IMF published its staff report and selected issues report under the 2019 Article IV consultation with Ireland. The IMF Directors welcomed the proactive use of macro-prudential policy tools, endorsed the expansion of the toolkit with a systemic risk buffer and debt-based measures, and stressed that continued efforts to improve asset quality remain a priority. They encouraged the authorities to further improve data collection, closely monitor risk build-up, and develop system-wide stress testing. In view of the sector’s global reach, Directors emphasized the need for continued engagement in international cooperation, with the need for continued close cooperation with EU and UK to avoid cliff-edge risks related to Brexit.
The staff report highlighted that size of the financial sector in Ireland has surpassed its pre-crisis level, as bank deleveraging was more than offset by the expansion of the non-bank sector. Domestic banks are well-capitalized and liquid. The capital ratios of these banks have somewhat declined in 2018 but remain among the highest in Europe. The common equity tier 1 ratio for the three largest domestic banks, at 17.8%, is well above the regulatory requirements and the EU peer average. Irish banks also fared well in the EU-wide banking stress tests of November 2018. The liquidity coverage ratio of banks continues to be in line with that of the international peers and is well above the minimum requirements. However, the high stock of non-performing loans (NPLs) and other crisis legacies continue to weigh on bank profitability. Moreover, the average margins of Irish banks continue to be weighed down by the high level of NPLs, a sizable portfolio of low-rate tracker mortgages, regulatory requirements to build up loss-absorbing liabilities, and elevated operational costs. Efforts to improve banks’ asset quality need to continue, building on recent progress.
The NPL ratio for the three largest domestic banks declined to 8.1% in 2018 from 10.7% at end-2017, helped by portfolio sales, improved economic conditions, and stepped-up resolution activities. NPLs have declined across all market segments with the largest absolute decline in mortgages on primary residences. Continued loan-restructuring efforts, accompanied by strengthened borrower-creditor engagement, accelerated legal proceedings, and enhanced supervisory efforts are needed to reduce the NPL ratio to the 5% target by 2020. Macro-prudential policy settings appear appropriate, but the toolkit should be expanded. Given that there are no signs of deterioration in lending standards, the current macro-prudential stance appears appropriate. The countercyclical capital buffer (CCyB) increase to 1%, which was announced last year, will come into effect in July and constitutes an appropriate policy buffer in view of the advanced business cycle and risks to the outlook. The IMF assessment points out that expanding the toolkit with a systemic risk capital buffer is important to bolster system resilience.
The financial-sector preparations for Brexit appear broadly adequate to mitigate major disruptions. The Central Bank of Ireland continues to closely monitor Brexit contingency planning of Irish financial firms. According to the latest report by the Task Force on Brexit, the majority of Irish banks, insurers, and brokers provided their assessment and contingency plans, which the Central Bank of Ireland deemed to be adequate in most cases. The central bank cooperates closely with the institutions in EU and UK to ensure business continuity and avoid cliff-edge risks in the financial sector. Given continued uncertainty, it is essential that banks and other financial institutions remain conservative in their internal stress tests and risk assessments. It is also important to analyze the potential impact of Brexit-related financial market shocks, including on the nonbank financial sector. More than one hundred UK-based firms have been seeking authorization from the Central Bank of Ireland to relocate some of their activities to Ireland to continue business in EU after Brexit. The IMF staff encourages the Central Bank of Ireland to continue to devote adequate resources to guarantee a high-quality authorization process.
Keywords: Europe, Ireland, Banking, Insurance, Securities, Systemic Risk, NPLs, Stress Testing, Brexit, Macro-Prudential Policy, CCyB, Article IV, IMF
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.