## 1irlea2022003

## Source details

**Canonical URL:** [1irlea2022003](https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2022/english/1irlea2022003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2022/english/1irlea2022003.pdf.json)

---

### Executive summary — Key messages
- Ireland is a small open economy with a major international financial center featuring extensive cross-border linkages, mostly through the MBF sector.
- Exceptional economic and financial sector growth over the past decade, recovering from the GFC; Brexit and a favorable tax regime drove growth in MNE-driven exports and financial sector complexity.
- Retail banks have struggled with low credit demand, post-GFC scarring and legacy policies, and low collateral recovery; non-bank lenders and fintech firms have been growing rapidly and taking market share from retail banks.
- The macroprudential framework is sound and has been up to the increased challenges, but authorities need to keep pace with a large, complex, and globally interconnected financial system and emergent risks from non-bank lending, Fintech, and AML/CFT issues.

### Macrofinancial developments
- GDP and inflation:
  - GDP grew by 13½ percent in 2021.
  - GNI* growth is estimated at 6 percent in 2021.
  - Inflation reached 7 percent in April 2022.
  - Growth path: 7.5 percent in 2022; medium-term potential of 3 percent by 2025.
- Pandemic and sectoral impacts:
  - Household balance sheets improved slightly since the start of the pandemic, largely due to extraordinary public income support.
  - NFC sector: limited aggregate impact with large heterogeneity across sectors.
- Structure and linkages:
  - Brexit increased size and complexity of international banks, cross-border insurance activities, and the MBF sector (primarily linked to the U.S. and Europe).
  - MBF sector has grown to the second largest in Europe.
  - Direct trade and financial links with Russia and Ukraine are small; direct financial sector linkages to Russia appear limited.

### Financial sector resilience and risks — Banking
- Capital, liquidity, and asset quality (as of Q3-2021 / mid-2021):
  - CET1 ratio: 22 percent (euro area average: 16 percent).
  - LCR: 178 percent.
  - NSFR: about 150 percent.
  - Aggregate NPL ratio: under 3 percent at mid-2021.
  - Retail banks’ NPLs: about 4 percent.
- Structural and legacy constraints:
  - GFC legacy issues: restrictions on bank pay and bonuses, dominant government ownership, impediments to repossession of mortgage collateral—contribute to low retail bank profitability.
  - Last two foreign retail banks announced exit from Ireland.
  - Non-bank lenders and fintech firms have been growing rapidly.
- Near-term vulnerabilities:
  - Unwinding of pandemic support and global shocks (including the war in Ukraine) may increase pressures on the banking system.
  - Some cross-currency vulnerabilities exist (USD- and sterling-denominated outflows).

### Financial sector landscape and scale
- Funds and MBF:
  - Funds sector assets: €4.5 trillion in 2021 (more than ten times GDP).
  - MBF sector total assets: over 15 times GDP.
  - OFIs total assets: four times GDP.
  - OFI residual segment total assets: about 1.6 times GDP.
- Banking system composition:
  - Retail banks: about 42 percent of total banking system assets.
  - International banks: significant wholesale and non-resident deposit use.
- Insurance:
  - Assets managed by insurance industry: 117 percent of GDP.
  - Ireland hosts the fourth largest insurance sector in the EU by premiums; less than 30 percent of total premiums written in Ireland.
- Exposures to Russia:
  - SPEs held €37 billion of Russian-issued assets at end-2021 (3.6 percent of their total assets).
  - Investment funds held €11.5 billion Russian-issued assets (0.3 percent of their total assets).
  - Banking asset exposures to Russia: €1.1 billion.

### Macrofinancial challenges and legacy issues
- Post-GFC legacies:
  - High NPLs persist, including LTMA some more than a decade old.
  - Elevated risk weights contribute to higher interest rates relative to euro-area peers.
  - Constraints from bailout-era policies: caps on executive pay, penal tax on employee bonuses (89 percent), bank levy affecting loss carryforwards, and long-term government ownership.
  - Low share of loans to non-financial corporations: 13 percent of total loans (EU average: 22 percent).
- Housing, credit, and CRE:
  - House price increases: 14 percent in December 2021.
  - Credit growth muted; credit gap (based on GDP and GNI*) negative since 2016.
  - Staff house-price-at-risk: downside risk of about 30 percent cumulative decline over a three-year horizon (5th percentile estimate).
  - CRE: sub-sector divergence; retail hardest hit, industrial robust; 2021 investment rebound with cross-border flows often intermediated via investment funds.
- Funding and contingent liabilities:
  - International banks: high reliance on wholesale and non-resident deposits and sizeable off-balance-sheet exposures at 40 percent of total assets.

### Transparency and data gaps
- Central Bank collects granular SPE data; OFI residual linkages remain opaque and warrant further analysis.

### FSAP solvency stress test — Headline results
- Coverage and approach:
  - Top-down ST covering 12 banks (~80 percent of sector assets): five retail banks and seven international banks; scenario-based ST for five retail and three large international banks; sensitivity analysis for four other international banks (LSIs).
  - Baseline and adverse scenarios span a five-year horizon from mid-2021; baseline aligns with staff projections as of March 2022.
- Adverse scenario shocks:
  - GDP and GNI* growth shocks equivalent to 2.6 and 3.2 standard deviations, respectively (when measured against baselines); equivalent to 2.1 and 2.4 standard deviations against historical means.
- Solvency outcomes:
  - Under the adverse scenario:
    - Retail banks: fully-loaded CET1 ratio declines by 6.7 percentage points by year 5; capital depletion at trough 7.2 percentage points.
    - Large international banks: fully-loaded CET1 ratio declines by 0.4 percentage points by year 5; capital depletion at trough 2.3 percentage points.
    - Credit risk provisioning largest contributor to decline: cumulative effect of 7.4 percentage points across five years.
    - No bank breaches hurdle rates in baseline adverse aggregate exercise; hurdle rates: CET1: 4.5 percent plus O-SII buffer; Tier 1: 6.0 percent plus O-SII buffer; Capital Conservation Buffer (2.5 percent) considered usable.
- Sensitivity — moratoria unwind:
  - Assumption: 50 percent of loans with active/expired moratoria flow into stage three.
  - Result: one retail bank’s CET1 and Tier 1 ratio falls below hurdle rates.
  - Capital shortfall against CET1 hurdle rate: 0.2 percent of GDP.

### FSAP liquidity analysis — Banking
- LCR and cashflow ST results:
  - LCR-based ST: banks are resilient to 30-day adverse liquidity shocks; retail banks more impacted by retail stress; international banks closer to the 100 percent threshold under stress.
  - Cashflow-based ST: extending stress beyond 30 days indicates potential liquidity gaps due to maturity mismatches; sustained stress can lead to shortfalls.
  - International banks more prone to liquidity shortfalls across maturities because of high wholesale funding, larger off-balance-sheet exposures, and reliance on parental foreign-currency backstops.
- Currency-specific liquidity vulnerabilities:
  - USD- and sterling-denominated outflows vulnerability, especially USD for international banks.

### Interconnectedness and contagion findings
- Domestic interbank:
  - Limited interbank exposures; retail banks prominent domestically; inward/outward spillover risks small.
  - Foreign asset claims of Irish retail banks declined from US$234 billion to US$15 billion; foreign liabilities from US$358 billion to US$31 billion since the GFC.
- Bank–NBFI linkages:
  - Significant linkages between large international banks and foreign NBFIs; including NBFIs in network raises inward spillover risks for large international banks.
- MBF sector interconnectedness:
  - MBF sector assets at almost 15 times GDP.
  - Key points:
    - Bank asset claims on Irish funds negligible; bank liabilities to funds ~4 percent of GDP.
    - Fund asset claims and liabilities to total OFI sector close to 30 and 50 percent of GDP, respectively.
    - OFIs have significant domestic transactions with banks, households, and firms despite international focus.
    - Funds and banks have common exposures to domestic CRE—potential contagion channel.
  - Data gaps: opacity of OFI residual sector; intensify domestic/international regulatory collaboration and granular risk analysis.

### Investment fund liquidity stress testing (STeM) — Findings and recommendations
- Findings:
  - Majority of fixed-income investment funds can weather severe redemption shocks without liquidity management tools.
  - Pockets of vulnerability: high-yield bond funds and emerging-market focused fixed-income funds.
- Recommendations:
  - Central Bank should review liquidity management by HY and emerging-market fixed-income funds and prioritize completion of internal stress-testing framework for funds.

### Insurance sector — Solvency and liquidity ST
- Solvency ST (top-down, 25 insurers covering ~70 percent of each sub-sector):
  - Irish insurers broadly resilient under the adverse scenario.
  - Most insurers remain well capitalized; only one insurer falls below the 100 percent SCR threshold.
  - Aggregate shortfall in eligible own funds to meet SCR: less than €10 million.
  - Non-life insurers more adversely affected than life insurers.
- Liquidity (variation margin) analysis:
  - Insurers can meet variation margin calls for interest rate swaps after a +/-100 basis point change using cash buffers.
  - Bottom-up Central Bank analysis: broader liquidity shock unlikely to be systemic; results driven by company specifics.

### Climate-related financial risk analysis
- Banking exposures:
  - About 15 percent of corporate loans to sectors with a high carbon footprint.
  - More than 20 percent of loans to sectors exposed to high physical hazards (largely floods).
- Physical risk scenario (severe flooding):
  - Retail banks could experience CET1 depletion "up to 2.4 percentage points" at trough, recovering close to pre-shock levels by end of period.
- Transition risk scenario (carbon tax jump):
  - Instantaneous carbon tax increase from "€33.5 to €100 per ton of CO2 emissions".
  - Cumulative CET1 depletion can "approach 3.5 percentage points of CET1 capital (or 15 percent of existing CET1 stock)" under most severe assumptions.
- Insurance impacts:
  - Large natural catastrophes in isolation unlikely to have pronounced solvency impact.
  - Transition risk: estimated investment portfolio loss "around €7 billion, or 2.3 percent of total investments" under an orderly 1.5 degree NGFS scenario priced instantly.

### Macroprudential framework and systemic risk monitoring
- Institutional setup:
  - Central Bank responsible for macroprudential policy; MMC and Financial Stability Directorate established in 2016; FSG formed in 2017.
  - Loan-to-value and loan-to-income limits introduced in January 2015.
- Strengthening recommendations:
  - Open MMC to external advisory members.
  - Complete dynamic macroprudential stress-testing framework.
  - Fill data gaps in CRE investment flows and consider broader limits on total debt if leakages from unsecured credit emerge.

### Non-bank risks, property funds, and data gaps
- Property funds:
  - Total assets "about €33 billion".
  - Account for "more than 40 percent" of invested CRE market.
  - A cohort with leverage "above 50 percent"; liquidity mismatches generally moderate.
- Non-bank SME lending:
  - NBFIs account for "around 30 percent of new lending to SMEs."
- Recommendations:
  - Finalize proposed leverage limit and liquidity management guidelines for property funds.
  - Consider counter-cyclical adjustments to leverage limits and more regular reporting.
  - Continue European and international coordination to close cross-border data gaps.

### Microprudential oversight — Banking and insurance supervision
- Central Bank capacity and governance:
  - Adequate resources with strong de facto independence; recommend de jure enhancements (e.g., dismissal grounds for Commission members, firmer legal basis for supervisory levy).
  - Prioritize adoption and implementation of the Individual Accountability Framework (IAF).
- Banking supervision:
  - Supervision of LSIs largely effective; continue enhanced monitoring of emergent credit risk and NPLs post-pandemic.
- Insurance supervision:
  - Solvency II fully implemented; prepare for IFRS 17 (effective "January 2023").
  - Strengthen monitoring of intra-group reinsurance/retrocession and complete intra-group exposures work.

