Financial Stability Note: Mapping Market-Based Finance in Ireland

• The structure of Ireland’s financial system has changed considerably over the last decade, given the rapid growth of market-based finance.
• While market-based finance can provide a valuable alternative to bank financing, it can also contribute to the build-up of financial vulnerabilities.
• The resilience of market-based finance in its current scale, both in Ireland and internationally, remains untested in times of stress.

Today the Central Bank of Ireland has published a Financial Stability Note written by Simone Cima, Neill Killeen and Vasileios Madouros entitled ‘Mapping Market-Based Finance in Ireland’. The Note explores growth in the market-based finance sector over the last decade, the composition of the sector domiciled in Ireland and the benefits and vulnerabilities associated with this form of financial intermediation.

Market-based finance has grown rapidly in Ireland in recent years and is large relative to international standards and the size of the domestic economy. The sector domiciled in Ireland comprises a number of diverse business models and has more than doubled in value from approximately €1.8 trillion at the end of 2009 to approximately €4.5 trillion in the second quarter of 2019. While the sector has predominantly an international focus, it has also become increasingly linked to parts of the domestic economy, especially the commercial real estate market.

The resilience of market-based finance in the current scale, both in Ireland and internationally, remains untested in times of stress. Given the recent growth, potential disruptions in the provision of market-based finance are likely to have a more material macro-financial impact relative to a decade ago. Potential sources of vulnerabilities related to market-based financing that the Central Bank monitors include liquidity transformation and leverage risks associated with investment funds.

The Central Bank of Ireland works closely with international organisations in the EU and globally on initiatives aimed at monitoring potential vulnerabilities related to market-based finance. It has – and will continue to – engage with international authorities to progress policy initiatives aimed at strengthening the resilience of market-based finance.

Governor Gabriel Makhlouf noted “The financial system has changed considerably over the last decade. While diversification away from the traditional banking system towards market-based finance brings benefits, it also brings risks.” The Governor added “The resilience of the sector remains untested in times of stress. The Central Bank will continue our work to better understand the interconnections and vulnerabilities. Given the size and scale of the sector here in Ireland, we need to be on the front foot and at the forefront of policy discussions.”