Central Bank Macro Financial Review 2016: II highlights risks

• Immediate impact of Brexit on the euro area has been relatively muted
• A less positive outlook for the non-financial corporates sector, with Brexit a substantial risk.
• Household indebtedness remains high
• Non-performing loans in Irish banks continue to decline

Read the Macro Financial Review: December 2016

Read Deputy Governor Sharon Donnery’s Opening Remarks from the press conference.

Macro-Financial Review

The Central Bank of Ireland has published the second edition of the 2016 Macro Financial Review. It provides an overview of the current state of the macro-financial environment in Ireland. Monitoring macro-financial developments and risks is an important task for the Central Bank. This Review aims to assist our key stakeholders - the public, financial market participants, and national and international authorities – better evaluate financial risks.

The Review finds that while financial market tensions have eased somewhat since earlier in 2016 and since the June 23 vote by the UK to leave the European Union, risks to European financial stability remain elevated. While it is too early to assess fully the impact of Brexit on the Irish economy, downside risks to the domestic economy prevail over the medium term.

The Review shows a less positive outlook for the non-financial corporate sector compared with the Review published last June, with Brexit posing a substantial downside risk. Despite an increase in new lending, the overall stock of non-financial corporate sector credit continues to decline.

In the household sector, despite the deleveraging that has taken place, debt remains high. The number of mortgage arrears cases continues to fall, with loan modifications a contributory factor. In the housing market, residential property price growth has declined from recent peaks. While residential construction activity is increasing, annual new supply does not meet projected long-term demand. Returns on Irish commercial property continued to decline in the first half of 2016, but remain higher than those in other countries.

The Review states the net-interest income of Irish retail banks declined marginally in the first half of 2016. Credit quality is improving and the stock of non-performing loans held by Irish retail banks declined by €15.6 billion over the past year to €37 billion in 2016Q3.

The domestic non-life insurance industry continues to experience operating challenges. All of the domestically-focused high-impact non-life firms reported underwriting losses in the first half of 2016, albeit at lower levels than in the same period of 2015. Those losses are mainly concentrated in the motor insurance market. Nevertheless, the overall solvency position of the non-life sector remains high.

Counter Cyclical Capital Buffer

The Central Bank has also announced today that the countercyclical capital buffer (CCyB) rate on Irish exposures is to be maintained at 0 per cent. The rate will be effective from 1 January 2017.

Notes
• The CCyB is a time varying capital requirement which applies to in-scope banks and investment firms. It is designed to make the banking system more resilient and less pro-cyclical. The CCyB will increase the capital requirement of banks when credit growth is ‘excessive’. The CCyB can then be released, partially or fully, either in the case of a period of systemic stress or when credit growth and associated systemic risks recede.
• National designated authorities are required to set CCyB rates on a quarterly basis. The Central Bank is the designated authority for setting the CCyB rate in Ireland.