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    Irish Central Bank Publishes Second Financial Stability Review of 2022

    December 08, 2022

    The Central Bank of Ireland published the second Financial Stability Review of 2022, which assess the resilience of the economy and financial system to adverse shocks and outlines key risks facing the financial system. The Irish Central Bank also published a letter on mortgage refinancing that outlines the results of a study to determine whether certain changes in communications with mortgage holders might boost engagement with refinancing opportunities.

    The financial stability review indicates that global markets remain vulnerable to further shocks, which could be amplified by segments of the non-bank financial system where leverage or liquidity mismatches are higher. Domestically, the Irish economy is facing increased downside risks; however, resilience built up over the last decade provides capacity to absorb shocks. With regard to the banking sector, the Central Bank expects higher interest rates to be positive for profitability of banks and announced an increase in the Countercyclical Capital Buffer (CCyB) requirement from 0.5% to 1% on domestic banking exposures, as part of the gradual rebuilding of the buffer rate toward the 1.5% target rate for the CCyB in periods when cyclical risks are neither elevated nor subdued. The Central Bank also introduced new macro-prudential policy measures for Irish property funds to make this growing form of financial intermediation more resilient to adverse shocks. To address risks stemming from leverage in Irish property funds, a 60% leverage limit is being introduced and the guidance on liquidity timeframes has been announced to further address risks from liquidity mismatch, with an 18-month implementation period. Both measures will apply immediately to the newly authorized Irish property funds.

    The letter on mortgage refinancing notes that, under the Consumer Protection Code, mortgage lenders are required to inform variable rate mortgage holders about other, lower-cost mortgage products that are available, when interest rates change (on an annual basis). Borrowers whose fixed rate term is nearing its end are also required to receive such information. The Central Bank sought to understand whether changes to the language used in these letters might encourage more consumers to engage with refinancing opportunities. The study showed that adapting communications to take account of insights from behavioral economics can be highly impactful in delivering better outcomes for consumers. Notifications to mortgage holders were adjusted to include clearer information on refinancing opportunities, which significantly increased refinancing activity. The strongest performing communication increased refinancing activity among mortgage holders by 76% when compared against the pre-existing standard notification. The addition of personalized euro savings estimates can help borrowers in making the most informed choices. The findings of this research demonstrate how small changes can make a considerable difference in stimulating consumer engagement and interrupting inertia in mortgage refinancing. The findings also underline the value of using behavioral insights to inform policy design, and the role such insights can play in addressing important issues in financial product markets.


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    Keywords: Europe, Ireland, Banking, Financial Stability Review, CCyB, Basel, Regulatory Capital, Lending, Credit Risk, Liquidity Risk, Mortgage Refinancing, Mortgage Lending, Central Bank of Ireland

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