The Central Bank says that, while the Irish economy has proven resilient, risks to financial stability are “rising and becoming more visible”.

Its second Financial Stability Review of 2023 warns that the full impact of higher interest rates “still lies ahead”, while there is a risk of further inflationary shocks to the world economy.

The review points out that commercial-property prices in Ireland have fallen by more than 20% since mid-2020, while there are tentative signs of a slowdown in export flows and corporation-tax receipts after years of exceptional growth.

'Moderate’ rise in insolvencies

The regulator says that it continues to view its mortgage rules, which were changed last year, as “a permanent feature” of the market and “does not foresee regular changes to their calibration”.

The review says that revenue growth has supported domestic businesses, but adds that “pockets of vulnerability” are visible in businesses that have struggled since the pandemic.

It notes a “moderate” increase in the insolvency rate, and the emergence of early arrears on business loans.

Bank buffer unchanged

Governor Gabriel Makhlouf (pictured) said that, while bank profits had continued to increase strongly, this would 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,” he warned.

The review notes, however, that commercial-property lending by Irish banks has so far been “relatively prudent”, reducing the potential impact of a shock in the sector on the Irish economy.

The regulator is to maintain the level of capital that the banks must hold to deal with potential financial shocks.

It is keeping the Countercyclical Capital Buffer (CCyB) rate at 1.5%, having raised it from 1% earlier this year.

PTSB upgraded

“In light of the changing banking landscape, Permanent TSB has been designated a ‘systemically important institution’,” the review says, meaning that it will have to hold extra capital in reserve.

A similar designation for Ulster Bank has been removed as it continues its exit from the market.

The Central Bank has also launched a public consultation on measures aimed at reducing the risks associated with certain sterling-denominated funds authorised in Ireland. The regulator had previously expressed concerns about the impact of volatility in yields linked to British bonds on the sector.