Banking Sector Risks and Vulnerabilities in Ireland Exposed as Global Economy Remains Turbulent
Ireland’s banking system has shown resilience in recent times, but a new report from the Central Bank of Ireland warns that pockets of vulnerability remain within the non-bank financial intermediation sector. The Financial Stability Review 2023 highlights the challenges posed by persistent inflation and higher interest rates on the global economy, which could have implications for the Irish economy.
Global Risks to Financial Stability
The review notes that risks to financial stability have increased globally, driven by:
- High inflation
- Monetary policy tightening
- Geopolitical fragmentation
Global markets remain vulnerable to shocks, and recent turbulence in the banking sector has highlighted the potential for amplification of market volatility by non-bank financial intermediaries.
Ireland’s Banking System
In Ireland, while households and businesses are showing resilience to the inflationary shock so far, there are concerns about:
- Persistent inflation
- An economic slowdown, which could expose vulnerabilities
The Irish economy remains vulnerable to these risks, but the banking system has capacity to absorb potential future shocks, with profits expected to remain higher due to the higher interest rate environment.
Countercyclical Capital Buffer (CCyB) Increase
To build further resilience, the CCyB will increase from 1 to 1.5 percent effective June 2024. This move is designed to ensure that Irish banks continue to have a strong buffer against potential future shocks.
Strengthening Non-Bank Financial Intermediaries (NBFI)
However, the report also highlights the need for further progress at the global level to strengthen the resilience of NBFI, which could be amplified by significant price movements. The Central Bank has published a paper outlining the factors that will guide its judgment in ongoing quarterly reviews and is working with international partners to develop and operationalize a macroprudential framework for NBFI.
Key Sources of Strength
While many households and businesses are experiencing challenges due to the cost of living, key sources of strength include:
- Lower levels of indebtedness
- Household income growth
- Robust employment
However, rising interest rates have already had an impact on the commercial real estate market, and mortgage repayment capacity is expected to be affected.
Governor’s Warning
The Governor of the Central Bank, Gabriel Makhlouf, warned that while the Irish economy has shown resilience so far, there are still risks to financial stability stemming from the rest of the world. He emphasized the need for continued prudent fiscal planning and stressed that more work needs to be done by monetary policy in the short run to address high inflation.
Discussion Paper on Macroprudential Policy
The Central Bank will publish a discussion paper on an approach to macroprudential policy for funds in the coming weeks, seeking stakeholder feedback in the months ahead. The move is designed to advance global discussion and progress on developing a framework for NBFI.