The Central Bank of Ireland published results of the second financial stability review of 2020, which outlines the key risks facing the financial system based on the central bank assessment. For the first time, the review contains a forward-looking assessment of the resilience of the domestic retail banking system, alongside the latest review of the Central Bank’s macroprudential policy tools, including the annual mortgage measures review. Also published is a Systemic Risk Pack, which presents indicators and visualization methods for monitoring systemic risk in the Irish financial system. As a result of the assessment, the central bank decided that mortgage measures continue to meet their objectives and there will be no change in loan-to-income (LTI) and loan-to-value (LTV) limits or the allowances for 2021. Furthermore, the countercyclical capital buffer, or CCyB, is being retained at 0%, with no change expected in 2021.
The annual review of other systemically important institution (O-SII) framework identified six institutions as systemically important with buffer rates between 0.5% and 1.5%. The 2020 review has resulted in no policy change, with the exception of the buffer rate for Barclays Bank Ireland plc increasing to 1% (from .75%), consistent with the increased size and complexity of the institution since the last review; the increased buffer will apply from January 2022. The other five O-SIIs are AIB Group plc, Bank of America Europe DAC, Bank of Ireland Group plc, Citibank Holdings Ireland Ltd, Ulster Bank, and Ireland DAC (UBI). The Central Bank emphasizes that the O-SII buffer is fully usable to absorb losses during this period of stress, consistent with the wider macro-prudential and supervisory actions taken by the Central Bank and ECB.
Looking ahead, the Central Bank will continue to develop the broader capital framework and consider the mix and interactions between instruments and buffers, including as a result of the impending transposition of CRDV into Irish legislation and embedding any lessons learned from the COVID-19 experience. The transposition of CRD5 will implement refinements made to the European macro-prudential framework in Ireland, including the power to set a systemic risk buffer. While the Bank's motivation to set this buffer remains relevant, the Central Bank does not intend to begin the phase-in of such a buffer in 2021. Any phase-in of such a buffer would take account of the prevailing macro-financial conditions, the interaction with the other capital and borrower-based measures, and the broader understanding of the operation of the macro-prudential framework in light of the experience during the COVID-19 shock.
In context of the conclusion of the financial stability review, the Governor of the Central Bank of Ireland stated that the central bank is “committed to developing that [macroprudential] framework domestically and at European and international levels, so it can most effectively safeguard financial stability and ensure the financial system works in the best interests of consumers and the wider economy.” The Governor said that the messages from the financial stability review are three-fold:
- The overall risk environment remains very challenging and continues to be characterized by heightened uncertainty.
- The banking system as a whole has loss-absorbing capacity for shocks that are materially worse than current baseline projections.
- The macroprudential framework has helped ensure that the financial system is better able to absorb the shocks being faced currently.
- Press Release on Financial Stability Review
- Financial Stability Review (PDF)
- Forward-Looking Assessment (PDF)
- Systemic Risk Pack
Keywords: Europe, Ireland, Banking, CCyB, Systemic Risk, Macro-Prudential Policy, CRD5, Financial Stability, Basel, Regulatory Capital, Central Bank of Ireland
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