## EXECUTIVE SUMMARY (Ireland FSAP — content unit 1irlea2022011)

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### Overview and systemic context
- Ireland is a small open economy within the Euro Area comprising 3.4 percent of aggregate EA GDP, with a significant portion of GDP attributable to foreign-owned multinational enterprises (MNEs).
- The Irish financial system holds assets of EUR 7.9 trillion, over 18 times GDP.
- Monetary policy set by the European Central Bank (ECB) makes national macroprudential policy a critical stabilizing role for the Irish financial system.

### Institutional framework, powers, and coordination
- Designated macroprudential authority: Central Bank of Ireland (CBI) under ESRB Recommendation 2011/3.
- Legal bases for CBI powers:
  - EU: Capital Requirements Regulation and Directive (CRR/CRD) including CRR II/CRD V.
  - National: Central Bank (Supervision and Enforcement) Act 2013 (including borrower-based measures such as LTV and LTI caps).
- Internal structure:
  - Financial Stability Directorate established in 2016 consolidating macroprudential policy, resolution, and crisis management.
  - Macroprudential Measures Committee (MMC) established in 2016 advising and recommending calibrations; typically meets twice per quarter and publishes accounts of meetings.
- Inter-agency and European interaction:
  - Financial Stability Group (FSG) formed in 2017 as a non-statutory coordination mechanism (DoF, CBI, NTMA).
  - Under the SSM, ECB has “top up” powers over CCyB, SyRB, and SIIs; the CBI must notify the ECB, ESRB, and, in some cases, EBA and the European Commission of macroprudential actions.
  - For non-banks, coordination with ESRB, EIOPA, ESMA and international bodies (FSB, IOSCO) is required.

### Implementation and past macroprudential actions
- Borrower-based measures introduced February 2015: LTV and LTI limits; subject to annual review and empirical evidence indicates effectiveness.
- Capital measures:
  - Additional O-SII buffer introduced July 2019.
  - Countercyclical capital buffer (CCyB) released in April 2020 (reduced from 1% to 0% effective April 2, 2020) in response to COVID-19.
- Transparency and data:
  - Publication of MMC meeting minutes, refreshed Financial Stability Review, Market-Based Finance Monitor launched 2021, Central Credit Register (CCR) established and fully operational (LTI coverage does not include non-mortgage debt).

### Institutional strengths and recommended enhancements
- Strengths:
  - Clear financial stability mandate under Section 6A of the Central Bank Act 1942.
  - Broad powers and information access; integrated supervisory model; Financial Stability directorate.
- Areas to strengthen:
  - Open the MMC to external advisory members to strengthen diversity of perspectives and guard against potential inaction bias. (Recommendation 1) — Agency: CBI — Timing: ST — Priority: H.
  - Prioritize completion of a dynamic macroprudential stress-testing framework to inform capital buffer calibration. (Recommendation 4) — Agency: CBI — Timing: I — Priority: H.
  - Close data gaps—especially commercial real estate (CRE)—and expand non-bank monitoring and international coordination (Recommendations 5–7, 11).

### Systemic risk monitoring and analytical capacity
- Monitoring process:
  - Structured around bi-annual Financial Stability Review (FSR) and a Systemic Risk Pack heatmap.
  - Ongoing development of macroprudential stress-testing (dynamic framework) prioritized.
- Quantitative tools and emphases:
  - Coverage includes early warning, asset price valuation, single-institution/sector risk, contagion risk, macro-financial linkages, and bank stress testing.
  - Recent methodological focus on distributions (growth-at-risk, CRE growth-at-risk, house price growth-at-risk) and alternative cyclical indicators where standard measures have low usefulness for Ireland.
- Data improvements and gaps:
  - CCR and AnaCredit valuable; CCR Phase 1 began June 30, 2017; Phase 2 reporting began March 31, 2018; hire purchase/leasing deemed reportable from June 30, 2019. Mandatory reporting tightened through 2024.
  - Remaining gaps: direct cross-border CRE exposures, some CRE held by foreign-regulated entities, and unreported domestic holders (private individuals, syndicates, non-financial firms).

### Vulnerabilities and risk assessment (broad-based)
- Overall vulnerability: moderate.
- Financial cycle position: currently neutral; indicators suggest CCyB could be increased near term to respond to an upswing.
- Credit cycle indicators:
  - Three credit gaps used: credit-to-GDP gap, credit-to-GNI* gap, and alternative credit-to-GDP gap. Credit-to-GDP and credit-to-GNI* gaps are significantly negative while gradually reversing/increasing; alternative gap stable around zero since 2019Q1.
- Tail risks:
  - Tightening external financial conditions and gradually increasing credit growth have increased downside risks; growth-at-risk has slightly increased.
  - CBI intends to build CCyB to 1.5 per cent when risk conditions are neither elevated nor subdued; if cyclical risk conditions are elevated, CCyB expected above 1.5 percent.
  - Notable update: CBI announced intention to increase the CCyB to 0.5% effective June 15, 2023, and subsequently to announce a further increase as risk conditions warrant (CBI, 2022).

