IMF Reports on 2017 Article IV Consultation with Ireland
IMF published its staff report and selected issues report in the context of the 2017 Article IV consultation with Ireland. Directors noted that banking system recovery is progressing. While the outlook is positive, Brexit-related uncertainties, international regulatory changes, and elevated nonperforming loan (NPL) levels pose challenges. Directors also stressed the importance of the macro-prudential framework, given the recent pick up in lending.
The staff report reveals that the financial health of domestic banks further improved, but crisis legacies remain a source of vulnerability. Domestic bank capital and liquidity positions strengthened further in 2016 and profitability is now above the average of EU peers. While still high, NPLs have declined as a share of total loans, reflecting improvement in all categories. Recent stress tests showed a significant decline in capital ratios in response to adverse shocks as the elevated level of NPLs and deferred tax assets weigh on banks’ loss-absorption capacity. These vulnerabilities pose a challenge to banks, particularly given the uncertain impact of Brexit, future international regulatory changes, continued cost pressures, and ongoing public pressure to reduce variable rates on mortgages.
Resolution of mortgage arrears remains sluggish due to limited creditor-borrower engagement and lengthy legal proceedings. The share of deep mortgage arrears (over 720 days) in total mortgage arrears has continued to increase to about 70%, while the proportion of mortgage arrears in total NPLs reached 55% in the fourth quarter of 2016, from 38% in the fourth quarter of 2013. Continued implementation of the Distressed Credit Strategy, which sets out bank-by-bank supervisory expectations regarding NPL reduction, should support further progress. Efforts to ensure that provisions remain adequate, including in the context of the upcoming IFRS9 implementation, as well as steps to make the legal proceedings more efficient, are also important to support faster portfolio cleanup. The authorities are addressing FSAP recommendations. The central bank has increased transparency and accountability regarding its policy decisions and operations, enhanced its stress-testing capacity, and made progress in addressing data gaps. Actions are being taken, in coordination with European institutions, to improve financial sector oversight. The authorities affirmed their commitment to advance bank balance sheet repair and safeguard against financial stability risks. They agreed that NPL resolution remains a key supervisory priority and noted that bank resolution strategies are consistently challenged to ensure that they are realistic and ambitious.
The selected issues report offers an overview of income distribution and the welfare system in Ireland, with a focus on the crisis and post-crisis period. Next, it takes stock of the recent deleveraging in Irish households while seeking to identify some of its drivers. Finally, the report examines the role of foreign-owned multinational enterprises in support growth in the country.
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Keywords: IMF, Europe, Banking, Ireland, FSAP, Article IV, NPL
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