Cyprus' excess liquidity shrinks sharply amid Eurosystem policy normalisation

Excess liquidity in Cyprus’ banking system fell significantly in 2024, marking one of the key monetary developments of the year, according to the Central Bank of Cyprus’ annual Monetary Policy Implementation report.

The decline was largely attributed to the continued normalisation of monetary policy across the Eurosystem, which drove down the Central Bank’s balance sheet and prompted repayments of refinancing operations by domestic counterparties.

Despite this notable contraction in surplus liquidity—from €23.7 billion in 2023 to €19.2 billion in 2024—the Central Bank stressed that overall liquidity conditions remained ample, with no domestic banks participating in the Eurosystem’s refinancing operations during the year.

Balance sheet shrinkage and key drivers

The CBC’s balance sheet contracted to €28.6 billion by the end of 2024, in line with the Eurosystem’s tighter monetary stance. Most assets were comprised of Intra-Eurosystem claims within the TARGET system and CBC-held monetary policy portfolios. On the liabilities side, the bulk continued to be deposits from domestic banks.

Two main drivers contributed to the reduction in excess liquidity:

• The repayment of targeted longer-term refinancing operations (TLTROs) by local monetary policy counterparties.
  
• A €1.2 billion decrease in the CBC’s monetary policy portfolios, reflecting reduced reinvestment of maturing securities.

While these actions tightened the liquidity environment, additional dynamics partly offset the effect. Intra-Eurosystem claims via TARGET increased liquidity by €0.5 billion, and liquidity-absorbing “autonomous factors” shrank by €0.7 billion. However, the Central Bank noted that in today’s high-liquidity environment, such autonomous factor movements have minimal impact on money market rates.

Banks turn to deposit facility

Banks continued to find the Eurosystem’s deposit facility attractive, following the ECB’s shift to positive rates in 2022. As of end-2024, €18.5 billion of excess liquidity was placed in the CBC’s deposit facility, as institutions sought to maximise returns on their holdings beyond the minimum required reserves, which rose from €500.3 million to €526.7 million during the year.

Mobilised collateral with the CBC included Additional Credit Claims (ACCs), government bonds, and traditional covered bonds.

Sector asset trends and liquidity implications

Loans emerged as the banking sector’s largest asset class in 2024, rising from €25.3 billion to €27.6 billion, while deposits and cash equivalents fell from €24.5 billion to €20.4 billion. This mirrored the liquidity pullback stemming from the TLTRO repayments.

Total liabilities across the sector dropped marginally—from €60.1 billion to €59.4 billion—mainly reflecting a reduction in deposits, especially those held by households and non-financial corporations.

Outlook

Although the reduction in excess liquidity reflects tighter monetary conditions, the Central Bank underscores that liquidity in Cyprus remains ample and market stability is intact. With structural excess liquidity still high and no immediate funding pressures, the monetary transmission remains smooth even amid a contracting central bank balance sheet.

Read the full report here