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IMF Country Report No. 22/215

IRELAND

FINANCIAL SYSTEM STABILITY ASSESSMENT

July 2022

This paper on Ireland was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on June 15, 2022.

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IRELAND

FINANCIAL SYSTEM STABILITY ASSESSMENT

June 15, 2022

KEY ISSUES

Context: Ireland has considerably strengthened financial sector regulation and supervision since the 2016 FSAP, aided by the ECB/SSM, and is working with European and international regulators to strengthen oversight of the large market-based finance (MBF) sector. This strengthening is evidenced by a successful navigation through the challenges of Brexit and the pandemic. Despite global headwinds, Ireland is exiting the pandemic with strong economic growth and a highly capitalized and liquid banking system. The financial system has grown rapidly and in complexity, especially after Brexit, and Ireland has become a European base for large financial groups. The MBF sector has grown to the second largest in Europe, with global interlinkages.

Findings: Risks to financial stability emanate from a much larger and more complex financial system, emergent risks from non-bank lending, Fintech, and climate change, as well as legacy issues from the global financial crisis (GFC) which weigh on the performance of domestic retail banks. Impediments to corporate insolvency and repossession of mortgage collateral slow NPL resolution and lead to a high cost of credit. The potential impact of the unwinding of public pandemic policy support and global shocks, against the backdrop of the war in Ukraine, may increase pressures on asset quality in the near term. The extent of linkages of a segment of the MBF sector with the domestic economy remains opaque. Stress tests indicate that the financial system is broadly resilient to severe macro-financial shocks.

Policy advice: Recognizing the progress made and the identified risks, the recommendations reflect five broad themes: i) enhancing supervisory and enforcement powers and practice; ii) maintaining the resources and capacity to regulate and supervise a larger and more complex financial system; iii) focusing supervisory efforts increasingly on cross-border aspects and in new areas including climate change; iv) comprehensively identifying financial linkages to the economy and promoting greater stability in the large MBF sector; and v) fully addressing legacy policies and scarring from the GFC.

Approved By

May Khamis and Laura Papi

Prepared By

Monetary and Capital Markets Department

• The team was led by Paul Mathieu, and included Tumer Kapan (Deputy Mission Chief), Vassili Bazinas, Xiaodan Ding, Tara Iyer, David Rozumek, Richard Stobo (all MCM); Anna Shabunina (EUR); Chanda DeLong (LEG); Timo Broszeit and David Scott (External Experts). Valuable inputs on AML/CFT issues were received from Chady El Khoury, Ivana Rossi, Maksym Markevych, and Indulekha Thomas (all LEG). Emeric Lai Tim provided research assistance and Ramanjeet Singh provided administrative assistance. The FSAP team also collaborated closely with the EUR Article IV Consultation team.

• The mission met with Central Bank of Ireland Governor Gabriel Makhlouf, Secretary General of Finance John Hogan, other high ranking public officials, senior representatives of various private sector entities, including local and foreign banks, investment funds, fintech firms, insurance companies, rating agencies, auditors, and industry associations.

• FSAPs assess the stability of the financial system as a whole and not that of individual institutions. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.

• Ireland is deemed by the Fund to have a systemically important financial sector according to SM/10/235 (9/16/2010), and the stability assessment under this FSAP is part of bilateral surveillance under Article IV of the Fund’s Articles of Agreement.

Contents

• Glossary

• EXECUTIVE SUMMARY

• BACKGROUND

• A. Macrofinancial Developments

• B. Financial Sector Landscape

• SYSTEMIC RISK ASSESSMENT

• A. Macrofinancial Challenges

• B. Systemic Risks

• C. Banking Sector Solvency and Liquidity

• D. Banking Sector Interconnectedness

• E. Interconnectedness of the MBF Sector

• F. Investment Fund Liquidity Analysis

• G. Insurance Sector Solvency and Liquidity

• H. Climate Risk Analysis

• FINANCIAL SECTOR OVERSIGHT

• A. Macroprudential Policy Framework

• B. Microprudential Oversight

• FINANCIAL SAFETY NET AND CRISIS MANAGEMENT

• FINTECH SECTOR

• A. An Evolving Landscape

• B. Regulatory and Supervisory Approach

• INSOLVENCY AND CREDITOR RIGHTS

• FINANCIAL INTEGRITY

• AUTHORITIES’ VIEWS

• FIGURES

• 1. GDP Growth

• 2. Household Sector Developments

• 3. COVID-19 Sectoral Impact

• 4. Banking Sector Indicators

• 5. Financial Sector Assets

• 6. MBF Sector Structure

• 7. Banking Sector Segments

• 8. Insurance Sector

• 9. Take-up of COVID-19 Loan Moratoria

• 10. Credit Developments and Leverage

• 11. Property Prices

• 12. Solvency ST Scenarios

• 13. Results of Scenario-based Solvency Stress Test

• 14. Results of Liquidity Stress Test

• 15. Interconnectedness Analysis

• 16. Insurance Solvency ST—Solvency Impact

• 17. Insurance Sector Liquidity Risk Analysis

• 18. Bank Exposure to Climate Risks

• 19. Results of Banking Sector Climate Risk Analysis

• TABLES

• 1. FSAP Key Recommendations

• 2. Selected Economic Indicators

• 3. Financial Soundness Indicators

• 4. Financial Sector Structure

• APPENDICES

• I. Status of Key Recommendations of 2016 FSAP

• II. Risk Assessment Matrix

• III. Banking Sector Stress Testing Matrix (STeM)

• IV. Insurance Sector Stress Testing Matrix (STeM)

• V. Investment Fund Liquidity Stress Testing Matrix (STeM)

Glossary