### Market-based finance (MBF) oversight — Recommendations
- Progress: EU MMF Regulation and ESMA guidelines applied; Central Bank strengthened data collection.
- Recommendations:
  - Promote EU convergence on MBF oversight; strengthen MMF resilience.
  - Close data gaps on delegation of portfolio management, IF credit lines, underlying investors, and leverage in UCITS.
  - Broaden liquidity management tools (swing pricing, anti-dilution levies); finalize framework for IF pricing errors; strengthen oversight of SPEs and winding-up frameworks.

### Financial safety net, crisis management, and resolution
- Developments:
  - Comprehensive new policy, procedure, and coordination frameworks for bank resolution since 2016; simulation exercises institutionalized.
  - Recovery planning advanced and extended to insurers.
- Legal and procedural recommendations:
  - Consider legal amendments to specify short timeframe for High Court decisions in resolution contexts.
  - Enhance planning and collaboration between Central Bank and Department of Finance on ELA eligibility assessments.
  - Remedy insolvency regime weaknesses for insurers; consider hybrid examinership procedure aligned with EU Directive spirit.

### Fintech, crypto-assets, and cloud service providers (CSPs)
- Fintech landscape:
  - PIEMIs largest sub-sector; growth in payments, e-money, insurance and investment management fintechs.
  - Central Bank Innovation Hub in place.
- Crypto-assets and MiCA:
  - Most crypto-assets fall outside existing EU legislation except AML/CFT; MiCA expected in H2-2023.
  - Recommendation: actively contribute to MiCA negotiations and prepare domestic legislation if MiCA is delayed or has material gaps.
- CSPs:
  - Reliance on a limited number of CSPs; recommend advocating for inclusion of systemic CSPs in Union Oversight Framework under DORA or seek additional statutory powers.

### Insolvency, creditor rights, and mortgage arrears
- Corporate insolvency:
  - Examinership is standard but little-used and costly; consider hybrid procedure to increase usage and reduce costs.
  - SCARP provides quicker process for small companies; monitor and revisit design features.
- Mortgage arrears and creditor rights:
  - Mortgage-backed arrears: almost one-half of all NPLs in retail banks; LTMA challenge collateral realization and credit growth.
  - Recommendations: streamline enforcement, provide judicial guidelines, ensure timely hearings, strengthen data collection, adopt coordinated multi-agency mortgage arrears strategy informed by borrower data, and expand social housing support.

### Financial integrity (AML/CFT)
- Threats:
  - Increasing ML/TF threats from foreign criminal proceeds due to fast-growing international financial center status.
- Supervision and capacity:
  - Central Bank has comprehensive AML/CFT supervisory approach but needs augmented resources and advanced data analytics to address cross-border risks.
  - VASP registration commenced; active supervision tools required.
- Professional gatekeepers and BORs:
  - Supervision fragmented across gatekeepers; recommend enhancing enforcement toolkit (including administrative fines) and ensuring BORs are accurate and up-to-date.

### Authorities’ views and follow-up
- Authorities welcomed FSAP, broadly agreed with assessments and recommendations.
- Emphasis on continuing to strengthen AML/CFT, addressing MBF and fintech issues in European and global coordination, and following up on tailored technical recommendations.
- Authorities agreed to publish the FSSA and Technical Notes and committed to follow-up actions.

### Key statistics and indicators (selected)
- Inflation (HICP) projections:
  - 2022: 7.5, 2023: 3.8, 2024: 2.5, 2025: 2.0, 2026: 2.0, 2027: 2.0
- Real GDP projections (percentage change):
  - 2022: 7.5, 2023: 5.0, 2024: 4.1, 2025: 3.1, 2026: 3.0, 2027: 3.0
- Unemployment rate (percent):
  - 2022: 5.0, 2023: 5.0, 2024: 5.0, 2025: 5.0, 2026: 5.0, 2027: 5.0
- General government gross debt (percent of GDP):
  - 2022: 49.1, 2023: 44.8, 2024: 41.6, 2025: 39.0, 2026: 36.4, 2027: 33.4
- Gross external debt (excl. IFSC):
  - 2022: 220.9, 2023: 201.2, 2024: 188.6, 2025: 180.5, 2026: 174.3, 2027: 169.4
- Selected Financial Soundness Indicators (2021Q2):
  - Regulatory capital to risk-weighted assets: 26.0
  - Tier 1 capital to risk-weighted assets: 23.7
  - Capital to assets (leverage ratio): 8.0
  - Return on assets: 0.6
  - Nonperforming loans to total gross loans: 2.8
- Financial sector structure (2021):
  - Banks: Number of institutions: 263; Total Assets (EUR billion): 3,764; Multiples of GDP: 1.8
  - Investment Funds: Number of institutions: 6,175; Total Assets (EUR billion): 3,889; Multiples of GDP: 9.2
  - Total institutions: 7,707; Total Assets (EUR billion): 18.3

### FSAP high-level recommendations (timing conventions: C = Continuous; I = Immediate; ST = Short Term; MT = Medium Term)
- Cross-cutting:
  - Enhance de jure independence of the Central Bank: amend legislation on dismissal grounds for Commission members and enshrine written procedure for supervisory levy approval. (Timing implied)
  - Extend supervisory and enforcement powers against individuals; finalize internal accountability framework (IAF).
  - Implement a sequenced action plan on climate risks for banking and insurance supervision emphasizing robust data and quality disclosure.
- Supervisory focus and resourcing:
  - Ensure supervisory resources keep pace with sector growth and cross-border linkages; strengthen supervision of credit risk and develop capacity on climate, non-bank lending, and Fintech.
  - Insurance oversight to prioritize intra-group complexities, post-Brexit group structures, recovery planning, and liquidity risk management.
  - MBF: provide guidance on liquidity management tools, intensify efforts to understand OFI residual linkages.
- Macroprudential:
  - Extend framework to cover nonbank sector risks, including introducing leverage limits on property funds.
- Resolution and crisis management:
  - Enhance planning and collaboration between Central Bank and Department of Finance; develop ELA solvency assessment procedures for resolution.
- Addressing GFC legacies:
  - Address impediments to repossession of mortgage collateral; complete sale of government bank ownership; lift operating restrictions that weigh on retail banking profitability.
  - Further develop targeted solutions for long-term mortgage arrears borrowers; review examinership.
- AML/CFT:
  - Adequately resource AML/CFT capacity; use advanced data analytics; focus on non-resident and cross-border ML/TF risks.
- MBF and fintech:
  - Work with ESMA, ESRB, EU Commission on MMF resilience and EU MMF Regulation; prioritize guidance on liquidity tools and prepare for MiCA gaps; advocate for inclusion of systemic CSPs in Union Oversight Framework under DORA or seek statutory powers.
  - Intensify collaboration between Central Bank, CSO, and international regulators to analyze OFI residual entities.
- Insolvency and insurance regime:
  - Remedy weaknesses in insurer insolvency regime; consider introducing a new hybrid examinership-aligned procedure.

*Italic line: Source: International Monetary Fund — Executive Summary and chapter extracts from 1irlea2022003 (Ireland Financial Sector Assessment Program).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### Key messages
- Ireland is a small open economy with a major international financial center featuring extensive cross-border linkages, mostly through the MBF sector.
- Exceptional economic and financial sector growth over the past decade, recovering from the GFC; Brexit and a favorable tax regime drove growth in MNE-driven exports and financial sector complexity.
- Retail banks have struggled with low credit demand, post-GFC scarring and legacy policies, and low collateral recovery; non-bank lenders and fintech firms have been growing rapidly and taking market share from retail banks.
- The macroprudential framework is sound and has been up to the increased challenges, but authorities need to keep pace with a large, complex, and globally interconnected financial system and emergent risks from non-bank lending, Fintech, and AML/CFT issues.

### Macrofinancial developments
- GDP growth and composition:
  - GDP grew by 13½ percent in 2021, largely driven by MNEs.
  - GNI* growth is estimated at 6 percent in 2021.
  - Inflation reached 7 percent in April 2022.
  - Growth is expected to decelerate to 7.5 percent in 2022 and gradually decline to its medium-term potential of 3 percent by 2025.
- Pandemic impact:
  - Household balance sheets improved slightly since the start of the pandemic, largely due to extraordinary public income support.
  - The NFC sector has seen limited aggregate impact, though large heterogeneity across sectors hit by COVID-19 exists.
- Structure and linkages:
  - Brexit drove a large increase in the size and complexity of the financial system, notably of international banks, cross-border insurance activities, and the MBF sector (primarily linked to the U.S. and Europe).
  - The MBF sector has grown to the second largest in Europe.
  - Direct trade links with Russia and Ukraine are small; direct financial sector linkages to Russia also appear limited.

### Financial sector resilience and risks
- Banking sector:
  - The banking system is highly capitalized and liquid as Ireland exits the pandemic.
  - GFC legacy issues and policies—including restrictions on bank pay and bonuses, dominant government ownership, and persistent impediments to repossession of mortgage collateral—result in low profitability in the retail banking system.
  - The last two foreign retail banks recently announced their exit from Ireland.
  - Non-bank lenders and fintech firms have been growing rapidly.
- MBF and other sectors:
  - An MBF subsector—“Other Financial Institutions (OFI) residual”, with total assets of about 1.6 times GDP—has opaque linkages with the economy that could act as risk transmission channels.
  - Cross-border insurance activities have grown markedly.
- Emerging risks:
  - Risks to financial stability emanate from a much larger and more complex financial system, persistent legacy issues, and emergent ones from non-bank lending, Fintech, and climate change.
  - The unwinding of public pandemic policy support and global shocks, against the backdrop of the war in Ukraine, may increase pressures on the banking system in the near term.
  - Some cross-currency vulnerabilities exist in the banking sector.

### Stress test results
- Solvency:
  - Stress tests confirmed banks’ resilience to severe macrofinancial shocks, with caveats. On the solvency side, banks’ high initial capital provides strong buffers, but there are some risks as the economy exits from pandemic-related policy support.
  - Insurers were broadly resilient in the solvency stress tests.
- Liquidity:
  - Liquidity stress tests suggest banks are resilient to adverse liquidity conditions, although maturity mismatches may expose banks to shortfalls in a sustained liquidity stress environment.
  - Insurers were broadly resilient in the liquidity stress tests.
- MBF liquidity and opacity:
  - Linkages of the OFI residual subsector remain opaque and warrant further analysis.

