Market confidence in Sri Lanka’s financial system remains intact over the next 12 months but beneath that surface stability, medium-term anxieties are rising, according to the latest Systemic Risk Survey released by the Central Bank of Sri Lanka (CBSL).
The biannual survey, conducted between 19 December 2025 and 16 January 2026 among 147 financial sector firms, reveals a cautiously optimistic short-term outlook.
However, confidence over a three-year horizon has weakened, reflecting deeper concerns about geopolitical instability, natural disasters, and structural vulnerabilities.
Importantly, the survey was completed before two major global shocks: a US Supreme Court ruling on tariff policy linked to the Trump administration and subsequent military strikes by the US and Israel on Iran.
Those developments triggered oil price spikes and temporary shutdowns of major airline hubs in the Gulf region events likely to amplify the very risks respondents had already flagged. While short-term sentiment remains positive, respondents reported a higher perceived probability of a “high-impact negative event” in both the one-year and three-year outlooks.
That dual signal — optimism combined with elevated tail-risk fears suggests markets believe the system can withstand near-term stress but are less confident about prolonged turbulence.
The survey framework is expansive, covering seven broad risk categories and 46 sub-risks. These include global macroeconomic risks, fiscal and sovereign risks, domestic macroeconomic conditions, financial market volatility, institutional stability, financial infrastructure resilience, and broader systemic threats.
Notably, the Central Bank refined its methodology in late 2025 by separating “domestic macroeconomic risks” into two new categories: fiscal and sovereign-related risks, and general domestic macroeconomic risks.
Three new sub-risks were added, reflecting the evolving complexity of Sri Lanka’s post-crisis environment.
The dispersion of responses across categories indicates no single dominant threat. Instead, risk perceptions are fragmented spanning external shocks, fiscal pressures, and operational vulnerabilities.
Such dispersion can be interpreted two ways: either systemic risk is diversified and manageable, or uncertainty is too diffuse to isolate. Participants included risk officers from licensed banks, finance companies, insurance firms, unit trust managers, brokerage houses, rating agencies, microfinance institutions, and mobile money providers a cross-section of the financial architecture. The CBSL emphasised that the findings reflect market perceptions rather than official views.
Still, perception often drives behaviour. If institutions anticipate higher tail risks, they may tighten lending standards, increase liquidity buffers, or delay expansion plans potentially slowing economic momentum.
The contrast between resilient short-term sentiment and weakening medium-term confidence may reflect a belief that immediate post-crisis stabilisation has worked, but structural and geopolitical uncertainties remain unresolved.
In essence, the survey captures a system no longer in emergency mode however not entirely out of the woods. Confidence has stabilised. Conviction has not.
