Financial Crime World

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Ireland’s Banking Sector Faces Growing Risks and Vulnerabilities

As Ireland grapples with rising interest rates, inflationary pressures, and subdued GDP growth, the country’s banking sector is facing a multitude of risks and vulnerabilities. According to Elizabeth McCaul, Member of the Supervisory Board of the European Central Bank, the sector’s resilience has been tested in recent years, and policymakers must remain vigilant to address emerging threats.

Key Challenges

  • Credit risk
  • Liquidity risk
  • Funding and interest rate risk
  • Persistently high inflation
  • Unprecedented monetary policy tightening
  • Difficult geopolitical situation

Digital Transformation

The digital transformation of the banking sector poses significant challenges to banks’ business models, underscoring the need for strengthened governance and cyber risk management.

Cybersecurity Concerns

  • Ongoing reliance on third-party providers for digital strategy
  • Increasing use of cloud-based services
  • Heightened concerns about cybersecurity risks

Climate Risks

Europe faces an “energy trilemma” - how to make energy secure, affordable, and sustainable. Banks must incorporate these risks into their business strategies, governance, and risk management frameworks to mitigate potential losses.

Sound Asset Liability Management (ALM) Frameworks

  • Importance of ALM frameworks in the face of unexpected short-term liquidity shocks and higher debt servicing costs due to monetary policy normalization

Credit Risk

  • Credit risk has become a major concern as the economic cycle weakens
  • Signs of asset quality deterioration emerging in recent quarters
  • ECB’s stress test showed that leveraged finance exposures carry a high degree of credit risk and market risk, which could materialize in a downturn

Non-Bank Financial Intermediation (NBFI) Sector

  • Liquidity risks in this sector could lead to funding pressures on banks if NBFI entities were to withdraw their support
  • Strong links between banks and the NBFI sector could amplify banks’ funding pressures if the soundness of their fundamentals was called into question

Regulatory Attention

  • Changing customer preferences
  • Increasing competition from new entrants
  • Surging cyber and IT-related risks
  • Need for banks to prioritize digital transformation, rethink their business models, and address emerging risks to maintain stability in Ireland’s banking sector