### FSAP recommendations (high level)
- Cross-cutting measures:
  - Further enhance de jure independence of the Central Bank: amend legislation so the Minister for Finance may dismiss Central Bank Commission members only on specified grounds of serious misconduct; enshrine a written procedure for submission by the Central Bank and approval by Minister for Finance of the supervisory levy.
  - Extend supervisory and enforcement powers against individuals (amend legislation and finalize internal framework to operationalize an upgraded accountability regime).
  - Implement an action plan on risks from climate change, with a sequenced action plan for banking and insurance supervision emphasizing robust data and quality disclosure.
- Supervisory focus and resources:
  - Ensure supervisory resources and capacity keep pace with a growing and more complex sector with significant cross-border linkages.
  - Strengthen supervision of banks’ credit risk and develop capacity and skills on climate, non-bank lending, and Fintech.
  - Insurance oversight should prioritize intra-group complexities, post-Brexit group structures, recovery planning, and liquidity risk management.
  - For the MBF sector, provide guidance to investment funds on liquidity management tools and intensify efforts to better understand linkages between the OFI residual segment and the economy.
- Macroprudential framework:
  - Further extend the macroprudential framework to cover risks from the nonbank sector, including introducing leverage limits on property funds.
- Resolution and crisis management:
  - Enhance resolution and crisis management through greater planning and collaboration between the Central Bank and the Department of Finance to bolster the ability to deal effectively with institution failures and systemic crises.
  - Develop policies and procedures for assessing prospective solvency of a bank entering into or undergoing resolution to determine ELA eligibility.
- Addressing GFC legacies:
  - Address impediments to repossession of mortgage collateral, complete the sale of government bank ownership, and lift operating restrictions that weigh on retail banking profitability.
  - Further develop the government strategy to provide targeted solutions to long-term mortgage arrears borrowers, and review examinership in light of limited usage and the new EU Directive.
- AML/CFT:
  - Adequately resource AML/CFT capacity, use advanced data analytical tools, and focus on deepening understanding of and addressing ML/TF risks from non-resident and cross-border activity.
- MBF-specific and fintech actions:
  - Work with ESMA, ESRB, and EU Commission on MMF resilience and the EU MMF Regulation.
  - Prioritize guidance to the funds sector on using the full range of liquidity management tools, including those that result in subscribing or redeeming investors bearing associated transaction costs.
  - Prepare to introduce domestic legislation in the event of significant delay or material gaps in the MiCA framework; advocate for inclusion of systemic Irish cloud service providers in the Union Oversight Framework under DORA or seek additional statutory powers if needed.
  - Intensify collaboration between the Central Bank, the CSO, and international regulators to better understand the OFI residual entities and conduct granular risk analysis.
- Insolvency and insurance regime:
  - Remedy weaknesses in the insolvency regime for insurers, including any required legislative amendments.
  - Conduct a review of examinership and consider introducing a new hybrid procedure aligned with the “spirit” of the EU Directive.

*Timing conventions used in recommendations: C = Continuous; I = Immediate (within one year); ST = Short Term (within 1-3 years); MT = Medium Term (within 3-5 years).*

*Source: International Monetary Fund — Executive Summary (Ireland Financial Sector Assessment Program).*

### 4.       While the pandemic was a significant shock to the economy, banks continued to

### 1irlea2022003 - 4.       While the pandemic was a significant shock to the economy, banks continued to

### Banking sector buffers and performance
- Capital, liquidity, and funding indicators (as of Q3-2021):
  - Common Equity Tier 1 (CET1) ratio: 22 percent (well above the euro area average of 16 percent).
  - Liquidity Coverage Ratio (LCR): 178 percent.
  - Net Stable Funding Ratio (NSFR): about 150 percent.
  - Non-performing loan (NPL) ratio of aggregate banking system: under 3 percent at mid-2021.
  - Retail banks’ NPLs: about 4 percent.
- Liquidity benefited from ECB liquidity measures and higher customer deposits.
- System returned to profitability; retail banks carry higher NPLs and face legacy mortgage NPLs and long recovery times for collateral.

### Financial sector landscape and scale
- Funds and MBF sector:
  - Funds sector assets: €4.5 trillion in 2021 (more than ten times GDP).
  - MBF sector (largest component of financial system) total assets: over 15 times GDP.
  - MBF composition: investment funds (IFs), money-market funds (MMFs), and other financial institutions (OFIs).
- OFIs and SPEs:
  - OFIs total assets: four times GDP.
  - OFI residual segment total assets: about 1.6 times GDP.
  - SPEs commonly used for securitization and intra-group/external financing.
- Banking sector composition:
  - Retail banks: about 42 percent of total banking system assets; focus mostly on domestic economy with some U.K. exposures; rely on domestic household and corporate deposits and mortgage finance.
  - International banks: focus on cross-border activities, significant use of wholesale and non-resident deposits.
- Insurance sector:
  - Assets managed by insurance industry: 117 percent of GDP.
  - Ireland hosts the fourth largest insurance sector in the EU by premiums; many insurers are subsidiaries of international groups with significant intra-group links; less than 30 percent of total premiums written in Ireland.

### Linkages to Russia and potential external exposures
- SPEs held €37 billion of Russian-issued assets at end-2021 (3.6 percent of their total assets).
- Investment funds held €11.5 billion Russian-issued assets (0.3 percent of their total assets).
- Banking asset exposures to Russia: €1.1 billion.

### Macrofinancial challenges and legacy issues
- Post-GFC legacies continue to weigh on retail banks:
  - High NPLs persist, including very long-term mortgage arrears (LTMA) some more than a decade old.
  - Risk weights remain elevated, contributing to higher interest rates in Ireland than in euro-area peers.
  - Policies from the bailout era that constrain talent acquisition and retention include caps on executive pay, a penal tax on all employee bonuses (89 percent), and a bank levy affecting loss carryforwards.
  - Long-term government ownership may slow cost reductions, innovation, and commercial/credit risk-taking; government ownership details noted for specific banks as of end-May 2022.
  - Low share of loans to non-financial corporations: 13 percent of total loans versus EU average of 22 percent; high concentration on mortgages; SME survey evidence indicates difficulties in acquiring bank credit.

### Systemic risks and near-term vulnerabilities
- Risks associated with withdrawal of public pandemic support:
  - All moratoria expired; 40 percent of household loans in Stage 2 were previously under moratoria, indicating credit quality deterioration.
  - FSAP sensitivity analysis performed to gauge capital risks from end of broad policy support.
- Housing and credit:
  - House price increases accelerated to 14 percent in December 2021.
  - Credit growth muted as SMEs and households deleverage; MNEs largely funded internationally.
  - Credit gap (based on GDP and GNI*) has been negative since 2016.
  - Staff’s house-price-at-risk estimation indicates downside risk of about 30 percent cumulative decline over a three-year horizon (5th percentile estimate).
- Commercial real estate (CRE):
  - CRE broadly resilient during pandemic with sub-sector divergence: retail sector hardest hit; industrial demand robust.
  - Investment in CRE rebounded in 2021 with significant cross-border flows, often intermediated via investment funds, which can diversify funding but may channel contagion from global shocks.
- Funding and contingent liabilities for international banks:
  - High reliance on wholesale and non-resident deposits increases exposure to funding stress relative to retail banks.
  - Off-balance-sheet exposures (including credit lines and guarantees) are sizeable for large international banks at 40 percent of total assets, raising potential for credit impairments.

### Transparency and data gaps
- Central Bank collects granular data on SPEs and has a better understanding of their domestic links.
- Information on the “OFI residual” is more limited, leaving some linkages opaque.

### FSAP stress testing: scope, scenarios, and key parameters
- Coverage and approach:
  - Top-down stress test covering 12 banks constituting around 80 percent of sector assets.
  - Sample: five retail banks and seven international banks; scenario-based ST for five retail and three large international banks; sensitivity analysis for four other international banks (LSIs).
- Key macrofinancial risks considered (adverse scenario constructed on joint realization):
  - Russia’s invasion of Ukraine leads to escalation of sanctions and disruptions, higher commodity prices, tighter financial conditions, higher domestic inflation, and weaker consumer activity.
  - Outbreaks of lethal and highly contagious COVID-19 variants leading to extended supply-chain disruptions, fiscal deterioration, financial tightening, and growth impacts.
  - De-anchoring of inflation expectations in the U.S. and/or advanced European economies prompting faster-than-anticipated central-bank tightening, sharp global financial conditions tightening, and spiking risk premia.
  - Geopolitical tensions and deglobalization causing economic disruptions, trade declines, and lower investor confidence.
  - Continued trade frictions and uncertainty in post-Brexit arrangements increasing costs for Irish businesses with close U.K. links, slowing growth.
- Scenario timing and shock magnitudes:
  - Bank data used: mid-2021.
  - Baseline and adverse scenarios span a five-year horizon starting from mid-2021.
  - Baseline scenario aligns with staff projections as of March 2022.
  - Adverse scenario features shocks to GDP and GNI* growth equivalent to 2.6 and 3.2 standard deviations, respectively, from their baselines (when measured against historical means, shocks are equivalent to 2.1 and 2.4 standard deviations, respectively).

*Source: IMF staff extract from 1irlea2022003 PDF chapter/section.*

### 20.      The solvency ST confirmed banks’    resilience to severe macrofinancial shocks, while

### 1irlea2022003 - 20.      The solvency ST confirmed banks’    resilience to severe macrofinancial shocks, while

### Solvency stress test (ST) — headline findings
- Baseline scenario: banks maintain strong capital positions with additional capital accumulation; both retail and large international banks see CET1 ratios trend upwards.
- Adverse scenario:
  - No bank would see its capital ratio fall below the hurdle rates, supported by high initial capital positions and high pre-provision income generation capacity of large international banks.
  - Retail banks: fully-loaded CET1 ratio declines by 6.7 percentage points by the 5th year.
  - Large international banks: fully-loaded CET1 ratio declines by 0.4 percentage points by the 5th year.
  - At the trough, capital depletion would reach 7.2 and 2.3 percentage points for retail and large international banks, respectively.
  - Credit risk provisioning is the largest contributor to the decline in capital ratios, with the cumulative effect amounting to 7.4 percentage points across five years.
- Hurdle rates (as considered for the adverse scenario):
  - CET1: 4.5 percent plus O-SII buffer.
  - Tier 1: 6.0 percent plus O-SII buffer.
  - Capital Conservation Buffer (currently at 2.5 percent) is considered usable in the adverse scenario; hence it is not included in the hurdle rate.

### Solvency sensitivity analysis — moratoria unwind
- Assumption: 50 percent of loans with either active or expired moratoria flows from stage one and stage two assets into stage three assets.
- Result: one retail bank’s CET1 and Tier 1 ratio falls below the hurdle rates under the adverse scenario.
- Capital shortfall against the CET1 hurdle rate: 0.2 percent of GDP.

### Liquidity analysis — LCR and cashflow-based ST
- LCR-based ST:
  - Banks are resilient to adverse liquidity conditions.
  - Retail banks experience a larger impact under the retail stress scenario; international banks are more adversely affected by the wholesale stress scenario.
  - The relatively lower initial LCR for large international banks brings this group closer to the 100 percent threshold under stress.
  - All banks can withstand the most severe shock within the 30-day window, underpinned by high initial levels of liquidity buffers.
- Cashflow-based ST:
  - Extending stress beyond 30 days suggests potential liquidity gaps due to maturity mismatches (frontloaded cash outflows, backloaded cash inflows).
  - Sustained liquidity stress can lead to liquidity shortfalls over the longer term.
  - International banks are more prone to liquidity shortfalls across various maturities due to:
    - High share of wholesale funding (largely group parental support).
    - Larger off-balance sheet exposures.
- Currency-specific liquidity:
  - Vulnerabilities to USD- and sterling-denominated outflows, especially USD for international banks.
  - Drivers: weaker currency-specific initial liquidity positions and high reliance of international subsidiaries on foreign currency backstop from parent entities.

