‘Macro-Financial Perspectives on the Irish Economy’ address by Philip R. Lane, Governor of the Central Bank of Ireland to the Institute for International and European Affairs

• Broadly positive IMF assessment welcomed, reflects efforts to address pre crisis structural, regulatory and supervisory arrangements
• New macroprudential measures committee – records of meetings to be published
  Irish economy: Performing well, but  remains vulnerable to downside risks, including a ‘harder form of Brexit’
• Stress tests indicate adequate capital, vulnerabilities remain
• Governor to contribute to development of supplementary indicators for Irish economy

Governor of the Central Bank Philip R. Lane today welcomed the broadly positive assessment in the IMF’s financial system stability assessment (FSSA) report for Ireland.  At an address,  ‘Macro-Financial Perspectives on the Irish Economy’ at the Institute for International and European Affairs, Governor Lane provided an overview of the macroeconomic environment, the recent IMF FSSA assessment which recognises significant strengthening of the financial system and more proactive regulatory approach, stress testing, the implications of Brexit and measurement challenges for the macro financial environment.

He announced the establishment of a new macroprudential measures internal advisory committee which will assess the design of domestic macroprudential policies, including the borrower-based mortgage rules, the counter-cyclical buffer and the other systemically important significant institution (OSII) buffer.  In line with the IMF’s recommendation to continue to enhance transparency measures as an independent body, a record of the proceedings of the committee will be published. The commitment to publish the summary records follows the initiative to publish accounts of Central Bank Commission meetings.

Following the Bank’s assessment of the short and medium-term impact of the Brexit referendum on Ireland, Governor Lane offered a note of caution over the gradual crystallisation of a new relationship between the UK and the EU over the coming months.  He warned that it carries ‘a continuous risk of triggering adverse market developments’ if a ‘harder’ form of Brexit emerges. He also highlighted Ireland’s vulnerability to any Brexit-related reversal in international financial sentiment.

Governor Lane also outlined two near term domestic challenges in relation to measurement.  First, to develop supplementary indicators to enhance understanding of the Irish economy and financial system - He stated policymakers must look beyond the headline accounts data to develop and communicate alternative policy targets that are not affected by the various statistical issues that have been much discussed in recent weeks. He welcomed the initiative by the Central Statistics Office to set up a consultative group to consider the development of supplementary indicators to enhance understanding of the economy and financial system and will chair the group.

NOTE:

1. The countercyclical capital buffer (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. Essentially 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. On July 1, the Central Bank announced that it was maintaining the CCyB rate at 0 per cent. A range of indicators are analysed when deciding the appropriate CCyB rate.

2. The objective of the Other Systemically Important Institutions (OSII) buffer is to reduce the potential impact of a systemically important financial institution’s failure on the domestic economy. The Central Bank, together with the ECB, is responsible for identifying OSIIs for Ireland and setting buffer rates.