The Central Bank of Ireland has published a report on the results of its first financial stability review. The report outlines key risks facing the financial system and assesses the resilience of economy and financial system to adverse shocks. The review, which is focused on the potential for negative outcomes that can materialize, reveals that the main risks to Irish financial stability are external in nature. The review shows that resilience of the domestic banking system has strengthened in recent years, through higher levels of capital, more stable sources of funding, and lower nonperforming loans (NPLs).
The main sources of risk to domestic financial stability include disorderly Brexit, abrupt tightening in global financial conditions, re-emergence of sovereign debt sustainability concerns in the euro area, the possibility of elevated risk-taking behavior, and abrupt falls in the Irish property prices and the banking sector profitability. The Central Bank of Ireland, 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 EU and UK in the event of 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 highlights that the aggregate common equity tier (CET) 1 capital ratio of the domestic banking system stood at 17% at the end of 2018; this CET 1 ratio is double the level it was five years before the end of 2018. Overall, the banking system is now better able to absorb shocks, rather than amplify them. Nonetheless, further progress to strengthen resilience is needed, especially with respect to the 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 of Ireland’s macro-prudential policies, which include the mortgage measures, the countercyclical capital buffer (CCyB), and the capital buffers for systemically-important institutions (O-SII), contribute to safeguarding the financial stability in Ireland. The review confirms that the CCyB has been maintained at 1%. The Minister for Finance has confirmed that the power to set a systemic risk buffer (SRB) is to be granted to the Central Bank of Ireland, which will complete the macro-prudential framework for bank capital. To support the precise design and calibration of SRB, the Central Bank of Ireland is considering the interaction between different capital buffers and the overall level of bank capital that is appropriate for a small, highly-globalized economy. This level of capital will inform the calibration of both cyclical and structural buffers.
Keywords: Europe, Ireland, Banking, Insurance, Securities, NPLs, Brexit, Macro-Prudential Policy, CCyB, CET 1, Systemic Risk, Financial Stability, Central Bank of Ireland
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