Cypriot and European financial institutions are increasingly reducing the amount of client funds they hold as cash and deposits with central banks. New data show that falling interest rates in the European Union are gradually making such placements less attractive, prompting credit institutions to channel liquidity more actively into lending and investments.
Under Eurozone regulations, banks are required to hold a minimum of 1% of client funds and short-term liabilities with maturities of up to two years in national central banks and, consequently, with the European Central Bank (ECB). In the past—especially following the banking crises in Cyprus and Greece more than a decade ago—financial institutions held significantly more than this minimum at the ECB, creating what was known as “excess liquidity.” At the time, this was seen as a way to reduce risk while earning stable income from the ECB’s deposit facility rate.
How Bank of Cyprus Indicators Are Changing
Bank of Cyprus has traditionally been one of the leaders in terms of the volume of funds placed with the ECB. In December 2022, the share of such deposits reached 50.4% of total customer deposits. However, a steady decline followed. ECB deposits fell from €9.615 billion at the end of 2023 to €7.217 billion by the end of the first quarter of 2024. In relative terms, this represented a decrease from 49.7% to 37.5%.
As customer deposits continued to grow while funds held at the ECB remained largely unchanged, their share kept declining and reached 35% by the end of the third quarter of 2025. This is one of the lowest levels of the past three years and a clear signal that the bank prefers to allocate excess liquidity to other, more profitable uses.
Experts link the start of this trend to expectations of a shift in European monetary policy, when it became clear that the cycle of high interest rates was nearing its end and returns on ECB deposits would decline.
A Broader Trend in Greece and the Eurozone
A similar pattern is evident among major Greek banks, which historically held a smaller share of funds at the ECB. By the end of September 2025, this ratio had fallen to 10.2% at the National Bank of Greece, 16.9% at Eurobank, while Alpha Bank maintained the lowest level, with ECB deposits accounting for just 6.5%.
This confirms a broader trend across the Eurozone banking sector toward gradually moving away from passive storage of funds at central banks and toward more active use of liquidity.
Interest Rates and Their Impact on Bank Revenues
The key driver of these changes has been the policy of the European Central Bank. In September 2023, the ECB’s deposit rate peaked at 4% amid efforts to combat inflation. However, as inflation approached the target level of 2%, the regulator began easing its policy, and by June 2025 the rate had been reduced to 2%, where it remains today.
Falling rates directly reduce banks’ interest margins and lower income from placing funds with the ECB. Under these conditions, financial institutions are increasingly seeking alternative sources of revenue—primarily through mortgage and corporate lending, as well as investment projects related to green energy, infrastructure, and tourism, which are currently considered priorities for Cyprus.
What This Means for the Market and Depositors
The declining share of funds held at the ECB points to a gradual revival of lending activity. Banks are increasingly channeling liquidity into the real economy, which may support investment growth and improve access to credit. For depositors, this means more active competition for deposits and the potential emergence of new banking products focused on long-term savings.
If interest rates remain around the current level of approximately 2%, analysts expect this trend to continue, with the share of funds placed at the ECB declining further—marking a new phase in the development of the banking sector in Cyprus and across the Eurozone.