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IMF Country Report No. 22/293

IRELAND

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE ON MACROPRUDENTIAL POLICY FRAMEWORK AND TOOLS

September 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 August 31, 2022.

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Title page

IRELAND

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE

MACROPRUDENTIAL POLICY FRAMEWORK AND TOOLS

August 31, 2022

Prepared By

Monetary and Capital Markets Department

Contents

• Glossary

• EXECUTIVE SUMMARY

• INTRODUCTION

• INSTITUTIONAL FRAMEWORK

• A. Willingness to Act

• B. Ability to Act

• C. Effective Coordination and Cooperation

• SYSTEMIC RISK MONITORING

• SYSTEMIC RISKS AND MACROPRUDENTIAL TOOLS

• A. Broad-Based Vulnerabilities

• B. Vulnerabilities from Residential Housing and the Household Sector

• C. Vulnerabilities from the Corporate Sector

• D. Vulnerabilities from Bank Funding and Liquidity

• E. Vulnerabilities from the Non-Bank Sector

• F. Structural Vulnerabilities

• BOX

• 1. Housing Policies in Ireland

• FIGURES

• 1. Broad Credit Conditions

• 2. House Prices

• 3. House Prices at Risk

• 4. Mortgages

• 5. Household Balance Sheets

• 6. Mortgage Measures

• 7. NFC Financing

• 8. Bank Funding and Liquidity

• 9. CRE Market

• 10. Property Funds and CRE

• 11. CRE at Risk

• 12. Non-Bank Lending to SMEs

• 13. Structure of the Financial System

• TABLES

• 1. Recommendations on the Macroprudential Policy Framework

• 2. Main Macroprudential Instruments Available to the Irish Authorities

• 3. Current Macroprudential Settings

• 4. Mortgage Measures in Ireland

• 5. LTI Allowances Under the Mortgage Measures, 2021H1

• 6. LTV Allowances Under the Mortgage Measures, 2021H1

• ANNEX

• I. Growth-at-Risk Models

• References

Glossary

Executive Summary

Ireland is a small open economy that is part of a monetary union and has a major financial system. Within the Euro Area (EA), Ireland comprises a relatively small proportion of aggregate GDP (3.4 percent), of which a significant portion is attributable to foreign-owned multinational enterprises (MNEs). Yet, the Irish financial system holds assets of EUR 7.9 trillion, over 18 times GDP. Since monetary policy is carried out by the European Central Bank (ECB) for the entire EA, macroprudential policy has the potential to play a critical stabilizing role for the Irish financial system.

The Central Bank of Ireland (CBI) is responsible for macroprudential policy in Ireland, sharing some responsibilities with European institutions. The CBI is the authority for the purposes of ESRB Recommendation 2011/3 establishing the macroprudential mandate of national authorities under the European System of Financial Supervision (ESFS). The EU Capital Requirements Regulation and Directive (CRR/CRD) provides the CBI with certain macroprudential powers as the designated authority. The Central Bank (Supervision and Enforcement) Act 2013 provides the CBI with a broad power to issue regulations. Where it is in the interests of the proper and effective regulation of regulated financial service providers, the regulations may be used to achieve a macroprudential objective, for instance through borrower-based measures.

The macroprudential policy framework in Ireland has developed significantly since the 2016 FSAP. Within the CBI, the Financial Stability Directorate was established in 2016 to bring together responsibilities for macroprudential policy, resolution, and crisis management. The Macroprudential Measures Committee (MMC) was also established within the CBI in 2016 to advise on the regular review of macroprudential measures and make recommendations over the calibration of these measures. The Financial Stability Group (FSG), formed in 2017 as a non-statutory, inter-agency coordination mechanism, has improved cooperation at the domestic level.

