Ireland’s banks are “adequately capitalised” but are still vulnerable to an economic downturn, the Central Bank governor has said.
Philip Lane was speaking at the Institute for International and European Affairs today, discussing the bank stress tests, the macroeconomic outlook for Europe and Ireland, and the impact of Brexit.
His comments came after stress tests by the European Banking Authority (EBA) showed that both AIB’s and Bank of Ireland’s capital would fall significantly in the event of a prolonged economic downturn, with AIB the worst affected.
Mr Lane noted that the EBA’s stress tests of the two main banks was based on recent experience. As the Irish banks had been through a major shock during the crash, this meant that the capital loss in the adverse scenario assumed in the test was “inevitably more pronounced for Irish institutions” than for banks in other countries, he said.
Underlying message
Mr Lane said the underlying message of the tests is that the two main banks “are adequately capitalised but remain vulnerable to a downturn, especially in relation to the continued workout of problem loans and the sustainability under stress of current profitability levels”.
He noted that a separate assessment of the financial sector by the IMF had a broadly positive assessment of the banks and of financial regulation here.
Turning to the economy, he said Ireland was still on track for a broad-based recovery, but much remained to be done in terms of addressing the effects of the crisis. Mr Lane said much of the ground lost during the crisis has been recovered, although he noted living standards and employment were still below pre-crisis levels.
He pointed to the Central Bank's projected output growth rates of 4.9 per cent and 3.6 per cent for 2016 and 2017, despite the expected impact of the British vote to leave the European Union on the Irish economy.
Mr Lane said that he would chair the special consultative committee being set up to examine Irish economic statistics in the wake of the recent data showing a 26 per cent GDP rise in 2015. In the long term he said there was a case for changing international conventions to take better account of the activities of multinationals. However, the committee would consider in the short term whether a supplementary series of data could better measure performance trends here.
Brexit
On Brexit, he said although the Irish economy was less reliant on the UK for trade compared with recent decades, the UK was still an important market and the agri-food and tourism sectors were particularly exposed. He also warned the economic and financial links to UK meant Ireland was still vulnerable to Brexit-related reversal in international financial sentiment. The initial reaction in financial markets had been relatively calm, he said, but there was no guarantee that this would continue, particularly if fears of a “ hard” Brexit became a reality.
“Despite some initial fears, we have yet to see the operation of more powerful transmission mechanisms by which Brexit triggers a more general international decline in confidence indicators and/or initiates a ‘risk-off’ phase in the international financial system that would involve a general repricing of risk premia, a decline in asset values and a tightening in financial conditions,” he said.
“Rather, the international markets have initially focused on the likelihood of a prolongation of low policy rates, with a visible drop in the yields in many sovereign bond markets (and a related reduction in bank equity values).”
However, he said the emergence of the potential new relationship between the UK and the EU over the coming months carried a continuous risk of triggering adverse market developments if the British exit from the EU was likely to be a “harder” form.
Mr Lane also said work had started on a number of recommendations from the International Monetary Fund to help improve transparency and increase resilience in the Irish financial sector.
