gabriel makhlouf : publication of the financial stability review 2023 : 1 opening address by mr gabriel makhlouf, governor of the central bank of ireland, on the publication of the financial stability review 2023 : 1, dublin, 7 june 2023. * * * welcome to the central bank for the release of the first financial stability review of the year. a recurring theme of these reviews in recent years has been the sheer level of uncertainty owing to the interlocking shocks of the pandemic, russia's war against ukraine and the current inflationary episode alongside the speed with which these events have unfolded and transmitted to across the globe. the first half of this year has been no different. the global economy has been in an ongoing period of adjustment to these shocks. given inflation remains far too high, the ecb began the process of normalising its monetary policy in december 2021, including by raising interest rates last july. a range of signals from across the globe tell us that more work is needed from monetary policy in the short run. core inflation in particular has proved more stubborn than many would have predicted. this adjustment has been made more turbulent by vulnerabilities built up in segments of the global financial system in the decade or so of low interest rates that preceded this inflationary episode. this has been evidenced most forcefully in recent months by the failures of a number of regional banks in the us as well as the takeover of credit suisse, a global systemically important bank. while each of these institutions had its own particular frailties, i think a fair synopsis is that in each case we have been reminded of the importance of resilience in the banking sector, including through good governance and robust risk management practices. the global banking reforms since 2008 are providing a level of system - wide resilience, both in terms of solvency and liquidity, that is serving us well. as an example, the spillovers from the events in march to depositor and market perceptions of banks in the euro area and in ireland have been limited. irish banks are in a very different position to those banks that experienced difficulties since march. more stringent regulation, our macroprudential policy measures, and banks'own risk management practices are all contributing to a banking sector that is much better able to absorb adverse shocks than in the past. nevertheless, we must not be complacent and it is of utmost importance for all actors to monitor and to ensure the soundness

part of our reflections on the future of macroprudential policy after the covid - 19 pandemic. these challenges relate to the creation of what we call “ macroprudential space ” and to the complementarities between monetary policy and macroprudential policy in a monetary and banking union. as i will argue, addressing these two challenges will increase the effectiveness of the macroprudential framework and strengthen the resilience of the euro area banking sector to major unexpected shocks in the future. macroprudential space the experience of the initial phase of the pandemic illustrated the importance of having sufficient releasable capital buffers in the banking sector. when the pandemic struck in early 2020, macroprudential authorities in the euro area had little room for manoeuvre to release macroprudential capital buffers. only seven euro area countries ( including the three home countries of my fellow panel members ) had enacted or announced a countercyclical capital buffer requirement above zero. in the euro area banking sector as a whole, countercyclical 1 / 3 bis central bankers'speeches capital buffer requirements accounted for only 0. 2 % of risk - weighted assets at the end of 2019. by contrast, structural buffer requirements, comprising the capital conservation buffer, systemic risk buffers and buffers for systemically important institutions, stood at 3. 4 %. unlike the countercyclical capital buffer, structural buffers were in principle not designed to be releasable. but, unlike minimum requirements, buffers are there to absorb unexpected losses and to help sustain lending under stress conditions. in short, the fact that only a tiny fraction of capital buffers has been explicitly releasable limited the macro - financial stabilisation function of macroprudential policy. banks ’ reluctance to dip into their existing buffers seems to be driven by a desire to avoid market stigma and to keep some distance from the threshold for automatic restrictions on distributions. this could be an area of concern at the system - wide level, given that recent empirical evidence of bank behaviour during the pandemic suggests that banks are less active in maintaining credit supply if they operate close to the combined buffer requirement. a contraction of the credit supply could compromise the recovery and increase the risks to financial stability. recent research by ecb staff further suggests that having higher countercyclical capital buffers at the onset of the pandemic, which could have been released during the current crisis, would