### Banking sector interconnectedness
- Domestic interbank network:
  - Limited interbank exposures within Ireland; retail banks play a more prominent role.
  - Inward and outward spillover risks for the domestic interbank network appear small due to limited interbank activity.
  - All banks have sufficient capital to withstand domestic interbank shocks via direct exposures.
- Cross-border interbank linkages:
  - Limited integration of Irish retail banks to the global network.
  - Declines since the GFC:
    - Foreign asset claims of Irish retail banks: from US$234 billion to US$15 billion.
    - Foreign liabilities of Irish retail banks: from US$358 billion to US$31 billion.
  - Cross-border inward and outward spillover risks for Irish retail banks are well-contained.
- Bank–NBFI linkages:
  - Significant linkages exist between large international banks and foreign non-bank financial institutions (NBFIs).
  - Adding NBFIs to the network sharply raises inward spillover risks for large international banks (credit channel), indicating larger vulnerabilities to NBFI shocks.

### Market-based finance (MBF) sector interconnectedness — key findings
- MBF sector size: total assets at almost 15 times GDP.
- Four main findings:
  - First: Irish funds have limited links to domestic banks and households.
    - Bank asset claims on Irish funds are negligible.
    - Bank liabilities to funds are mostly deposits corresponding to only around 4 percent of GDP.
    - Households do not have significant linkages with the funds.
  - Second: Irish funds have significant interlinkages with OFIs resident in Ireland.
    - Fund asset claims and liabilities to the total OFI sector are close to 30 and 50 percent of GDP, respectively.
  - Third: OFIs, while largely internationally focused, have significant linkages to the domestic economy (transactions with domestic banks, households, and firms).
  - Fourth: Funds and banks have common exposures to the domestic CRE sector, representing a potential contagion channel.
- Data and policy implications:
  - Important data gaps remain, particularly opacity and lack of granular data on financial transactions of entities in the OFI residual sector.
  - Authorities should intensify domestic and international regulatory collaboration to better understand OFI residual entities and their linkages, and to conduct granular risk analysis for this segment.

### Investment fund liquidity analysis
- Focus: liquidity resilience of the investment fund industry (largest component of MBF) to severe redemption shocks.
- Findings:
  - Majority of fixed-income investment funds in Ireland would be able to weather severe but plausible redemption shocks under a wide range of shock scenarios without using liquidity management tools or selling less liquid assets.
  - Pockets of vulnerability exist: high-yield (HY) bond funds and emerging-market focused fixed-income funds are more susceptible to liquidity mismatches and may be less resilient in severe market stress.
- Recommendations:
  - Central Bank should review the use of liquidity management tools by HY bond funds and emerging-market fixed-income funds, taking into account EU and international developments.
  - Central Bank should prioritize completion of its internal stress-testing framework for funds, given the size, accelerating growth, and systemic importance of the sector.

### Insurance sector — solvency and liquidity
- Solvency ST:
  - Top-down approach covering 25 insurers and 70 percent of each sub-sector (life, non-life, and reinsurance).
  - Shocks derived from the banking sector adverse scenario assumed to occur instantaneously at the reference date end-Q2 2021.
  - Findings:
    - Irish insurers are broadly resilient under the adverse scenario.
    - Portfolio asset values decline due to higher spreads, partially offset by higher interest rates reducing firms’ liabilities.
    - Most insurers remain well capitalized; only one insurer falls below the 100 percent Solvency Capital Requirement (SCR) threshold.
    - Aggregate shortfall in eligible own funds to meet the SCR is less than €10 million.
    - Non-life insurers are more adversely affected; life insurers on aggregate see smaller balance sheet effects.
- Liquidity (variation margin) analysis:
  - Assessed insurers’ resilience to variation margin calls in interest rate swap portfolios.
  - Top-down analysis confirms low vulnerabilities from this channel, though reporting data for other derivative types are incomplete.
  - Central Bank bottom-up analysis: a broader liquidity shock is unlikely to have a systemic impact; results driven by company specifics.
  - Insurers can meet variation margin calls for interest rate swaps after a +/-100 basis point change in interest rates using only their cash buffers.

### Climate-related financial risk analysis
- Scope: assessed transition and physical risks for banking and insurance sectors.
- Banking exposure to climate risks:
  - About 15 percent of corporate loans is to sectors with a high carbon footprint.
  - More than 20 percent of loans are to sectors exposed to high physical hazards (largely floods), well above the euro area average.
  - These exposures suggest vulnerability of banks to potential carbon tax shocks and sea level rises.

*Source: IMF staff and related figures and notes as presented in the FSAP chapter.*

### 41.      A    scenario-based physical risk analysis was conducted to gauge the impact of a

### 41. A scenario-based physical risk analysis was conducted to gauge the impact of a severe flooding event on banks, focusing exclusively on retail banks given the high domestic nature of the simulated scenario

### Banking-sector climate risk analysis: physical and transition scenarios
- A severe flooding event was mapped to a set of macrofinancial variable shocks over a 5-year horizon, which were translated to bank capital impact.
- Transmission channels to capital impact: mainly through credit and market risk.
- Key results (physical shock):
  - Retail banks could experience non-trivial depletion of CET1 capital "up to 2.4 percentage points" at trough, before recovering to close to pre-shock capital levels at the end of the scenario period.
- Transition risk analysis:
  - Scenario: instantaneous increase of carbon tax from "€33.5 to €100 per ton of CO2 emissions".
  - Higher carbon prices increase defaults among firms with heavy carbon footprints, impairing credit quality for banks lending to those firms.
  - Energy-intensive sectors saw the largest increase in defaults under various scenarios based on firm-level behavioral response assumptions.
  - Cumulative CET1 depletion resulting from projected default paths can "approach 3.5 percentage points of CET1 capital (or 15 percent of existing CET1 stock)" under the most severe scenario.
  - Implication: meaningful exposure to transition risks and the need for enhanced monitoring of banking sector exposure to climate-sensitive segments.

### Insurance-sector exposures and effects
- Main channels of physical risk: non-life underwriting and investments.
- Domestic important natural perils: windstorms, floods and freezes.
- (Re)insurers underwrite globally and are exposed to international climate-related risks such as U.S. hurricanes and wildfires.
- FSAP analysis: even large natural catastrophes, when seen in isolation, would likely not have a pronounced impact on solvency levels.
- Transition risk impact on insurers:
  - Larger for life insurers due to comparably larger asset allocation towards sectors with high carbon footprints.
  - Method: assumed instantaneous pricing by investors of the NGFS scenario of an orderly 1.5 degree increase until 2050, resulting in lower asset valuations.
  - Resulting loss on investment portfolios of insurers: "around €7 billion, or 2.3 percent of total investments."

### Macroprudential policy framework and systemic risk monitoring
- Institutional responsibilities:
  - The Central Bank is responsible for macroprudential policy in Ireland, sharing some responsibilities with European institutions.
  - Developments since 2016 FSAP: implementation of residential mortgage measures and macroprudential capital buffers. Loan-to-value and loan-to-income limits introduced in January 2015.
- Institutional arrangements:
  - Financial Stability Directorate (responsibility for macroprudential policy and crisis management) and the Macroprudential Measures Committee (MMC) established in 2016.
  - The Financial Stability Group (FSG) formed in 2017 as a non-statutory, intra-agency coordination mechanism.
- Strengthening recommendations:
  - Opening the MMC to external advisory members to align with best practice and broaden perspectives.
  - Complete a dynamic macroprudential stress-testing framework to inform calibration of capital buffers.
  - Fill data gaps in CRE investment flows, especially for direct cross-border flows, in coordination with international institutions.
  - Consider broader limits on total debt should leakages emerge from unsecured credit.

### Non-bank risks, property funds, and data gaps
- Irish property funds:
  - Total assets "about €33 billion".
  - Account for "more than 40 percent" invested CRE market.
  - Largely financed by overseas investors.
  - A cohort of these funds has leverage "above 50 percent", while liquidity mismatches are generally moderate.
- Non-bank lending to SMEs: increasing; NBFIs account for "around 30 percent of new lending to SMEs."
- Central Bank actions and recommendations:
  - Proposed leverage limit and liquidity management guidelines for property funds — details should be finalized and implemented.
  - Consider counter-cyclical adjustments to leverage limits, more regular reporting requirements, and careful calibration of compliance timelines to mitigate fire-sale risk.
  - Continue working through European and international institutions to close data gaps (including direct cross-border investments into CRE) and address cross-border non-bank macroprudential effectiveness.

### Microprudential oversight: banking and insurance supervision
- Central Bank capacity:
  - Adequate supervisory resources and enforcement powers; de facto independence strong, but some de jure enhancements recommended.
  - Recommendation: align grounds for dismissing Commission members with those for the Governor; put determination of the “supervisory levy” on a firmer legal basis.
  - Prioritize adoption and implementation of the new Individual Accountability Framework (IAF).
- Climate risk management in supervision:
  - Central Bank adopted a strategic plan and established the Climate Change Unit.
  - Recommendation: operationalize the strategic plan with a sequenced action plan for banking and insurance supervision that includes indirect effects, litigation risks, robust data, and quality disclosure.
- Banking prudential developments:
  - The Central Bank applies the entire SSM regulations to its LSIs.
  - EU regulatory initiatives on NPEs helped reduce non-performing loans sharply to "under 5 percent of total loans."
  - Supervision of LSIs is largely effective; the new IAF, planned for 2022, will allow more efficient enforcement.
  - Recommendation: continue enhanced monitoring of emerging credit risk and NPLs post-pandemic, upgrade monitoring tools, and ensure banks’ reviews of latent credit risks are robust and reflected in credit risk indicators.
- Insurance supervision:
  - Progress since 2016 FSAP: Solvency II fully implemented; risk-based supervisory framework (Probability Risk and Impact System) applied.
  - Recommendation: prepare for implementation of IFRS 17 (effective "January 2023") — major operational challenge requiring upgrades to accounting frameworks, data, processes, systems, and staff training.
  - Continue strengthening monitoring of subsidiaries’ exposures to group internal reinsurance or retrocession for capital management; complete work on intra-group transactions and exposures expected to be finalized in 2022.
  - Leverage Central Bank expertise to promote EU convergence on insurance oversight, including cross-border business supervision, intra-group transactions, group concentrations, and supervision of captives.

### Market-based finance (MBF) oversight
- Progress and remaining gaps:
  - Implementation of MBF-relevant recommendations from the 2016 FSAP progressed; EU Money Market Fund Regulation and ESMA guidelines applied.
  - Central Bank strengthened data collection, monitoring and analysis on MBF.
- Recommendations:
  - Promote EU convergence on MBF oversight and build on Ireland’s status as a MMF hub to strengthen vehicle resilience (e.g., decoupling gates and fees from liquidity thresholds, increasing liquidity buffers).
  - Close data gaps on delegation of portfolio management, IF credit lines, underlying investors of IFs, and leverage in the UCITS sector.
  - Intensify work to assess and mitigate financial stability risks of MBF, broaden liquidity management tools (swing pricing, anti-dilution levies), and engage with ETF providers to ensure robust arrangements with authorized participants and market makers.
  - Finalize comprehensive framework for IF pricing errors and strengthen oversight of SPEs and governance practices; fill gaps in winding-up framework for IFs.

