- The main risks facing the Irish financial system are external, these include a disorderly Brexit, changes to global tax policy and the risk of an escalation of trade wars.
- We judge that the mortgage measures – as currently designed and calibrated – continue to meet their objectives. There will be no change in LTI and LTV limits or the allowances for 2020.
- Countercyclical Capital Buffer (CCyB) retained at 1 per cent. The capital buffers for Other Systemically-Important Institutions (O-SII) was announced between 0.5 and 1.5 per cent.
The Central Bank of Ireland has today published the second Financial Stability Review (FSR) of 2019. The FSR outlines key risks facing the financial system and the Central Bank assessment of the resilience of the economy and financial system to adverse shocks.
Speaking at the publication of the FSR, Governor Gabriel Makhlouf said “a stable and resilient financial system is one that absorbs shocks, rather than amplifies them. And our job is to ensure that the system serves the people, the families and the firms that make up the Irish economy.”
The Financial Stability Review indicates that:
- As a small and open economy, Ireland remains vulnerable to shocks arising abroad. The possibility of a disorderly Brexit, changes to global tax policy, the risk of escalating trade wars and a sudden change to global financial conditions are all ongoing risks to financial stability in Ireland.
- While the further fall in global interest rates mitigates near-term debt sustainability concerns, this can build vulnerabilities in the medium term.
- Domestically, an economy close to capacity and continued lending growth points to a gradual build-up of cyclical systemic risk.
- Overall, the banking system is now better able to absorb – rather than amplify – shocks, but profitability challenges have become more acute.
Announcing the outcome of the annual review of the mortgage measures, Governor Makhlouf said, “we judge that the mortgage measures – as currently designed and calibrated – continue to meet their objectives. In the circumstances, there will be no change in LTI and LTV limits or the allowances for 2020”.
The overall context of the housing market remains challenging. The Governor added “Over the past year, activity levels and mortgage lending have continued to grow, albeit at a slower pace.” He said “our analysis suggests that – in the absence of the mortgage measures – affordability for mortgage borrowers would be even more acute.”
In addition to the mortgage measures, the Central Bank’s macroprudential policies also include the Countercyclical Capital Buffer (CCyB) and capital buffers for systemically-important institutions (O-SII). These policies contribute to safeguarding financial stability in Ireland. The CCyB rate was retained at 1 per cent. The Governor also announced the annual review of the O-SII framework where six systemically important institutions have buffer rates between 0.5 and 1.5 per cent.
In his remarks, the Governor outlined a road map for the further development of the macro prudential framework. He highlighted three pillars; capital to build the resilience of lenders, the mortgage measures to build resilience of both lenders and borrowers and the need to consider strengthening the resilience of market based finance. He pointed to the need to take “a holistic view”, and noted that “it is good practice to review periodically not just the calibration of policy but the overarching framework”.