Financial Stability Note: External Balance Sheet Risks in Ireland

Recent Irish experience raises important questions about the monitoring of external balance sheet risks and the framework for doing so. A Financial Stability Note by Vahagn Galstyan and Valerie Herzberg proposes one indicator to monitor these risks in Ireland.

The key findings of the Financial Stability Note are:

• Irish financial and trade integration gives rise to well-known complexities with regards to traditional economic indicators, making direct comparison with other-country experiences difficult. Given the complexities in the Irish net international investment position, a focus on the external balance sheet of the domestic banking sector is a more fruitful avenue to detect crisis risk.
• A closer monitoring of external balance sheet risk is warranted when the net external debt liabilities of domestic banks exceed 17% of GNI*. (At end-2017, net external debt liabilities of domestic banks were negative and stood at around -16% of GNI*).
• In contrast to what the official net international investment position of Ireland suggests, based on this research’s proposed metric alone, the risk of a financial crisis emanating from the net external debt position of the Irish banking sector appears low.

The views expressed in this Note are those of the authors alone and do not represent the official views of the Central Bank of Ireland.

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