### Financial safety net, crisis management, and resolution
- Developments since 2016 FSAP:
  - Comprehensive new policy, procedure, and coordination frameworks for bank resolution and crisis management adopted.
  - Simulation exercises used to test and enhance frameworks; testing program is well institutionalized and overseen by the FSG and the Central Bank’s Financial Stability Committee.
  - Recommendation: extend the FSG’s Terms of Reference to encompass an annual discussion of member agencies’ contingency plans and testing regimes related to systemic bank failures and financial sector crises.
- Central Bank preparedness and powers:
  - Resolution functions adequately staffed and resourced; a Central Bank unit guides development and testing of preparedness arrangements.
  - Recovery planning by banks and oversight by the Central Bank are well advanced; recovery planning extended to insurers.
  - The Central Bank has extensive powers to require banks to implement measures specified in their recovery plans.
- Legal framework and recommendations:
  - Bank and insurer winding-up and liquidation regimes governed by national insolvency laws; legal framework sound for banks but has deficiencies for insurers.
  - Bank resolution framework is the Irish transposition of the EU’s 2014 Bank Recovery and Resolution Directive.
  - No comparable legal framework for insurers currently.
  - The Central Bank must notify the Minister of certain steps and obtain prior consent in limited circumstances; recommendation: limit the Minister’s consent to circumstances that require the use of fiscal resources to reduce appearance of conflict of interest when government-owned banks might be subject to resolution action.

*Source: ECB, Central Bank, and IMF staff.*

### 71.      Unlike in some Euro Area states, the High Court plays a decisive role in the

### 71.      Unlike in some Euro Area states, the High Court plays a decisive role in the

### Resolution framework for banks and insurers
- The High Court must approve all relevant actions proposed by the Central Bank in the resolution of bank failures whether by liquidation or alternative action.
- The Central Bank has elaborated policies and procedures to facilitate prompt Court petitions and arrangements to mobilize external experts to support petitioning the Court and implementing the Court’s orders.
- Recommendation: Legal amendments to specify a short timeframe for Court decision-making pertaining to resolution powers should be considered.
- Resolution planning:
  - Resolution planning by the Central Bank and within banks is well advanced.
  - Substantial progress has been made to ensure that banks not likely to be liquidated can be effectively and efficiently resolved.
  - The Central Bank has detailed policy, procedure, and coordination frameworks for executing winding-up and resolution actions.
- Insurers:
  - Authorities have proposed a resolution regime for insurers and identified scope for improving the existing insolvency framework for insurers.
  - Adoption of an insurer resolution regime will depend on progress at the European level where an Insurance Recovery and Resolution Directive recently has been proposed, but remedies to insolvency framework shortcomings can be implemented independently.
- Early intervention and ELA:
  - The Central Bank is developing a structured framework on the use of its early intervention powers and its determination as to whether a bank is likely to fail.
  - The emergency liquidity assistance (ELA) framework has been undergoing testing and enhancements; this effort will continue.
  - The DoF is developing an Incident Response Protocol to complement interagency and Central Bank protocols.
  - Recommendation: The Central Bank should adopt policies and procedures for assessing the prospective solvency of a bank undergoing resolution to determine its eligibility for ELA.

### Fintech sector — evolving landscape and regulatory approach
- Sector overview:
  - Ireland’s fintech sector is growing through entry of innovative new players and transformation of incumbents’ business models and products.
  - The largest sub-sector is payment and e-money institutions (PIEMIs), which continues to grow rapidly.
  - Fintech activities also developing in insurance and investment management; cloud service providers (CSPs) are increasingly important and interconnected with financial institutions.
- Regulatory approach:
  - Authorities seek to encourage innovation while ensuring prudent oversight; the Central Bank has an Innovation Hub as a single point of contact to inform regulatory development.
- Crypto-assets and MiCA:
  - Most crypto-assets and related services fall outside the scope of existing EU legislation, except for AML/CFT requirements.
  - The Central Bank has issued consumer warnings but has not adopted a bespoke regulatory framework.
  - A common EU framework is due to be put in place in H2-2023 via the Markets in Crypto-Assets (MiCA) Regulation.
  - Recommendation: Irish authorities should continue to contribute actively to MiCA negotiations, advocate for its earliest possible introduction, and prepare to introduce domestic legislation in the event of significant delay or material gaps in MiCA.
  - Recommendation: The Central Bank should, together with European peers, intensify monitoring through systematic data collection.
- Cloud service providers (CSPs):
  - Reliance by Irish regulated entities on a limited number of CSPs.
  - The Basel Principles for Operational Resilience, ESA guidelines, and Central Bank guidance provide a strong framework for indirect supervision, but CSPs themselves may be outside the regulatory perimeter.
  - Recommendation: The Central Bank should continue to advocate for systemic CSPs to be included in the Union Oversight Framework under the EU’s Digital Operational Resilience Act; failing which, seek additional statutory powers to review and examine resilience of systemic CSPs.
- Cross-border information and passporting:
  - Under the EU’s passporting framework, host regulators receive limited information on activities that passporting entities carry out in their jurisdiction.
  - Recommendation: The Central Bank should engage with the ESAs on how to expand information that host regulators receive from home regulators.
- PIEMIs and consumer protection:
  - PIEMIs are offering banking-type services through e-money wallets, which are not covered by the DGS.
  - The Central Bank has strengthened governance expectations for PIEMIs informed by best practice corporate governance requirements.
  - Recommendation: The Central Bank and the DoF should actively contribute to the review of the EU framework and push for stronger governance, risk management, safeguarding, crisis management, and corporate insolvency regimes; absent EU changes, introduce reforms at the national level.
- Incumbent banks and modernization:
  - Incumbent retail banks are investing in digital transformation; fintechs are enlarging consumer choice.
  - Recommendation: The Central Bank, working with the Competition and Consumer Protection Commission, should continue efforts to address IBAN discrimination and encourage adoption of instant payments and open banking benefits.

### Insolvency and creditor rights
- Legal toolkit and procedures:
  - Ireland has a well-developed legal toolkit for corporate debt resolution largely in line with international best practice.
  - Examinership is the standard corporate reorganization procedure; restructuring agreements outside court are possible if a qualified majority of creditors agree.
  - Small Company Administrative Rescue Process (SCARP) provides a quicker, less court-involved reorganization for small and micro-sized companies.
  - Other options: receivership and voluntary/compulsory liquidation.
- Challenges and recommendations:
  - Examinership is little-used and costly; a review should identify ways to increase use, lower costs, and close gaps with the international insolvency standard.
  - Recommendation: Consider creating a hybrid procedure to complement examinership with limited judicial intervention, subject to constitutional constraints and consistent with the EU Directive on Preventive Insolvency.
  - SCARP’s design features—such as the ability of public creditors to opt out—may limit effectiveness; monitor implementation and revisit law as experience and data are collected.
  - Data gaps: Collecting and publishing meaningful data on corporate insolvency procedures is needed.
  - Institutional improvements: Dedicate more judges to insolvency matters; intensify modernization programs for electronic filings and remote hearings.
- Mortgage arrears and creditors’ rights:
  - Mortgage-backed arrears are largely a legacy of the GFC but still constitute almost one-half of all NPLs in the retail banks.
  - Long-term mortgage arrears (LTMA) challenge debt resolution and creditor rights and may undermine credit growth and affordability due to uncertainty in collateral realization.
  - Enforcement on primary dwelling homes is unpredictable and inefficient.
  - Recommendations to improve enforcement:
    - Streamline and simplify enforcement.
    - Provide clear rules and guidelines for judges on proceedings.
    - Ensure timely hearings (e.g., through more frequent court sessions).
    - Strengthen data collection and publication on repossession cases.
  - Recommendation: Government should adopt a coordinated, multi-agency strategy for resolving mortgage arrears informed by borrower financial data and debt servicing capacity.
  - Consider publishing more granular guidelines on solutions creditors offer borrowers based on capacity-to-repay parameters.
  - Broader social housing would support approaches where borrowers lack capacity to repay.
  - Personal insolvency should ensure court-approved mortgage repayment plans provide sustainable solutions.

### Financial integrity (AML/CFT)
- Threats and assessments:
  - Ireland faces increasing money laundering threats from foreign criminal proceeds as a fast-growing international financial center exposed to transnational ML/TF risks.
  - Authorities have strong domestic ML/TF risk assessment experience but less so on transnational risks.
  - Recommendation: Conduct a thematic risk assessment focusing on non-resident and cross-border ML/TF risks to inform AML/CFT policy priorities.
- Supervision of banks and cross-border activity:
  - Central Bank has a comprehensive AML/CFT supervisory approach with engagement depth determined by an entity’s overall risk rating.
  - Given sector expansion, augmentation of resources and skills is necessary to maintain supervisory engagement.
  - Since 2017, the Central Bank broadened access to data from supervised entities, but collection of cross-border data and use of analytical tools (machine learning, big data) can be improved.
  - Desk-based and on-site inspections should be reassessed to reflect risks of fast-growing entities with significant cross-border flows.
  - Recommendation: Central Bank should continue vigorous enforcement actions aligned with compliance breaches and risk levels.
- Virtual Asset Service Providers (VASPs):
  - Commencement of registration process of VASPs is welcome; the Central Bank is seeing significant VASP applications and expects a high volume of transactions.
  - The Central Bank has not yet commenced active supervision; a comprehensive assessment of applicants is undertaken during registration.
  - Recommendation: The Central Bank should invest in developing supervisory tools for the sector and increase resources commensurate with risks.
- Professional gatekeepers and fragmentation:
  - Efforts to raise ML/TF risk awareness among lawyers, accountants, and Trust and Company Service Providers (TCSPs) are positive, but supervision is fragmented, undermining effectiveness.
  - The AMLCU and self-regulatory bodies are working to improve TCSP understanding of AML/CFT obligations.
  - A recently published risk assessment of the TCSP sector should inform supervisory engagement.
  - Fragmentation can lead to inconsistent supervision and regulatory arbitrage, particularly in the accountancy sector.
  - Recommendation: Enhance the enforcement toolkit, including power to impose administrative fines.
- Beneficial ownership registries (BORs):
  - Three BORs for companies, trusts, and certain financial vehicles were created in 2019-20.
  - A sectoral risk assessment for legal persons and legal arrangements (2020) showed significant ML risk, particularly for entities with complex ownership.
  - The Pandora Papers highlighted potential misuse of limited partnerships.
  - Recommendation: BORs should ensure registration information is accurate, complete, and up-to-date; professional gatekeepers should assist by sharing discrepancies found during customer due diligence.

### Authorities’ views and follow-up
- Authorities welcomed the FSAP and engaged constructively with the IMF team.
- They broadly agreed with IMF assessments and recommendations and noted:
  - Positive endorsement of progress in strengthening regulation, supervision, and crisis management since 2016, aided by collaboration with ECB/SSM, the Single Resolution Board, and ESFS.
  - Financial sector remained resilient through Brexit and the pandemic shocks.
  - Need to ensure regulatory framework and supervisory capacity keep pace with financial sector growth, complexity, and interconnectedness.
  - Priority to strengthen AML/CFT framework, including cross-border activity, as European and international standards evolve.
  - Several FSAP focus areas (market-based finance, fintech) require regulatory coordination at European and global levels; authorities committed to continue driving work with counterparts.
  - Intent to follow up on FSAP recommendations and agreed to publish the FSSA and the Technical Notes.
- Authorities welcomed tailored technical recommendations: banks and insurance companies found resilient; further efforts needed to address legacy GFC issues in retail banks and government divestiture; continue enhancing supervisory powers on individual accountability; conduct deep dives on market-based finance; implement sequenced program to manage climate-related financial risks.

