“Conditions have improved, but the recovery may be bumpy and uneven.” – Governor Gabriel Makhlouf

• The expansion of vaccination programmes has reduced downside risks to the macro-financial outlook.
• The full impact of the COVID-19 shock will only become apparent as government supports start to unwind.
• The Central Bank’s macroprudential policy stance enables the banking system to support households and businesses through the recovery.

The Central Bank of Ireland today published the first Financial Stability Review of 2021. The Review highlights that the expansion of vaccination programmes has reduced uncertainty and downside risks to the macro-financial outlook. However, the recovery is likely to be uneven across countries and sectors and could be vulnerable to setbacks. Vulnerabilities in global financial markets have been building, amid higher levels of sovereign and corporate indebtedness. Looking beyond the pandemic, structural risks remain, including those stemming from changes in the banking sector, international tax changes, and climate change.

At the launch of the Financial Stability Review, Governor Makhlouf said “Overall, economic and financial conditions in Ireland have improved over the last six months.  Job losses reached record highs during the pandemic, but government supports played an important role in absorbing the shock to people’s livelihoods and incomes.” He went on to say that “The recovery may be bumpy and uneven, as some sectors in Ireland thrive while others continue to struggle with the effects of the restrictions. The viability of some businesses will be tested by the necessary tapering of government supports.”

In the Financial Stability Review, the Central Bank judged that the system as a whole has the capacity to support households and businesses, even in economic outcomes worse than currently expected. Governor Makhlouf said “It remains a priority for us that lenders continue to play their part in the management of the fallout from the pandemic. This means arriving at restructuring and forbearance arrangements that ensure that viable businesses survive, and that they do not begin to accumulate arrears in ways that caused such damaging long-term issues after the last crisis.”

The Central Bank’s overall macroprudential stance aims to enable the banking system to absorb the shock and maintain the supply of credit to households and businesses in a sustainable way through the recovery. The Central Bank judged that a CCyB rate of 0% remains appropriate for the current environment and for the macro-financial conditions expected during 2021. Similarly, the Central Bank does not intend to begin any phase-in of the Systemic Risk Buffer in 2021 and O-SII buffer is fully usable to absorb losses to enable banks to continue to support the real economy during the current period.

Governor Makhlouf went on to say that “The evidence we have to date is that, through both our actions and a wide range of other supportive policy decisions, a lack of credit has not contributed to the economic challenges facing our country. This is a big contrast to where we found ourselves a decade ago, and reflects all the efforts to build resilience over the past decade.”

Governor Makhlouf also updated on the ongoing review of the Central Bank’s mortgage measures framework, the first ‘deep dive’ since the measures were introduced. He said “The role of the mortgage measures in guarding against the over indebtedness of households and protecting financial stability is clear. However, as a permanent feature, it is important that we not only maintain the good practice of regularly reviewing the calibration of policy but also consider the overarching framework.  It is now approaching seven years since the introduction of the measures and a review of the framework will allow us to consider the overarching approach to our toolkit and strategy to ensure they continue to remain fit for purpose in view of the constant evolution of our financial system and economy.” The framework review accompanies a review of the bank capital framework and the development of the Central Bank’s framework for macroprudential policy in the area of market-based finance, as part of a current three-pronged review of our macroprudential framework at the Central Bank of Ireland.

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Notes to editors

The Countercyclical Capital Buffer (CCyB) is a time-varying capital requirement which applies to banks and investment firms. It aims to promote a sustainable provision of credit to the economy by making the banking system more resilient and less pro-cyclical.  The Central Bank is the designated authority for setting the CCyB rate in Ireland and as such sets the rate for Irish exposures on a quarterly basis, following consultation with the European Central Bank.  Further information is available on the Central Bank’s website.

The objective of the Other Systemically Important Institutions (O-SII) is to reduce the probability of failure of a systemically important institution. The buffer enhances the resilience of these institutions, which due to the scale or nature of their business are of systemic importance, by providing an additional layer of loss-absorbing capital. A higher capital requirement for these institutions acknowledges the greater impact that their failure would have.

Consistent with the purpose of the buffer and the wider capital buffer framework the O-SII buffer is fully available to banks to use during times of stress (e.g. the effects of the COVID-19 pandemic) to absorb the impact of the shock to the economy.

Other Systemically Important Institutions (O-SIIs) are institutions which are systemically important to the domestic economy or to the economy of the European Union (EU). An institution’s systemic importance is assessed based on (i) size, (ii) importance for the economy of the Union or of the relevant Member State, (iii) significance of cross-border activities, and (iv) interconnectedness of the institution or group with the financial system. Further information is available on the Central Bank’s website.

The mortgage measures were first introduced in February 2015 and are aimed at enhancing the resilience of both borrowers and the banking sector. The measures set limits on the size of mortgages that consumers can borrow through the use of loan-to-value (LTV) and loan-to-income (LTI) limits. The measures are reviewed annually by the Central Bank.  Further information is available on the Central Bank website.

Records of meetings of the Macro-prudential Measures Committee are available on the Central Bank’s website.

Please also see Explainer - What are the Mortgage Measures?