“Pandemic recovery has continued, but the risk environment is shifting” - Governor Makhlouf launches Central Bank’s Financial Stability Review 2021:2

25 November 2021 Press Release

Central Bank of Ireland

  • The economic recovery from the pandemic shock has continued, but uncertainty remains given the recent resurgence of the virus across Europe.
  • Medium-term vulnerabilities have continued to build, stemming from developments in the financial markets, higher levels of global indebtedness and growing price pressures in the global economy.
  • In light of the ongoing framework review, the LTI and LTV limits and level of allowances will remain unchanged. Operational changes will be made to clarify the interaction of the mortgages measures with the ‘First Home’ shared equity scheme and to implement a ‘carry-over approach’ for allowances.

The Central Bank of Ireland has today (25 November) published the second Financial Stability Review (FSR) of 2021. The FSR outlines key risks facing the financial system and the Central Bank’s assessment of the resilience of the economy and financial system to adverse shocks.

The Financial Stability Review indicates: 

  • While uncertainty around the path of the pandemic remains, the economic recovery has continued over the past six months, reducing some of the near-term macro-financial risks.
  • More medium-term vulnerabilities have been building up, stemming from developments in global financial markets, higher levels of indebtedness internationally, and growing price pressures and capacity constraints in some sectors.
  • The impact of the pandemic on the financial position of borrowers and the banking sector has started to dissipate as the economy has re-opened.
  • The Counter-Cyclical Capital Buffer (CCyB) remains at 0%, in line with previous guidance and to continue to enable the banking sector to lend to support the economic recovery. However, if the economic recovery is not materially disrupted by the resurgence of the virus, the Central Bank expects to announce a gradual rebuilding of macroprudential capital buffers during 2022, to safeguard resilience against future risks.

Governor Gabriel Makhlouf said the latest review comes at a moment of re-emergence of public health concerns around the path of the pandemic, underlining the inherent uncertainty of the current environment. He added: “Our overall assessment of the macro-financial environment is that near-term macro-financial risks have receded since our last review. The vaccination programme has had a supportive effect on economic activity. Indeed, we are now in an environment where medium-term risks of imbalances are beginning to build, both domestically and globally. At the same time, we have seen a continued increase in global levels of indebtedness, especially for governments and companies. Domestically, the labour market recovery during the second half of the year has been strong and has been associated with sectoral labour shortages, while house prices are now rising at rapid levels driven by an imbalance between supply and demand.”

Governor Makhlouf said inflation is “now running well ahead of many developed economy central bank targets.” He explained that “while our baseline scenario is that these inflationary pressures will gradually fade, we must also acknowledge the uncertainty involved and the prospect of the risks that would ultimately be associated with a more prolonged inflationary period.”

On resilience, Governor Makhlouf said the impact of the pandemic-related shock on the financial position of lenders and borrowers has started to dissipate. He explained “the true financial health of the most affected businesses will only become apparent over coming months and years, as policy support and forbearance are gradually removed.” Governor Makhlouf went on to say that forecasts suggest emergent financial distress “will be of a magnitude that can be absorbed without significant adverse knock-on effects in the financial sector or the economy, testament to the success of the rapid policy support deployed from March 2020 to avoid scarring effects of the pandemic on the economy.”

The FSR also contained the latest review of the Central Bank’s macroprudential policy tools:

Countercyclical Capital Buffer (CCyB)

In line with previous guidance, the Countercyclical Capital Buffer (CCyB) rate will remain at 0 per cent, to enable banks to continue to lend to support the economic recovery. If the economic recovery is not materially disrupted by the resurgence of the virus, the Central Bank expects to announce a gradual rebuilding of the CCyB in 2022. The annual review of the capital buffers for systemically-important institutions (O-SII) has resulted in no policy change.

Annual Review of the Mortgage Measures

The 2021 annual review of the mortgage measures has taken place in parallel with the ongoing wider framework review of the measures. The Central Bank has decided the calibration of the mortgage measures will remain unchanged at this time, in light of the ongoing framework review. However, a number of operational changes will be implemented:

  • A ‘carry-over’ system will be introduced for managing allowances. This will permit lenders to carry over any unused allowance share for use in the first half of 2022, on the provision that those loans were approved in 2021. This will apply to all allowance types across both Primary Dwelling Home (PDH) and Buy-to-Let (BTL) lending, and will take effect later this year. This decision reflects the challenges to the operationalisation of the allowances during the uncertainty posed by the pandemic.
  • The measures will be amended to clarify the ability of retail banks to participate in the ‘First Home’ shared equity scheme. This reflects our overall judgement based on financial stability considerations, including the characteristics of this form of financing, other safeguards in place such as bank capital, as well as the initial scale and scope of the scheme. Further information on the financial stability considerations can be found in this Financial Stability Note published today.

Mortgage Measures Framework Review

The Central Bank’s wider framework review of the mortgage measures is ongoing with extensive analysis and stakeholder engagement. The review has been informed by our online survey, which engaged more than 4,000 individuals, and a number of stakeholder listening events held during the summer.

As part of the process, a public consultation will be launched in December and we will invite the public and broader stakeholders to provide us with feedback on a range of specific questions relating to the framework. The consultation will remain open into the first quarter of 2022.

The Central Bank expects to complete the framework review during the second half of 2022.

Macroprudential measures for property funds

The Central Bank is today launching a consultation on a set of measures to limit leverage and liquidity mismatches for property funds. These entities are now a systemic part of the Irish commercial real estate market, holding more than 40% of the estimated investable stock. The proposed measures aim to safeguard the resilience of the Irish resident property fund sector, so that this form of financial intermediation is better able to absorb – rather than amplify – adverse shocks. The full proposal is outlined in the Consultation Paper, and feedback on these proposals is invited until February 1, 2022.


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 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. More information on the Mortgage Measures Framework Review can be found here.

The ‘carry-over’ system will permit, within the specified limits of the measures, lenders who have allowance lending which has not been allocated in a given year to utilise this in the first half of the following year, on the condition that such lending was fully approved in the given year. For a loan to be considered approved the loan will be fully underwritten and a formal letter of offer will have been issued to the borrower, but the loan would not yet have gone to drawdown.

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. A positive CCyB rate is generally subject to a phase-in period whereby it would take effect 12-months after announcement. View further information on CCyB.

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.

Records of meetings of the Macroprudential Measures Committee are available here.