Banking Sector Risks and Vulnerabilities in Ireland: Central Bank Warns of Elevated Risk Level
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The Governor of Ireland’s Central Bank, Gabriel Makhlouf, has sounded the alarm over the heightened risk level in both the payment and e-money sector and the investment fund sector. In his annual letter to the Minister for Finance outlining the bank’s financial regulation priorities for the year, Makhlouf highlighted several areas of concern.
Payment and E-Money Sector Risks
Makhlouf expressed concerns about significant control weaknesses found in firms operating in this market. These firms have experienced rapid growth and ambition, but their operational, governance, compliance, and risk management capabilities have not kept pace. This has led to a heightened level of risk in the sector.
Investment Fund Sector Risks
Risks in the funds sector reflect structural vulnerabilities in parts of the sector, including:
- Leverage and liquidity mismatches
- The impact of market volatility
- Market conduct risks
- The degree of interconnectedness with the wider financial system and economy
Other Potential Risks Facing the Irish Banking Sector
Makhlouf also highlighted a range of other potential risks facing the Irish banking sector, including:
- Significant and widening geopolitical tensions with potential ramifications for supply chains and markets
- Geoeconomic fragmentation
- A global economy that is less interconnected
- Environmental and climate-related challenges, such as:
- The implications of increased severity and frequency of extreme weather events
Resilience of the Financial System in Ireland and Europe
Despite these risks, Makhlouf noted that the financial system in Ireland and across Europe has proved resilient in recent times. However, he warned that the risk environment remains elevated, with potential implications for the financial resilience of firms.
Initiatives to Address Risks
The Central Bank is prioritizing a range of initiatives to address these risks, including:
- Revising and modernising the Consumer Protection Code
- Continuing to progress work to address systemic risks from the non-bank sector
- Implementing the Individual Accountability Framework
- Preparing for the implementation of the Digital Operational Resilience Act and the Markets in Crypto Asset Regulation
Policy Work and Supervisory Expectations
Makhlouf emphasized the need for policy work and supervisory expectations related to the use of artificial intelligence in financial services. He urged leaders in firms to adopt a proactive, consumer-centric, and forward-looking approach to managing risks and uncertainties facing their organisations and customers.
Overall, while the financial system has proved resilient in recent times, the risk environment remains elevated, and it is crucial that firms take proactive steps to address these risks and ensure the continued stability of the financial sector.