“Uncertainty remains high, but the benefits of resilience built up in recent years most evident now” – Governor Makhlouf at the launch of the Central Bank’s Financial Stability Review 2020:2

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  • Main risks to financial stability stem from a disruption to the global economic recovery, prolonged impact of COVID-19 disruption on domestic activity, and the interaction of these developments with the adverse macroeconomic implications of a disruptive end of the Brexit transition period.
  • Mortgage measures continue to meet their objectives and there will be no change in LTI and LTV limits or the allowances for 2021.
  • Countercyclical Capital Buffer (CCyB) retained at 0 per cent, with no change expected in 2021.

The Central Bank of Ireland has today published the second Financial Stability Review (FSR) of 2020. The FSR outlines key risks facing the financial system and the Central Bank’s assessment of the resilience of the economy and financial system to adverse shocks.

Speaking at the publication of the FSR, Governor Gabriel Makhlouf said that “The full transmission of this now extended shock to the economy and financial system will take time, as the balance between the impact of near-term policy supports and the depth of the implications of this shock for households, businesses and the financial system plays out.  We remain in a position where liquidity challenges have not, as yet, resulted in widespread solvency challenges.”

The Financial Stability Review indicates that:

  • Policy supports have cushioned the initial liquidity shock to firms and households.
  • The loss-absorbing capacity of the system as a whole is sufficient to absorb shocks that are materially worse than current baseline projections. That loss-absorbing capacity is not unlimited.
  • Macro-financial conditions would be worse if the banking system sharply reduced the supply of credit. 
  • To guard against this risk, policymakers have responded with a range of fiscal, monetary, macroprudential and microprudential actions.   

For the first time, the FSR contains a forward-looking assessment of the resilience of the domestic retail banking system, alongside the latest review of the Central Bank’s macroprudential policy tools, including the annual mortgage measures review. On the resilience of the domestic banking system, Governor Makhlouf outlined that “uncertainty remains high, but the benefits of resilience built up in recent years is most evident now.”  He explained that “the macro-financial outlook beyond the current quarter is characterised by huge uncertainty, tied to the progress of the pandemic, the successful roll-out of a vaccine, the economic implications of the related public health response and the more medium-term implications of this shock”.

Announcing the outcome of the annual review of the mortgage measures, Governor Makhlouf said: “This year the review focused on understanding the impact of the COVID-19 shock on the housing and mortgage markets. It drew on extensive analysis and stakeholder engagement on the effectiveness of the measures.  At our most recent meeting, the Commission of the Central Bank agreed that the measures – as currently designed and calibrated – continue to meet their objectives and decided that they will remain unchanged for 2021.” He went on to point out that “Taking a longer perspective, it is clear the mortgage measures have meant we were in a better position going into the COVID-19 shock than the previous financial crisis. The benefits of the measures are most evident in times of stress.”

In addition to the mortgage measures, the countercyclical capital buffer (CCyB) rate will remain at zero per cent. Furthermore, the Governor announced that “given the current outlook, we do not expect to announce a change in the CCyB rate through 2021.”  In providing this explicit guidance he added that “we want to provide as much clarity as possible to banks and facilitate the usability of those buffers.”  The Central Bank’s macroprudential policies 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 Governor said that the messages from the FSR are threefold: that the overall risk environment remains very challenging and continues to be characterised by heightened uncertainty, the banking system as a whole has loss-absorbing capacity for shocks that are materially worse than current baseline projections, and the macroprudential framework has helped ensure that the financial system is better able to absorb the shocks being faced currently.  He concluded by stating that the Central Bank is “committed to developing that [macroprudential] framework domestically and at European and international levels, so it can most effectively safeguard financial stability and ensure the financial system works in the best interests of consumers and the wider economy.”

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