The CBI has successfully implemented new macroprudential policy measures, including residential mortgage measures and macroprudential capital buffers. In February 2015, the CBI introduced loan-to-value (LTV) and loan-to-income (LTI) limits to increase the resilience of banks and borrowers to adverse shocks, as well as to dampen the feedback between credit and house prices. Empirical evidence shows that the measures have been working as intended, and they remain subject to annual review. The CBI has also made active use of its macroprudential toolkit for bank capital, including by introducing an additional buffer for other systemically important institutions (O-SII) in July 2019 and by releasing the countercyclical capital buffer in April 2020 in response to the COVID-19 shock.

The institutional framework is appropriate for the CBI to be able to act, but some areas can be strengthened. The CBI has a clear financial stability mandate. Decision-making on tools under the CBI’s power is divided between the Central Bank Commission and the Governor under advisement by the MMC. The CBI has broad powers to implement measures as relevant for financial stability, as well as broad information powers. Nevertheless, opening the MMC to external advisory members would align the committee with international best practice, strengthening diversity of perspectives and acting as a safeguard against the risk of potential future inaction bias.

The systemic risk monitoring framework is sophisticated and continues to develop but would benefit from closing data gaps and continuing to expand the framework for non-bank monitoring. The process for monitoring systemic risks is structured around the bi-annual production of the Financial Stability Review, facilitating an exchange of views at multiple stages of the development cycle. Completion of a dynamic macroprudential stress-testing framework would provide an additional analytical framework for quantifying the appropriate capital stance for the banking system to withstand adverse shocks, thereby informing the calibration of capital buffers. Expanding risk monitoring, including through international coordination, is important to strengthen the assessment of interactions between banks and investment funds, as well as filling gaps in commercial real estate (CRE) investment, including direct cross-border exposures.

Broad-based vulnerabilities are moderate, and risks from the real estate and non-bank sectors warrant continued attention.¹ The financial cycle is currently in a neutral position, but cyclical indicators suggest that the CCyB could be increased in the near term in order to respond to the upswing of the financial cycle. Households have come out of the COVID-19 pandemic with increased liquidity buffers, contributing to upward pressure in the residential real estate (RRE) prices. Irish-resident corporates continue to deleverage, but the withdrawal of policy support in 2022 will likely lead to rising NPLs and insolvencies. Accumulated savings, constrained supply, and accelerating construction costs are likely to intensify the current imbalance between housing supply and demand in the near term, leading to higher RRE prices and possible overvaluation. The CRE market has shown uneven recovery across sectors, with valuations of retail properties still below pre-pandemic levels.

Risks from non-banks are diverse. Irish property funds investing in real estate are largely financed by overseas investors, but a cohort of these funds have high levels of leverage relative to EU peers and a moderate liquidity mismatch. Non-bank lending to SMEs has been increasing, but a small share of non-bank lending (peer-to-peer and crowdsourced) is not included in the CCR.

The CBI has proposed a leverage limit and liquidity management guidelines for property funds, but details must be finalized. The CBI should consider counter-cyclical adjustments to leverage limits on property funds, more regular reporting requirements, and the tradeoff between timeliness, in the event that the limit is breached, and the risk of provoking fire sales in returning a fund in breach to compliance. Conditional on policy leakages, the CBI may also consider broader measures to safeguard the resilience of CRE finance and mitigate macro-financial feedback.

In the absence of an international framework to address non-bank risks, the CBI should continue to work with European institutions. Various data gaps, including direct cross-border investments into CRE, can only be closed through international coordination. The CBI has also been innovative in proposing the activation of macroprudential measures for non-banks as provided for in the AIFMD regulation, but the lack of reciprocity increases the risk of policy leakage. The CBI should continue to work through European institutions to address cross-border issues and policy leakage, in the context of developing a non-bank macroprudential framework.

^{Table 1.}

Ireland: Recommendations on the Macroprudential Policy Framework

^*C = Continuous; I = Immediate (within one year); ST = Short Term (within 1-3 years); MT = Medium Term (within 3-5 years).

^**H = High; M = Medium; L = Low.