### Key statistics and indicators (selected)
- Inflation (HICP) projections: 2022: 7.5, 2023: 3.8, 2024: 2.5, 2025: 2.0, 2026: 2.0, 2027: 2.0
- Real GDP projections (percentage change): 2022: 7.5, 2023: 5.0, 2024: 4.1, 2025: 3.1, 2026: 3.0, 2027: 3.0
- Unemployment rate (percent): 2022: 5.0, 2023: 5.0, 2024: 5.0, 2025: 5.0, 2026: 5.0, 2027: 5.0
- General government gross debt (percent of GDP): 2022: 49.1, 2023: 44.8, 2024: 41.6, 2025: 39.0, 2026: 36.4, 2027: 33.4
- Gross external debt (excl. IFSC): 2022: 220.9, 2023: 201.2, 2024: 188.6, 2025: 180.5, 2026: 174.3, 2027: 169.4
- Selected Financial Soundness Indicators (2021Q2):
  - Regulatory capital to risk-weighted assets: 26.0
  - Tier 1 capital to risk-weighted assets: 23.7
  - Capital to assets (leverage ratio): 8.0
  - Return on assets: 0.6
  - Nonperforming loans to total gross loans: 2.8
- Financial sector structure (2021):
  - Banks: Number of institutions: 263; Total Assets (EUR billion): 3,764; Multiples of GDP: 1.8
  - Investment Funds: Number of institutions: 6,175; Total Assets (EUR billion): 3,889; Multiples of GDP: 9.2
  - Total institutions: 7,707; Total Assets (EUR billion): 18.3; Multiples of GDP: (aggregate)

*Sources: CSO, DoF, Eurostat, and IMF staff estimates and projections.*

### Appendix I. Status of Key Recommendations of 2016 FSAP

### Appendix I. Status of Key Recommendations of 2016 FSAP

### Cross-cutting
- Recommendation 1: "Support independence of the Central Bank by continuing to demonstrate accountability to the Oireachtas (Parliament) and enhancing public transparency (⁋39)."  
  - Time: Ongoing  
  - Status: Partially addressed.  
  - Key points: Strengthening transparency and accountability featured in two (three-year) Central Bank Strategic Plans since the last FSAP; Central Bank actively and regularly engages with the Oireachtas via Committee hearings, correspondence, and Parliamentary Questions.

- Recommendation 2: "Revise personnel policies to attract and retain experienced staff (⁋39)."  
  - Time: NT  
  - Status: Largely addressed.  
  - Key points: Central Bank formulated and implemented a People Strategy covering resourcing, learning and development, leadership development and talent management; significant growth in staffing; long-term people strategy continues to evolve.

### Stability Analysis
- Recommendation 3: "Further develop bank stress testing, including risks in U.K. operations (⁋22)."  
  - Time: NT  
  - Status: Addressed.  
  - Key points: CBI enhanced solvency stress testing capabilities including modelling infrastructure to stress test U.K. exposures; capabilities sufficient for domestic retail banks; means to stress test new institutions with significant ‘traded risk’ exposures under development.

- Recommendation 4: "Close data gaps on cross-border exposures, the nonbank financial sector, the commercial real estate market, and the non-financial corporate sector (⁋24, 26, 28, 52, 53)."  
  - Time: NT  
  - Status: Partially addressed.  
  - Key points: Progress via projects such as AnaCredit, SHS and the Central Credit Register; Central Bank led data collection on non-bank financial sector and reduced “OFI residual” relative to peers though OFI residual remains large relative to domestic economy; data used for analytical and policy purposes; data gap closure is ongoing.

- Recommendation 5: "Build internal capacity that allows for regular stress testing of MMFs (⁋52)."  
  - Time: NT  
  - Status: Partially addressed/ongoing.  
  - Key points: Central Bank contributes to ESMA and ESRB parameter development; conducts liquidity analysis of MMFs and is developing stress testing capabilities for investment funds and MMFs, with full development taking time.

- Recommendation 6: "Improve data coverage and monitoring of all special purpose vehicles (⁋52)."  
  - Time: NT  
  - Status: Partially addressed.  
  - Key points: Data on SPVs first collected in Q3 2015; Central Bank publishes quarterly statistical updates and analytical work on SPEs; ongoing engagement with industry and dependence on international definitions and Central Statistics Office for further implementation.

- Recommendation 7: "Develop better understanding of the use of investment fund portfolio leverage (⁋52)."  
  - Time: NT  
  - Status: Partially addressed.  
  - Key points: Leverage varies by fund type; Central Bank contributed to FSB and ESRB monitoring; conducted deep dive on property fund sector identifying a cohort with elevated leverage; further domestic and international work required to comprehensively measure and monitor leverage.

### Financial Sector Oversight — Macroprudential Policy
- Recommendation 8: "Maintain, and in due course review, LTV and LTI limits (⁋55)."  
  - Time: NT  
  - Status: Addressed.  
  - Key points: Central Bank commits to annual review of mortgage measures calibration; views measures as a permanent market feature with adjustable calibration.

- Recommendation 9: "Operationalize the Central Credit Register as soon as possible, and, once operational, transform the LTI limit into a more comprehensive DTI limit (⁋55)."  
  - Time: MT  
  - Status: Partially addressed/ongoing.  
  - Key points: Central Credit Register now fully operational with pseudo-anonymized data available for Central Bank analytical use; conceptual and practical considerations for a move to a DTI limit were part of thematic reviews in 2021 and 2022.

### Financial Sector Oversight — Banking
- Recommendation 10: "Continue to streamline options under national discretion and regulations in bank supervision (⁋ 42)."  
  - Time: MT  
  - Status: Noted as addressed to the ECB (outside CBI scope).  
  - Key points: ECB under the SSM coordinates optional discretions; CBI will input to SSM discussions and comply as appropriate; limited instances where CBI retains discretion exercised differently from ECB.

- Recommendation 11: "Further enhance the effectiveness and enforceability of the supervision of credit risk in banks with respect to loan classification and provisioning (⁋ 43)."  
  - Time: NT  
  - Status: Partially addressed (noting ECB role for significant institutions).  
  - Key points: Initiatives to promote appropriate provision levels via RMPs and discussions; enforcement of EBA GL on Definition of Default / ECB NPL guidance; CRD/CRR calendar provisioning backstop implemented with initial impacts at year-end 2020; CBI delegates for less significant institutions and promotes prudent provisioning.

- Recommendation 12: "Remain vigilant that harmonization of the SSM supervisory processes is balanced by the application of the principle of proportionality (⁋ 42)."  
  - Time: NT  
  - Status: Noted as addressed to the ECB (outside CBI scope).  
  - Key points: FSAP observed changes in ECB approach; CBI will input to SSM discussions and comply as appropriate.

### Financial Sector Oversight — Insurance
- Recommendation 13: "Enhance assessment of credit risk in insurers’ portfolios (⁋33)."  
  - Time: NT  
  - Status: Addressed.  
  - Key points: Investment portfolios monitored via base and core risk assessments; supported by investment risk dashboard updated quarterly; captures credit risk and time series analysis; aggregate credit quality analyzed in quarterly financial resilience overview.

- Recommendation 14: "Enhance analysis of unusual reinsurance transactions to ensure that any capital relief is warranted by true risk transfer (⁋ 45)."  
  - Time: NT  
  - Status: Addressed.  
  - Key points: Reinsurance proposals extensively reviewed in authorization and quality review assessments; counterparty risk reviewed in supervisory process; policy papers developed on SPVs and intragroup quota share arrangements.

- Recommendation 15: "Coordinate among insurance supervisors to ensure due scrutiny of license application and limit improper 'jurisdiction shopping' (⁋46)."  
  - Time: NT  
  - Status: Addressed.  
  - Key points: Revised general protocol with EIOPA effective 1 May 2017; internal procedures updated and training provided; an MMoU developed between EIOPA members and U.K. authorities.

### Financial Sector Oversight — Market-based Finance
- Recommendation 16: "Require MMFs to report liquid assets and characteristics of the investor base (⁋52)."  
  - Time: NT  
  - Status: Addressed.  
  - Key points: EU MMF Regulation requires MMF disclosures and supervisor reporting; Central Bank developed monitoring tools and new databases (including the Securities Holding Database) to improve understanding of investors in Irish MMFs and interconnectedness.

- Recommendation 17: "Encourage existing MMFs to graduate away from the CNAV convention ... discourage CNAV valuation in new MMFs (⁋52)."  
  - Time: NT  
  - Status: Addressed.  
  - Key points: Money Market Funds Regulation (EU 2017/1131) and Irish implementing regulations introduced detailed operational requirements (prohibition on sponsor support, cessation of reverse distribution mechanism, rules on liquidity, eligible assets, stress testing, valuation, redemption practices, transparency); IOSCO assessment found Ireland to be ‘Fully Consistent’; Central Bank active in FSB, IOSCO, ESRB, ESMA deliberations on further reforms.

### Financial Safety Net / Resolvability
- Recommendation 18: "Continue to identify and address impediments to resolvability (⁋64)."  
  - Time: Ongoing  
  - Status: Addressed.  
  - Key points: Irish retail banks have set up separate holding companies to facilitate bail-in of MREL debt; made significant progress building MREL and are very close to meeting full MREL requirements; required to develop and test bail-in "playbooks"; progress on operational continuity in resolution; more progress needed and European crisis management and deposit insurance framework strengthening remains necessary.

- Recommendation 19: "Streamline the process for court approval of resolution measures (⁋ 61)."  
  - Time: NT  
  - Status: Not addressed.  
  - Key points: Recommendation relates to ex ante judicial approval requirement in Ireland; legislative change required to remove requirement; Department of Finance view: imposing fixed timeframe on Court risks unconstitutional fetter on judicial discretion and independence; other measures: new Financial Stability Group terms of reference and crisis simulation exercises; Central Bank elaborated policies to facilitate prompt Court decisions.

- Recommendation 20: "Streamline the process of SRM decision making (⁋61)."  
  - Time: MT  
  - Status: Partly outside Irish scope (addressed to EU authorities).  
  - Key points: Some streamlining in resolution planning has occurred but framework for resolution decision and execution remains relatively complex; Central Bank advocates SRM simulation exercises to test processes and enhance preparedness.

### Appendix II — Ireland Risk Assessment Matrix (selected risks and impacts)
- Conjunctural Risks (examples):
  - Russia’s invasion of Ukraine escalation (Overall Level of Concern: High; Relative Likelihood: Low)  
    - Expected impacts: higher commodity prices, refugee migration, tighter financial conditions, deterioration in growth and credit quality, higher inflationary pressures, potential capital outflows.
  - Outbreaks of lethal and highly contagious Covid-19 variants (Overall Level of Concern: Medium; Relative Likelihood: High)  
    - Expected impacts: renewed lockdowns, erosion of market confidence, constrained policy space, formation of NPLs, deterioration in commercial real estate prices affecting bank loan books.
  - De-anchoring of inflation expectations in the U.S. and/or advanced European economies (Overall Level of Concern: Medium (for U.S.)/Medium/Low (for EA); Relative Likelihood: Medium/Low)  
    - Expected impacts: sharp tightening of global financial conditions, losses in bank trading portfolios and insurers’ investments, higher government borrowing costs, asset price corrections.
  - Geopolitical tensions and deglobalization (Overall Level of Concern: High; Relative Likelihood: Low)  
    - Expected impacts: growth slowdown, abrupt asset price reversals, higher credit delinquencies, system-wide liquidity and solvency stress.

- Structural Risks (examples):
  - Continued trade frictions and post-Brexit implementation uncertainty (Overall Level of Concern: Medium; Relative Likelihood: Medium)  
    - Expected impacts: higher input and logistics costs, curbed firm profitability, potential credit exposure shocks via U.K. market exposures.
  - Natural disasters related to climate change (Overall Level of Concern: Medium; Relative Likelihood: Medium)  
    - Expected impacts: physical damage impairing financial health of firms and households, higher credit and market risks for the financial sector.

