‘Macro-financial environment improving but external risks weighted to the downside’ - Macro Financial Review 2016:1

14 June 2016 Press Release

Risks to the economic outlook are weighted to the downside and relate mostly to uncertainty in the external financial environment.
While economic conditions are improving, public and private sector indebtedness remain high.
Workout of impaired loans and disposal of non-performing loans in banking sector ongoing, domestic bank profitability remains weak.
Mortgage regulations: Call for evidence which will inform review opens from 15 June to 10 August.

Macro-Financial Review

The Macro-Financial Review offers 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 report aims to assist our key stakeholders - the public, financial market participants, and national and international authorities – in better evaluating financial risks..

The macro-financial environment has improved, with strong growth in 2015 and growth projected for both 2016 and 2017. External factors like the forthcoming referendum on the UK’s membership of the EU and geopolitical tensions are all risks that lead to uncertainty.

The report concludes that a vote for the UK to leave the EU would have both short-term and long-term impacts on Ireland. A negative impact on Irish exports to the UK could be expected. The Central Bank has been engaging with financial sector firms to assess their preparedness for the risks associated with Brexit.

Household debt, while declining, remains high, leaving households vulnerable to adverse movements in income or interest rates. The General Government gross debt-to-GDP ratio remains high, leaving the public finances vulnerable to economic and financial shocks. Maintaining fiscal discipline is necessary to keep the public finances on a sustainable path.

The workout of impaired loans and the disposal of non-performing loans in the banking sector are ongoing, with non-performing loans and related provisions remaining elevated. Bank capital has improved, with domestic banks returning to profitability, but that remains weak and varies at an individual level.

The domestic non-life insurance sector faces a difficult operating environment with all of the high-impact firms reporting underwriting losses in 2015 primarily due to current challenges in the Irish motor market. In the non-bank financial intermediaries sector, risks centre on the potential for intermediaries in Ireland and abroad to play a destabilising role in international financial markets at times of market stress.

Call for evidence

The Central Bank is today announcing details of the call for evidence which will inform the review of the impact and effectiveness of its macroprudential mortgage market measures which were introduced to enhance resilience of households and banks and to protect households from a house-price cycle emerging again. The Central Bank welcomes data-based and other analytical submissions to inform its assessment. Submissions of evidence can be made at centralbank.ie.

Speaking at the publication of the review, Deputy Governor Sharon Donnery said “The review will be informed by a public call for evidence on the impact of the measures. The call for evidence will remain open from 15 June to 10 August.

She added, “The mortgage rules were enacted in February 2015 to enhance the resilience of households and banks to financial shocks. We acknowledge that our measures impact individuals’ ability to access credit and purchase houses. However, these loan-to-value and loan-to-income ratio limits are designed to protect the system as a whole and limit the risk of a house price – credit cycle emerging once again. And in this context, we must take a medium to long term view. The measures were introduced as a permanent and structural feature of the Irish mortgage market and the evidence threshold to justify adjustments to these rules is significant. While the housing shortage is widely acknowledged, housing shortfall issues must primarily be addressed by other targeted policies.”