The Cypriot banking system has managed to stay on the sidelines of the global financial turbulence, but credit risk remains high, the International Monetary Fund (IMF) said. Banks have high exposure to the struggling real estate and construction sectorsCyprus has one of the highest household debt-to-GDP ratios (122% to GDP at end-December 2008), and loan quality will be affected as the global slump is now hitting Cyprus. Supervisors should ensure that banks’ capital cushions remain ample, according to an assessment report prepared by a staff team of the IMF under Cyprus: Financial Sector Assessment ProgramFinancial System Stability Assessment during the period September-October 2008. 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. Bank liquidity has fallen somewhat, but banks’ liquidity situation remains comfortable thanks to their reliance on deposits and relatively prudent liquidity management practices. The authorities’ strict liquidity regulations remain appropriate in view of the global turmoil.