- Note: “NT-near-term” denotes up to 2 years; “MT-medium-term” denotes 2–5 years.

- Final note: Banking Sector: Solvency Stress Test — Top-down by IMF (heading present).

*Appendix I. Status of Key Recommendations of 2016 FSAP*

### 1. Institutional

### 1. Institutional

### Perimeter and Exercise
- Top-Down by FSAP team.
- Scope of consolidation: banking activities of the consolidated banking group for banks having their headquarters in Ireland. Foreign subsidiaries are assessed on the unconsolidated level covering domestic activities only.

### Institutions included (Banking)
- 12 banks subcategorized as SIs (7 banks) and LSIs (5 banks).
- Among the total, 5 are domestically focused retail banks and 7 are internationally oriented banks which are subsidiaries of foreign parents.
- LSIs are only subject to sensitivity analysis.
- Scenario based stress test for retail and large international banks (8 banks); sensitivity analysis for other international banks (4 banks).

### Market share (Banking)
- Total coverage is about 80 percent of the banking sector, with 73 percent for SIs and 7 percent for LSIs.

### Data and baseline date (Banking)
- Multiple data vintages: December 2019, December 2020, June 2021.
- Supervisory data: bank balance sheet and supervisory statistics (including FINREP and COREP), information on interest rate risk in the banking book (IRRBB), liquidity risk and market risk sensitivities (including STE templates) provided by the authorities and the ECB.
- Expected Default Frequency sourced from Moody’s.
- Further supervisory information provided, among others, probability of defaults and stage transition matrix by credit portfolios.
- Data includes transparency templates for banks in the 2021 EBA stress test sample.
- Market and publicly available data, such as information from ECB statistical data warehouse on funding and lending rates by type of asset and funding portfolios.
- Data on policy mitigation impact on banking sectors in the context of COVID-19 primarily through moratoria, public guarantees, and liquidity support measures.
- Coverage of sovereign and non-sovereign securities exposures: debt securities measured through fair value (FVPL and FVOCI) and amortized cost (AC) account.
- Coverage of lending exposure: credit institutions, nonbank financial institutions, household (retail and mortgage), corporate (Ireland non-CRE, Ireland CRE, U.K., U.S., rest of EA and rest of the world).

### Channels of Risk Propagation and Methodology (Solvency)
- FSAP team satellite models and methodologies.
- Balance-sheet regulatory approach.
- Market risk treated as an add-on component, with a separate calibration. Market risk stress scenario impacts both capital resources (via profit and loss or via Other Comprehensive Income (OCI)) and capital requirements (RWA).
- Impact on capital resources comprises positions in the trading book as well as other fair valued items in the banking book. Impact on RWA for market risk evolves with balance sheet assumptions.
- Traded risk impact from revaluation of trading assets (FVPL) and FVOCI securities by counterparty: central government (by country issuers), credit institutions, other financial institutions, and nonfinancial corporates.
- Credit spreads on sovereign, credit institutions and corporate securities interpolated using bank-specific residual maturity at the book and issuer level (i.e., sovereign issuers by country and individual corporate issuers by ISIN codes). Credit spreads on other securities estimated on a hypothetical portfolio using a duration proxy. Valuation effects assessed using a modified duration approach. Hedges are considered as ineffective under stress.
- Losses for securities portfolios based on modified duration approach. Losses on equities (both long and short position) based on stock market price movement specified by the scenario.
- For internally modelled exposures (IRB), projection of PiT and TTC PDs, LGD, EAD and RWA. For standardized (STA) exposures, projection of new flows of defaulted exposures, risk weights downgrades and coverage ratio for defaulted loans.
- Credit risk projections for IRB and STA exposures cover ten asset classes: credit institutions, nonbank financial institutions, household (retail and mortgage), corporate (Ireland non-CRE, Ireland CRE, U.K., US, rest of EA and rest of the world).
- Credit risks from domestic nonfinancial corporations adopt a sectoral approach to differentiate impact on COVID and Brexit sensitive sectors.
- PDs (or flow of new nonperforming loans) obtained from country authorities for domestic exposures and proxied by Moody’s EDFs for foreign exposures.
- Resulting impact translated into credit loss impairment charges and shifts to RWAs due to capital charges for defaulted assets.
- Provisioning for IRB and STA modeled using IFRS9 transition matrix approach. Transition matrices, PiT PDs, PiT LGDs for loan and securities classified under financial asset measured through amortized cost (AC) and other comprehensive income (FVOCI) modeled using CBI submissions and COREP data.
- Funding costs projected at the portfolio level using funding structure by product (deposits, debt securities, etc.) and maturity bucket (overnight vs. term). Funding cost projections capture systematic risk linked to the scenario and utilized bank level data on 8 Irish banks from COREP templates.
- Lending rates projected at the system level and attached to bank-specific effective interest rates and outstanding amount at cut-off date (interest rate on corporate and household loans and debt securities).

### Stress test horizon
- 2021 Q2–2026 Q2 (5 years)

### Scenarios and Sensitivity Analysis (Solvency)
- 2 Scenarios:
  - A baseline scenario based on the March 2022 WEO macroeconomic projections.
  - An adverse scenario that captures the key risks in the RAM. This scenario relies on Global Macro-financial Model (GFM), a structural macroeconometric model of the world economy, disaggregated into forty national economies, documented in Vitek (2018). Scenarios for foreign countries where Ireland has significant exposure is extracted from GFM and is internally consistent with country scenarios of ongoing FSAPs.
- Single-factor sensitivity test for other international banks (4 banks) imposing:
  - a lower bound (10 percentile) of the historical distribution of net interest margin, net trading income ratio and net fees and commission income ratio,
  - and an upper bound (90 percentile) of net loan loss ratio and loss ratio from off-balance sheet exposure with 50 percent conversion rate to on-balance sheet exposure.
- Single-factor sensitivity test further assesses resilience to concentration risk for SI and LSIs, where the banks’ top 3 to 5 exposures are assumed to fail.
- Sensitivity analysis assessing the effects of unwinding of supportive COVID-19 policies (e.g., payment breaks) on bank solvency condition.

### Risks Covered and Buffers (Solvency)
- Risks covered include credit (on loans and debt securities), market (valuation impact of debt instruments through repricing and credit spread risk as well as the P&L impact of net open positions in market risk factors such as foreign exchange risks) and interest rate risk (IRRBB) on the banking book.
- Concentration risk assessed by sensitivity analysis.
- Solvency and liquidity risk interactions, mainly through asset haircut.

### Behavioural Adjustment and Other Assumptions
- Quasi-static approach for growth of banks’ balance sheet over the stress-test horizon: asset allocation and composition of funding remain the same, balance sheet grows in line with the nominal GDP paths of major geographical exposures and subject to reduced credit demand in material jurisdictions and FX shock from revaluation effects on foreign currency loans specified in the stress test scenario.
- To prevent deleveraging, the rate of change of balance sheets is set at a floor of zero percent. This constraint is binding in the adverse scenario.
- Projecting RWAs: standardized and IRB portfolios are differentiated. For standardized portfolios, RWAs change due to balance sheet growth, new inflows of non-performing loans, new provisions for credit losses, exchange rate movements, and conversion of a portion of off-balance sheet items to on-balance sheet items. For IRB portfolios, through-the-cycle-PDs, downturn LGDs and EAD for each asset class/industry are used to project risk weights.
- Interest income from non-performing loan is not accrued.
- Banks do not issue new shares or make repurchases during the stress test horizon.
- Dividends are assumed to be paid out at 25 percent of current period net income after taxes (i.e., only if net income is positive) by banks that were in compliance with supervisory capital requirements.

### Regulatory and Market-Based Standards and Parameters (Solvency)
- National regulatory framework Basel III regulatory minima on CET1 (4.5 percent).
- Evaluated banks’ total capital adequacy ratio against the 8 percent level, Tier 1 capital ratio against the 6 percent benchmark and the leverage ratio during the stress test horizon against the 3 percent Basel III minimum requirement.
- The adverse scenario hurdle rate for CET1, T1 and total capital adequacy includes any requirements due to systemic buffers for other systemically important institution (O-SII), and do not include the capital conservation buffer which is considered useable in the adverse scenario.
- Countercyclical capital buffer is currently set at 0 in Ireland.

### Reporting Format for Results (Solvency)
- Evolution of capital ratios for the system as a whole and as groups of retail banks and large international banks.
- Information on impact of different result drivers, including profit components, losses due to realization of different risk factors.
- Capital shortfall as sum of individual shortfalls; reported in euros and in percent of nominal annual GDP.
- Number of banks and corresponding percentage of assets below the regulatory minimum (or below the minimum leverage ratio).

---

### Banking Sector: Liquidity Stress Test

### Perimeter and Exercise
- Top-Down by FSAP team.
- 12 banks subcategorized as SIs (7 banks) and LSIs (5 banks). Among the total, 5 are domestically focused retail banks and 7 are internationally oriented banks which are subsidiaries of foreign parents.

### Market share and Data
- Total coverage is about 80 percent of the banking sector, with 73 percent for SIs and 7 percent for LSIs.
- Latest data: June 2021.
- Source: supervisory data (LCR, NSFR and ALMM Maturity Ladder template).
- Scope of consolidation: banking activities of the consolidated banking group for banks having their headquarters in Ireland. Foreign subsidiaries are assessed on the unconsolidated level covering domestic activities only.

### Channels of Risk Propagation and Methodology
- Basel III LCR and cash-flow based liquidity stress test using maturity buckets by banks, incorporating both contractual and behavioral (where available) assumptions about combined interaction of funding and market liquidity and different level of central bank support.
- Liquidity test in total currency, USD, and Sterling.

### Risks and Buffers
- Risks: Funding liquidity; Market liquidity.
- Buffers: The counterbalancing capacity, including liquidity obtained from markets and/or the central bank’s facilities. Expected cash inflows are also included in the cash-flow based analysis.

### Tail shocks and Shock Calibration
- Run-off rates calibrated to reflect scenarios of system-wide deposit runs and dry-up of unsecured wholesale and retail funding, with additional run-off for non-resident deposits on top of the retail and wholesale run-off, calibrated following historical events, recent international experience in liquidity crisis and IMF expert judgment.
- Retail scenario key assumptions:
  - (i) 10 percent run-off rates for stable retail deposits and 20 percent for less stable retail;
  - (ii) 5-25 percent for operational deposits and 20-40 percent for non-operational deposits;
  - (iii) no changes in liquid assets weights.
- Wholesale scenario key assumptions:
  - (i) 5 percent run-off rates for stable retail deposits and 15 percent for less stable retail;
  - (ii) 15-35 percent for operational deposits and 30-50 percent for non-operational deposits;
  - (iii) no changes in liquid assets weights.
- Combined run-off and price shock scenario key assumptions:
  - (i) 10 percent run-off rates for stable retail deposits and 20 percent for less stable retail;
  - (ii) 15-35 percent for operational deposits and 30-50 percent for non-operational deposits;
  - (iii) liquid assets weights reduction of 0-5 percent for level 1 assets, 3-20 for level 1 covered bonds, 5-15 percent for level 2A assets and 5-25 for level 2B assets.
- Liquidity shocks simulated for 1–month for both LCR, and 5 days, 1 month, 3 months and 1 year for cash-flow based approach.
- Haircuts of high-quality liquid assets (HQLA) calibrated against ECB haircuts, past Euro Area FSAPs, and market shock for investment securities and money market instruments in the solvency stress test.

