemic risks.

The warning comes against an increasingly complicated and uncertain international backdrop.

Geopolitical pressures remain high, with tensions in the Middle East, the continuing Russia-Ukraine war and deepening fragmentation in the global economy increasing uncertainty and placing pressure on energy prices and supply chains.

Although the Cypriot economy has remained resilient so far, the Central Bank said these developments are increasing external downside risks and require constant preparedness and preventive action from all those involved.

Against this backdrop, the Central Bank said it remains essential for financial institutions to maintain strong capital buffers and sufficient liquidity reserves to absorb both short-term and prolonged pressure.

It also called for geopolitical, macroeconomic, climate, and cyber risks to be systematically incorporated into strategic decision-making, alongside stronger corporate governance and the continuation of prudent fiscal policy.

According to the Central Bank, these factors will be central to strengthening the resilience of Cyprus’ financial system and protecting its stability against future shocks.