^{Table 1.}

Ireland: Recommendations on the Macroprudential Policy Framework

Recommendations	Agency	Timing*	Priority**
1. Open the MMC to external advisory members to strengthen diversity of perspectives and as a safeguard against the risk of potential future inaction bias. (¶11)	CBI	ST	H
2. Ensure that government policies with potentially material financial stability implications are presented and discussed in the FSG. (¶18)	DoF	C	L
3. Review the relative utility of systemic risk measures, developing and streamlining new indicators as needed. (¶23)	CBI	C	L
4. Prioritize work on the dynamic macroprudential stress-testing framework, including to inform the calibration of cyclical capital buffers. (¶24)	CBI	I	H
5. Enhance systemic risk monitoring to deepen understanding of interconnections between the bank and non-bank sectors. (¶26)	CBI	ST	M
6. Expand monitoring of non-bank lenders beyond those engaged in mortgage activities. (¶27)	CBI	ST	M
7. Build on work undertaken at the domestic and international level to address CRE data gaps and to enhance understanding of the type of financing and ownership of the invested commercial property market in Ireland. (¶29)	CBI, CSO	MT	H
8. Monitor possible leakages from unsecured credit and be ready to expand borrower-based measures to include DTI/DSTI limits. (¶54)	CBI	MT	M
9. Strengthen the resilience of property funds by introducing the proposed macroprudential leverage limit and liquidity management guidance, while adjusting the leverage limit countercyclically. (¶73)	CBI	I	H
10. Broaden the bank, non-bank, and borrower-based macroprudential toolkit aimed at mitigating CRE market vulnerabilities as needed. (¶75)	CBI	MT	M
11. Work with European institutions to develop macroprudential tools targeting risks from non-banks, including for leakages and cross-border issues. (¶81)	CBI, DoF	MT	H

^*C = Continuous; I = Immediate (within one year); ST = Short Term (within 1-3 years); MT = Medium Term (within 3-5 years).

^**H = High; M = Medium; L = Low.

View Table

^{Table 1.}

Ireland: Recommendations on the Macroprudential Policy Framework

Recommendations	Agency	Timing*	Priority**
1. Open the MMC to external advisory members to strengthen diversity of perspectives and as a safeguard against the risk of potential future inaction bias. (¶11)	CBI	ST	H
2. Ensure that government policies with potentially material financial stability implications are presented and discussed in the FSG. (¶18)	DoF	C	L
3. Review the relative utility of systemic risk measures, developing and streamlining new indicators as needed. (¶23)	CBI	C	L
4. Prioritize work on the dynamic macroprudential stress-testing framework, including to inform the calibration of cyclical capital buffers. (¶24)	CBI	I	H
5. Enhance systemic risk monitoring to deepen understanding of interconnections between the bank and non-bank sectors. (¶26)	CBI	ST	M
6. Expand monitoring of non-bank lenders beyond those engaged in mortgage activities. (¶27)	CBI	ST	M
7. Build on work undertaken at the domestic and international level to address CRE data gaps and to enhance understanding of the type of financing and ownership of the invested commercial property market in Ireland. (¶29)	CBI, CSO	MT	H
8. Monitor possible leakages from unsecured credit and be ready to expand borrower-based measures to include DTI/DSTI limits. (¶54)	CBI	MT	M
9. Strengthen the resilience of property funds by introducing the proposed macroprudential leverage limit and liquidity management guidance, while adjusting the leverage limit countercyclically. (¶73)	CBI	I	H
10. Broaden the bank, non-bank, and borrower-based macroprudential toolkit aimed at mitigating CRE market vulnerabilities as needed. (¶75)	CBI	MT	M
11. Work with European institutions to develop macroprudential tools targeting risks from non-banks, including for leakages and cross-border issues. (¶81)	CBI, DoF	MT	H

^*C = Continuous; I = Immediate (within one year); ST = Short Term (within 1-3 years); MT = Medium Term (within 3-5 years).

^**H = High; M = Medium; L = Low.