The impact of the COVID-19 pandemic on Ireland’s real economy has yet to fully materialise, according to the Central Bank of Ireland.

And the macro-financial outlook has deteriorated significantly as a result of the pandemic.

Downside risks

The risks posed to domestic financial stability stem from the sudden halt in domestic activity, further financial market stresses and structural vulnerabilities of a small, open economy exposed to the downside risks in the recovery of global demand. 

The Central Bank’s first Financial Stability Review (FSR) of 2020 outlines the key risks facing the financial system, the economy’s resilience and the policy actions being taken to safeguard financial stability

It describes the pandemic as an exceptional shock triggering the materialisation of long-identified risks to financial stability and a collapse in global economic activity. 

“The full transmission of these risks to the real economy and the financial system will take time. In response to the shock, policymakers have reacted with a range of fiscal, monetary, macro-prudential and micro-prudential actions to mitigate the risk of further amplification of the shock and enable the financial system to support households and businesses through this crisis,” the review says.

The main findings of the Financial Stability Review are:

• The risks posed to domestic financial stability stem from the sudden halt in domestic economic activity,
• The macro-financial outlook is intimately linked to the pandemic itself, including the success of the public health measures and medical advances to tackle it,
• Companies will require access to liquidity and, in some cases, solvency support to reduce the risk that the productive capacity of the economy is permanently damaged,
• The domestic banking system has already played a role in supporting liquidity needs of households and businesses so far in this crisis, including through payment breaks,
• COVID-19 will put pressure on banks’ financial position, but improved resilience, supported by recent policy actions, results in a banking system that is now better able to absorb, rather than amplify, such a shock,
• Market developments in light of COVID-19 underline the need to understand and address any structural vulnerabilities from parts of the market-based finance sector at a global level.

Governor Gabriel Makhlouf said: “Today’s publication sets out the implications of COVID-19 for domestic financial stability.

Shock

“The economic shock has quite simply been unprecedented in scale and speed, and the medium to longer-term impact has yet to fully materialise.

“However, going into this period, households, businesses, and the domestic banking system were in a significantly stronger position compared to the onset of the financial crisis a decade ago.

“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.”

Capital buffers 

He said the Central Bank has released capital buffers and is participating in the €1.35 trillion Pandemic Emergency Purchase Programme to provide additional liquidity and reduce funding costs in the economy. 

“We are also ensuring borrowers are treated consistently when availing of payment breaks. It is in the interests of everybody that the banking system plays a sustainable role in minimising the extent of the downturn and contributes to the recovery,” he said. 

“However, as we begin to take the first tentative steps out of the crisis we have already seen that it has had a significant negative impact on many households and small businesses. 

Struggle

“Some people will struggle to meet their financial commitments and some firms will not re-open.  Sustained and coordinated policy action will be required to reduce to the greatest extent possible the long-term effects of this crisis on people’s livelihoods and the economy as a whole,” the Governor said.