“The main risks to domestic financial stability stem from external developments” – Central Bank Financial Stability Review

• Main risks facing the financial system include a disorderly Brexit, an abrupt tightening in global financial conditions, and a re-emergence of sovereign debt sustainability concerns in the euro area.
• While lenders have become more resilient to a downturn in recent years through higher capital, and borrowers through reduced debt levels, vulnerabilities remain.
• The Minister for Finance has agreed to give the Central Bank the power to use the Systemic Risk Buffer (SyRB) completing the macroprudential toolkit for bank capital.

The Central Bank of Ireland has published the first Financial Stability Review, succeeding the previous Macro Financial Review. The Financial Stability Review outlines key risks facing the financial system and assesses the resilience of the economy and financial system to adverse shocks. The aim of the Review is not to provide an economic forecast, but instead focuses on the potential for negative outcomes to materialise.

The Review outlines that the main risks to Irish financial stability are external in nature.

The main risks include:

• A disorderly Brexit;
• An abrupt tightening in global financial conditions;
• A re-emergence of sovereign debt sustainability concerns in the euro area;
• An abrupt fall in Irish property prices; and
• Banking sector profitability and the possibility of elevated risk-taking behavior.

The Central Bank, working with other authorities domestically and internationally, has taken action to mitigate the most material and immediate risks to the disruption of financial services between the EU and the UK in a disorderly Brexit. The main outstanding source of risk to financial stability and the wider economy is a larger-than-expected macroeconomic shock in a disorderly Brexit.

The Review shows that the resilience of the domestic banking system has strengthened in recent years, through higher levels of capital, more stable sources of funding and lower non-performing loans (NPLs). Further progress to strengthen resilience is needed, especially with respect to remaining NPLs, resolvability and operational resilience. Domestic households and companies have also become more resilient through reduced debt levels in recent years. However, a significant number of households with restructured mortgages could be particularly vulnerable to economic stress.

The Central Bank’s macroprudential policies, which currently include the mortgage measures, the Countercyclical Capital Buffer (CCyB) and capital buffers for systemically-important institutions (O-SII), contribute to safeguarding financial stability in Ireland. The Review confirms that the CCyB has been maintained at 1 percent.

The Minister for Finance has confirmed that the power to set a Systemic Risk Buffer (SyRB) is to be granted to the Central Bank, which will complete the macroprudential framework for bank capital. To support the precise design and calibration of the SyRB, the Central Bank is considering the interaction between different capital buffers and the overall level of bank capital that is appropriate for a small, highly-globalised economy, such as Ireland. This level of capital will inform the calibration of both cyclical and structural buffers.

Acting Governor, Sharon Donnery, said, “As a small and highly globalised economy, with a particular reliance on activity from foreign multinational companies, Ireland is both more sensitive to developments in the global cycle and more prone to structural macroeconomic shocks.

It is critical that we continue to identify, plan and prepare to mitigate the impact of those shocks, should they materialise. Building a resilient system is central to this. Resilience is not something that can be built after an event, but is something that should be in place well before any issues arise.

We continue to expand our macroprudential framework to ensure we have the right tools to manage potential risks to financial stability and the addition of the Systemic Risk Buffer will be an important tool for us in building a resilient banking system with sufficient capital buffers to absorb these structural shocks.”