gabriel makhlouf : publication of the financial stability review 2020 : 1 remarks by mr gabriel makhlouf, governor of the central bank of ireland, on the publication of the financial stability review 2020 : 1, dublin, 16 june 2020. * * * this afternoon we are publishing our latest semi - annual financial stability review ( fsr ). the fsr is one of the main ways we communicate our thinking on the risks facing the economy and financial system, how well the financial system as a whole can face those risks, and the policy actions that we are taking ( among others ) to safeguard financial stability and ensure the financial system supports households and businesses in a sustainable way. our aim remains to have a resilient financial system that can absorb and not amplify adverse shocks, one that performs its essential function to support the real economy through both good times and bad. i think it is not an over - statement if i say that developments so far in 2020 underline the necessity of that approach. covid - 19 has been a public health crisis the likes of which almost none of us have seen in our lifetime. it has also brought in its wake an economic shock unprecedented in scale and speed. and it has been a test of the financial system like no other in the last decade. unlike the experience of a decade ago, the financial system is not the origin of the current challenges but, like the rest of the economy, it is affected by them. we are perhaps only at the end of the beginning of seeing those challenges emerge. as we have taken stock of what this means for domestic financial stability in the fsr, i think there are three key messages emerging. first, the speed, size and pervasive nature of the economic shock have presented both immediate challenges and tighter financing conditions, as well as a sharp deterioration in the macro - financial outlook, with further downside risks for households, businesses, the public finances and the financial sector. second, households, businesses and the financial system have entered into the current phase in a more resilient position compared to the onset of the financial crisis a decade ago. indeed, the domestic banking system has played role in supporting the liquidity needs of households and businesses so far in this crisis, including through payment breaks. looking ahead, the banking system will be making losses. the capital buffers we have asked banks to build up in recent years are now there to absorb those losses. but, of course, that resilience

i would like to mention briefly is the impact of the directive on business models or, more narrowly, corporate structures. as i have mentioned, capital optimisation will inevitably be a key theme for the management of companies impacted by the directive. in addition to the use of models, revisions to corporate structures are to my mind likely to be a further avenue of exploration. in particular, in ireland we see considerable interest in the so called hub and spokes model. this involves choosing a single european jurisdiction as the location for the hub operating company and conducting pan european insurance business on a branch basis throughout various eu countries. as necessary, existing subsidiaries outside of the hub country are therefore transferred into branches. this has the dual advantage of consolidating operations, thereby reducing costs through economies of scale, and also crucially of optimising capital, as capital is no longer fragmented in each individual subsidiary. there are some prominent examples of the hub and spokes structure in europe involving ireland as the choice of hub. we will have to see whether this trend continues or not, although as i say there appears to be a compelling logic behind it. a challenge for the supervisor is the effective supervision of such structures. for our part, our starting proposition that the hub must have substance and be able to deploy effective controls over the operations of its branches. then, as a supplement, as a supervisor we too will assess branch operations directly or through the use of skilled persons such as auditors and consultants. finally there is a significant challenge of coordination between both home and host supervisors to ensure that all interested stakeholders are kept well informed. at the central bank of ireland we are very committed to ensuring that the appropriate regulatory framework is in place for hub and spoke operations and that our supervisory resources are adequate to the task of overseeing such operations. it will be interesting to see whether this model will grow as solvency ii gets closer to implementation. bis central bankers ’ speeches i have by now given you a sense of where solvency ii stands in the implementation process and a few of the key issues that are currently being debated or considered. let me conclude with a few words about the equivalence process and where bermuda stands. solvency ii requires that insurers from third country jurisdictions must be subject to a regulatory framework that is broadly equivalent to that within europe itself. absence of such an equivalence finding provides the prospect of a more punitive solvency treatment for firms from such jurisdictions. bermuda, along with switzerland and japan, is in the first