Gabriel Makhlouf: Publication of the Financial Stability Review 2023:2
Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, on
the publication of the Financial Stability Review 2023:2, Dublin, 23 November 2023.
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Welcome to the Central Bank of Ireland for the release of the second Financial Stability
Review of 2023 .
Our assessment of the financial stability outlook continues to be shaped by the ongoing
adjustment of the global economy to higher interest rates. Since our last Review in
June, inflation has fallen in many economies, but we remain some way from our target.
We have not yet seen the full extent of the lagged effect of monetary policy actions on
borrower finances or economic demand. In a setting where long-term interest rates
have risen since June, despite some moderation in recent weeks, global financial
markets remain vulnerable to bouts of volatility.
The global economy also remains vulnerable to further shocks. We have already seen a
pandemic and a war in Europe. Humility is therefore a prerequisite to good
policymaking. Geopolitical tensions, signs of fragmentation of the global economy and
extreme weather events are three potential sources of future shocks with
consequences for policy. Against this backdrop, it is imperative that we maintain
resilience while we have scope to do so.
What does this mean for an open economy like Ireland? This question is top of mind for
us at the Central Bank. The Irish economy has continued to expand since the last
Review, albeit at a slowing pace. The labour market remains tight, with strong wage
growth. However, we must also acknowledge that a range of previously-flagged risks
are now closer to materialising than in June. Commercial real estate prices have now
fallen more than 20 per cent since mid-2020, while slowing exports and corporation tax
receipts may mark the beginnings of a weaker global economy feeding its way through
to Ireland. The lagged effect of monetary policy actions remains a source of uncertainty
for the domestic economy, as the financial system continues to pass through higher
interest rates gradually to borrowers and depositors.
Despite these emerging signals of risks crystallising, the domestic household, business
and banking sectors continue to demonstrate resilience in aggregate, with a strong
labour market being a key factor. Low levels of debt, prudent and appropriate
macroprudential policy, and the fixed borrowing costs for many are also supporting
resilience to the shock. Again, we must now acknowledge that, when compared to the
last Review, the early signs of financial challenges are starting to come into view in
pockets of the household and business lending markets. Anyone experiencing financial
distress should contact their lender at the earliest opportunity.
Bank profitability, driven by growth in interest margins, has risen rapidly this year. We
must be clear-eyed in our assessment that this will not last forever. There are significant
risks to the outlook, including increases in financial distress, a repricing in global and
local commercial real estate markets, weakening loan growth and increased funding
costs. In light of these headwinds, this is a time to be prudent.
I now turn to macroprudential policy which is aimed at supporting the resilience of the
financial system.
On bank capital, we have concluded that it is appropriate to maintain the countercyclical
capital buffer (CCyB) at 1.5 per cent, at a time when broad, systemic risks have not
materialised, while domestic developments do not point to a build-up of macro-financial
imbalances. A key feature of the CCyB is that, if a shock were to hit the economy, its
release would better enable the banking system to absorb losses and facilitate a
sustainable flow of credit to the economy. We also require additional bank capital for
those institutions whose failure could have wider systemic consequences. Reflecting
structural changes in the Irish banking system over the past two years, today I am
announcing that this additional capital to reflect systemic importance is no longer
required of Ulster Bank, but is being required of PTSB.
The mortgage measures remain a central pillar of our financial stability policy toolkit.
Lending patterns for the first half of this year suggest the framework continues to
achieve its aim of promoting sustainable mortgage lending. Our refreshed framework is
resulting in more borrowing beyond the previous limits, but - at the same time - we
have seen lending at higher levels of indebtedness fall as lenders have tightened their
own lending standards, in light of the cost of living shock and higher interest rates.
Overall, we judge that the refreshed mortgage measures framework has been operating
in a manner that is consistent with our objectives.
Finally, on our ongoing policy work to safeguard the resilience of non-bank financial
intermediation, we are today publishing a consultation paper on measures to enhance
the steady state resilience of Irish authorised sterling denominated liability driven
investment funds. Given the cross-border nature of these funds, we have sought to
ensure international coordination in codifying these measures, as exemplified by the
fact that the Commission de Surveillance du Secteur Financier(CSSF) in Luxembourg is
also publishing a similar consultation paper on LDI funds. Given the international nature
of these funds, such coordination is important to ensure the effectiveness of these
measures.
We also continue to progress our work on the phased implementation of the
macroprudential measures for Irish property funds announced last year. And in addition
to our work on property funds and LDI funds, we continue to work with international
partners to develop and operationalise the broader macroprudential framework for the
funds sector. We are also considering feedback received to our Discussion Paper on an
approach to macroprudential policy for the sector. The deadline for feedback closed last
week and a feedback statement will be published next year.
Thank you for joining us this morning. I will hand you over to Director of Financial
Stability Mark Cassidy to take us through the report, before answering your questions.