### Regulatory Standards and Reporting
- Consistent with Basel III regulatory framework (LCR).
- Liquidity shortfall by bank reported.
- Output presentation:
  - Liquidity ratio or shortfall by groups of banks and aggregated (system wide).
  - Number of banks that still can meet or fail their obligations.

---

### Bank and Non-bank Sector: Contagion Analysis

### Perimeter and Exercise
- Top-Down by FSAP team.
- Domestic interbank contagion: 12 banks subcategorized as SIs (7 banks) and LSIs (5 banks).
- Cross-border contagion: country-pair bilateral exposure across Ireland, rest of Euro Area countries, U.K., and US.
- Cross-sectoral contagion: entity specific bilateral exposure across Irish banks and top 10 nonbank financial institutions (NBFIs) in terms of exposure size, drawing from sample including but not limited to, financial vehicle corporations (FVCs) and special purpose vehicles (SPVs), other financial service companies, as well as investment fund, pension and insurance companies.
- Total coverage is about 80 percent of the banking sector, with 73 percent for SIs and 7 percent for LSIs.

### Data and Baseline
- Latest data: Supervisory as of June 2021 (and to the extent possible December 2021).
- BIS consolidated banking statistics.

### Methodology and Tail Shocks
- Balance-sheet model: Interbank and cross-border network model by Espinosa-Vega and Solé (2010).
- Pure contagion: hypothetical default of institutions.
- Default threshold: banks would default if their total CET1 ratios falling below 4.5 percent.

### Reporting
- Capital shortfall systemwide, by bank and by group: contagion and vulnerability scores.
- Direction and size of spillovers within the network.

---

### Banking Sector: Climate Risk Analysis

### Perimeter and Data
- Top-Down by FSAP team.
- 12 banks subcategorized as SIs (7 banks) and LSIs (5 banks). Among the total, 5 are domestically focused retail banks and 7 are internationally oriented banks which are subsidiaries of foreign parents.
- Total coverage is about 80 percent of the banking sector, with 73 percent for SIs and 7 percent for LSIs.
- Supervisory data as of June 2021.
- Public data from 2003 to 2020 from capital IQ, Moody’s Analytics and Eurostat.

### Methodology: Channels of Risk
- Transition risk:
  - Single factor sensitivity analysis to assess near-term impact on corporate credit quality from a rising carbon tax, with sectoral differentiation.
  - Bank credit impairment generated by applying changes in sectoral PDs from entire firm sample to bank corporate loan PDs.
  - Market losses from bank holdings of mark-to-market (MTM) debt securities estimated using a duration approach while relying on estimated PDs and Merton theory.
- Physical risk:
  - Scenario-based analysis simulating the macroeconomic impact of a severe flooding event, translated into bank losses through credit, market, and interest rate risk channels.

### Risks and Firm Behavioural Response
- Risks: Transition risk; Physical risk.
- Firms are allowed to pass through partial or full cost of carbon tax to consumers through increase in prices. Corresponding drop in demand is incorporated based on pre-determined price elasticity.

### Tail Shock (Climate)
- Increase of carbon tax from €33.50 to €100 per ton, based on CBI national targets and NGFS scenarios.
- Impact assessed from 1-year to 5-year horizon, assuming shock materializes immediately in the first year.

### Regulatory Parameters and Reporting
- No capital thresholds are applied.
- Output presentation:
  - Change in corporate PDs by sector with and without firm behavioral response from 1-year to 5-year horizon.
  - Bank credit impairment by sectors due to shock on PDs on corporate loan, from 1-year to 5-year horizon.
  - Bank market losses on holdings of debt securities due to shock on credit spread induced from corporate PDs, from 1-year to 5-year horizon.
  - Bank capital ratio impact from 1-year to 5-year horizon.

---

### Insurance Sector: Solvency Risk

### Institutional perimeter and Coverage
- Institutions included:
  - 10 life insurers: Aviva Life & Pensions Ireland DAC, AXA MPS Financial DAC, Darta Saving Life Assurance dac, Intesa SanPaolo Life dac, Irish Life Assurance Plc, Metlife Europe d.a.c., New Ireland Assurance, Standard Life International, Utmost PanEurope dac, Zurich Life Assurance plc.
  - 8 non-life insurers: Allianz Plc, Aviva Insurance Ireland, AXA Insurance DAC, AXIS Specialty Europe SE, FBD Insurance Plc, RSA Insurance Ireland dac, XL Insurance Company SE, Zurich Insurance plc.
  - 7 reinsurers: Allianz Re Dublin, Hannover Re (Ireland) DAC, Partner Reinsurance Europe SE, RGA International Reinsurance, SCOR Global Life Reinsurance Ireland dac, SCOR Life Ireland Designated Activity Company, XL Re Europe SE.
- Market share:
  - Life: >70 percent (gross premiums written, total and domestic business).
  - Non-life: >70 percent (gross premiums written, total and domestic business).
  - Reinsurance: >70 percent (gross premiums written, total and domestic business).
- Consolidation: Solo-entity level.

### Data and Reference date
- Data: Regulatory reporting.
- Reference date: June 30, 2021.

*Source: 1irlea2022003 - 1. Institutional*

### 2. Channels of risk

### 2. Channels of risk propagation

### Methodology
- Investment assets: market value changes after price shocks, affecting the solvency position
- Insurance liabilities: impact on value of the best estimate by changing discount rate of future cash flows, proportionate change for the risk margin
- Recalculation of required capital after stress: approximated by the Solvency II standard formula also for internal model users
- Time horizon: Instantaneous shock

### Tail shocks — Scenario analysis (Adverse scenario, aligned with banking sector stress test narrative)
- Risk-free interest rates (without volatility adjustment):
  - -17 bps (1yr EUR)
  - -49 bps (10yr EUR)
  - -17 bps (1yr USD)
  - -48 bps (10yr USD)
  - -17 bps (1yr GBP)
  - -49 bps (10yr GBP)
- Sovereign bond spread:
  - +160 bps (domestic)
  - +25 bps for other low-yield advanced economies
  - up to +180 bps for emerging and developing economies
- Stock prices:
  - -58.0 percent (domestic)
  - -18.0 percent (Euro Area and United States)
  - -20.0 percent (other advanced economies)
  - -35.0 percent (emerging and developing economies)
- Property prices:
  - -19.9 percent (domestic, residential)
  - -34.1 percent (domestic, commercial)
  - -5.0 percent (foreign, residential)
  - -18.0 percent (foreign, commercial)
- Corporate bond spreads:
  - between +60 bps (AAA, non-financials) and +420 bps (CCC and lower, non-financials)
  - between +75 bps (AAA, financials) and +450 bps (CCC and lower, financials)
- Rating downgrades: one category (3 notches) for one third of the corporate bond portfolio
- EUR external value: -11.8 percent

### Sensitivity analyses
- Risk-free interest rates +/-100 bps (all currencies)
- EUR external value +/-10 percent
- Stock prices -40 percent
- Default of largest banking counterparty

### Risks assessed and buffers
- Risks/factors assessed:
  - Market risks: interest rates, share prices, property prices, credit spreads, currency
  - Credit risks: default of largest financial counterparty
  - Summation of risks, no diversification effects
- Buffers:
  - Solvency II long-term guarantee measures and transitionals:
    - Volatility Adjustment (VA)
    - Unit-linked life insurance: Investment losses borne by policyholders
- Behavioral adjustments: None

### Regulatory/accounting standards
- Solvency II
- National GAAP

### Reporting format for results — Output presentation
- Impact on valuation of assets and liabilities
- Impact on solvency ratios (including and excluding the effect of long-term guarantee measures and transitionals)
- Contribution of individual shocks to changes of eligible own funds
- Dispersion measures of solvency ratios
- Capital shortfall and possible de-risking of investment assets to re-establish a full coverage of solvency requirements

---

### Insurance Sector: Liquidity Risk (Bottom-up by CBI; Top-down by IMF)

### Institutional perimeter
- Institutions included (Bottom-up by CBI):
  - 10 insurers: Allianz Global Life, Amtrust International Underwriters, Hannover Re (Ireland) DAC, Intesa SanPaolo Life dac, Metlife Europe d.a.c., Partner Reinsurance Europe SE, RGA International Reinsurance, Utmost PanEurope dac, XL Insurance Company SE, Zurich Insurance plc
- Institutions included (Top-down by IMF):
  - 10 life insurers, 8 non-life insurers, 7 reinsurers: As for the solvency ST
- Market share:
  - Life: 20 percent (gross premiums written)
  - Non-life: 45 percent (gross premiums written)
  - >70 percent (gross premiums written, total and domestic business)
- Data:
  - Regulatory reporting (both)
- Reference date:
  - December 31, 2020 (Bottom-up by CBI)
  - June 30, 2021 (Top-down by IMF)

### Channels of risk propagation — Methodology and time horizon
- Bottom-up (CBI):
  - Stock/flow assessment of liquidity sources and liquidity needs
  - Shock to cash flows, based on EIOPA’s 2021 adverse scenario (market and insurance risks)
  - Reduction in the value of liquid assets, based on EIOPA’s 2021 adverse scenario (market shocks)
  - Revaluation of derivative positions after interest rate shock
  - Time horizon: 90 days
- Top-down (IMF):
  - Stock/flow assessment elements
  - Time horizon: Instantaneous (1 day, 5 days)

### Tail shocks and sensitivity analysis
- Scenario analysis:
  - Bottom-up: EIOPA 2021 adverse scenario
  - Top-down: None
- Sensitivity analysis:
  - Bottom-up: None
  - Top-down: Parallel shift of the interest rate term structure (for all currencies): +25 bps, +50 bps, +100 bps

### Risks and buffers
- Risks/factors assessed:
  - Bottom-up: Liquidity risk: Shock to market value of assets, mass lapse shock, mortality shock, pandemic morbidity shock and increase of non-life cost of claims, shock to reinsurance inflows, reduction in written premiums
  - Top-down: Liquidity risk: Margin calls for interest rate swaps
- Buffers: None (both)
- Behavioral adjustments: None (both)

### Regulatory/accounting standards
- Solvency II
- National GAAP

### Reporting format for results — Output presentation
- “Sustainability indicator”: Net flows divided by liquid assets
- Total amount of variation margin calls
- Variation margin as percent of cash holdings
- Variation margin as percent of high-quality liquid assets

---

### Investment Fund Liquidity Stress Testing Matrix (STeM)

### Institutional perimeter
- Institutions included:
  - Fixed-income bond funds
- Market share:
  - Varies by type of fund
- Data and baseline date:
  - Portfolio reporting date: Jan 1, 2021 or later
  - Data: Morningstar

### Channels of risk propagation — Methodology and horizon
- Methodology:
  - Various levels of redemptions shock compared level of highly liquid assets at the fund level
  - Redemption shocks calculated based on historical data on redemptions using VaR and Expected Shortfall methodologies with multiple thresholds
- Stress test horizon:
  - Monthly data frequency, instantaneous shocks

### Tail shocks — Scenario analysis
- Pure redemption shock: severe outflows based on historical distribution

### Risks and buffers
- Risks:
  - Liquidity risk: severe redemption shock
- Buffers:
  - Level of highly liquid assets

### Reporting format for results — Output presentation
- Number of funds with a redemption coverage ratio (ratio of highly liquid assets to redemptions) below one
- Liquidity shortfall amount for individual funds after redemptions

*Source: 1irlea2022003 - 2. Channels of risk (Ireland, Insurance and Investment Fund stress testing matrices).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022003.pdf_