Central Bank of Ireland publishes financial stability assessments of the non-bank sector

• A financial stability assessment of Irish hedge funds concludes that the diversity of the sector, and its modest market footprint, limit systemic vulnerabilities.
• A separate assessment focused on open-ended funds shows that the availability of tools to manage liquidity is now widespread, but with further scope to increase use.
• Strengthening the financial stability lens in the regulation of the non-bank sector has been – and continues to be – a priority for the Central Bank.

Speaking at an Irish Funds event, Deputy Governor Madouros outlined the findings of two in-depth assessments recently concluded by the Central Bank: one evaluating financial vulnerabilities in the Irish hedge fund sector, and another examining liquidity management tools by open-ended funds in Ireland.

Irish hedge fund sector

Published today, a financial stability assessment of Irish hedge funds found that the sector (PDF 1.4MB), which manages approximately €400 billion in assets, is unlikely to pose systemic risks on its own, given its relatively limited market footprint in core global markets.

“The sector is large, but diverse. And that diversity, in and of itself, supports resilience,” Deputy Governor Madouros said. “The market footprint of the Irish hedge fund sector is modest, limiting systemic impacts.”

However, the analysis reveals vulnerabilities in certain hedge strategies that could generate financial stability risks, if correlated with hedge funds in other jurisdictions that follow similar strategies and have similar exposures.

“A key outcome of our work will be engagement with authorities internationally, to deepen our collective assessment of the global non-bank sector. The insights from this work will also strengthen our ongoing surveillance of hedge funds – because systemic vulnerabilities are not fixed, they evolve over time”, Deputy Governor Madouros said.  

Availability and use of Liquidity Management Tools by open-ended funds

The Central Bank also published analysis on the availability and use of liquidity management tools by Irish-domiciled investment funds.

In 2023, the Financial Stability Board published revised policy recommendations on liquidity risk management by open-ended funds. A key focus of these recommendations was on the availability and use of certain types of liquidity management tools (LMTs).

“Around 85% of open-ended funds in Ireland have at least one such tool available. This is a significant increase over the past half decade,” Deputy Governor Madouros said. “And that is a positive outcome. It means that asset managers are better equipped to mitigate the effects of liquidity mismatches.”

The survey also highlighted that the use of these tools lags availability. Deputy Governor Madouros said “This is an area where we want to continue to see a shift in outcomes: towards greater use, and greater consistency in use, of these liquidity management tools.”

To support that, the Central Bank is also publishing today a document outlining good practices in the use of these tools. (PDF 307.7KB) “Ultimately, the aim is to translate the policy intent of the FSB recommendations, as well as the updated requirements in the European framework, into real-world outcomes”.

Strengthening resilience of non-bank finance

Deputy Governor Madouros emphasised that strengthening the financial stability lens in the oversight of the non-bank sector remains an important priority for the Central Bank.

“As the composition of the financial sector itself is evolving, our approach also needs to adapt,” Deputy Governor Madouros said. “Following progress with a number of policy initiatives at a global and domestic level, our focus at the Central Bank is now shifting towards effective implementation and strengthened surveillance.”

“The goal is collective resilience. Not for its own sake, but as a foundation that enables the financial system to weather shocks, serve the economy, and seize the opportunities ahead,” he said.

ENDS