| Summary: | This paper discusses key findings of the Financial System Stability Assessment on Cyprus. The assessment reveals that the banking system of Cyprus has managed to avoid the worst effects of the global financial crisis, but stress tests confirmed that credit risk remains high. The assessment suggests that work on the crisis contingency framework should be completed. Various European Union (EU)-wide and national initiatives are already under way, including strengthening deposit insurance, drafting guidelines for emergency liquidity assistance, and adopting a legal framework for covered bonds to facilitate access to European Central Bank refinancing.
1. The 2008 Financial Sector Assessment Program (FSAP) mission to Cyprus took place against a background of rapidly spreading spillover into Europe of the global financial crisis. The timing of the mission in mid-September 2008 came shortly after the collapse of Lehman Brothers, and coincided with the (near) failure of several European financial institutions and the broad-ranging policy reactions to these events, including the announcement of blanket deposit and other guarantees. These events lent a new urgency to reviewing crisis preparedness and management, as well as analyzing the soundness of financial institutions and possible channels of contagion for the Cypriot financial sector.
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