The International Monetary Fund (IMF) has published a positive assessment report on the stability of the Cyprus financial system, pointing out at the same time that “challenges remain”.

According to an official announcement, the report followed the visit of the IMF mission team to Cyprus during the period September-October 2008, on the basis of the Financial Sector Assessment Program (FSAP), as well as the visit of the IMF mission team in June 2009.

According to the assessment the banking system of Cyprus has managed to avoid the worst effects of the global financial crisis and banks’ liquidity situation remains comfortable thanks to their reliance on deposits and relatively prudent liquidity management practices.

The report also says that banks’ capital adequacy remains stable, while supervisors should ensure that banks’ capital adequacy remains above the regulatory minimum.

It also points out that the Central Bank of Cyprus and the Authority for the Supervision and Development of Co-operative Societies have made impressive progress in strengthening the supervisory framework for credit institutions.

It also mentions that work on the crisis contingency framework has progressed well but should be completed. Various EU-wide and national initiatives are under way, including strengthening deposit insurance (to increase funding and covered amounts), drafting guidelines for emergency liquidity assistance (ELA), and adopting a legal framework for covered bonds to facilitate access to European Central Bank refinancing.

Finally the IMF indicates that the supervisory framework of the financial sector should be further strengthened, by moving towards a single supervisor for all credit institutions in the medium to longer term, further tightening certain prudential practices in relation to insurance and securities supervision and further improving home-host supervisory coordination.