### Residential real estate (RRE) and households
- Structural supply-demand imbalance:
  - Estimated new housing demand: approximately 33,000 units per year (Conefrey and Staunton, 2019; Bergin and Garcia-Rodriguez, 2020).
  - Expected shortfall: 15,000 fewer units available over 2020-2023 due to the pandemic (CBI, 2021a).
  - Construction costs rising 8.5 percent and materials costs rising 15.7 percent y-o-y in 2021Q4.
- Recent price dynamics:
  - Housing prices increased 8 percent in real terms year-on-year in 2021Q4 (14.2 percent in nominal terms).
  - Regional price growth in 2021Q4: outside Dublin real +9.1 percent y-o-y (nominal +15.3 percent); Dublin real +6.9 percent y-o-y (nominal +12.9 percent).
  - Historical valuation signals: house prices slightly elevated vs incomes (1.8 percent deviation from average) and in line with rents (0.1 percent deviation).
- Tail-risk projections and drivers:
  - Near-term tail risks to house prices at the 10th percentile described as "mild".
  - Medium-term: house prices projected to accelerate to "almost 7 percent at the 10th percentile"; downside risks effectively eliminated at that horizon under the model.
  - Key drivers of tail risk: persistence, misalignment, and leverage.
  - Projection caveat: projections use data to 2021Q4 and assume no policy changes; rises in interest rates after 2021Q4 may cool credit demand and contain price growth.

### Mortgage market structure and borrower-based measures
- Mortgage composition:
  - "60 percent of new mortgages and 30 percent of all existing mortgages have fixed rates for longer than 3 years."
  - Total outstanding mortgage balances continue to decline; new originations driven by first time buyers (FTB).
- Arrears and legacy issues:
  - "The overwhelming majority of mortgages in arrears (80 percent) involves loans that have been in arrears longer than two years."
  - "Non-banks currently hold the largest share (60 percent of accounts in arrears over two years)."
  - Non-banks’ share of outstanding mortgage loans risen to "almost 20 percent."
- Mortgage measures (design and empirical effects):
  - LTV and LTI limits introduced February 2015 with specified allowances and exemptions.
  - Concentration around limits in 2021H1: FTB average LTV "80.8"; SSB average LTV "66.8".
  - Among FTBs in 2021H1: "42.7 percent had an LTV of 89-90 percent" and "43.8 had an LTI of 3.25-3.5".
  - Allowances: share of mortgage loans with allowances around "20 percent" historically, declined to "17 percent in 2020" and "12 percent in 2021H1".
  - Representative 2021H1 statistics (selected):
    - FTBs without allowance — Loan size (EUR) "229,368"; Value (EUR) "289,855"; Income (EUR) "77,179"; LTV "80.6"; LTI "3.0"; Loan term (years) "29"; Interest rate "2.7".
    - FTBs with allowance — Loan size (EUR) "357,702"; Value (EUR) "431,333"; Income (EUR) "88,197"; LTV "83.5"; LTI "4.1"; Loan term (years) "32"; Interest rate "2.6".
  - Empirical estimates:
    - CBI (2019) counterfactual PTI analysis suggests house prices "may have been 13 to 25 percent higher in 2019" absent the measures.
    - Quantile-regression HaR: "a 10 percent tightening in both the LTV and LTI limits reduces the 5 percent HaR from -7.2 percent to -6.4 percent."
- Policy monitoring and leakages:
  - No hard upper limit on LTV and LTI ratios; recommendation to monitor unsecured credit leakages and be ready to expand borrower-based measures to include DTI/DSTI limits (Recommendation 8) — Agency: CBI — Timing: MT — Priority: M.

### Government housing policy and potential price effects
- "Housing for All" commitment: "EUR 4 bn per year up to 2030" (initial commitment over "EUR 4 bn per annum between 2021-25, continuing through 2030") to develop "300,000 new homes over the next decade."
- Estimated annual demand breakdown: "11,800" new private ownership homes; "6,500" new private rental homes; "4,100" new affordable homes; "10,300" new social housing homes.
- First Home Scheme details:
  - Government may pay "up to 30 percent of the cost of a new home in exchange for an equity stake."
  - Over 2022-26, "EUR 400 million" allocated to the First Home scheme with a target of "8,000 homes" and an expected average equity payout of "EUR 50,000 per household", corresponding to approximately "1,600 households per year on average."
  - Aggregate coverage: "8 percent of all FTBs (6 percent of new mortgages by FTBs as of 2021Q4)."

### Corporate sector and SME vulnerabilities
- Corporate financing:
  - Foreign financing accounts for "65 percent of total NFC financing."
  - Irish-resident NFCs continue to deleverage; cash holdings and deposits have increased faster than new credit origination.
- SME stress and outlook:
  - "50 percent of SMEs were loss-making in the six months leading to October 2020"; "20 percent of SMEs remained loss-making in the six months leading to March 2021."
  - NFC loans in stage 2 rose to "34.4 percent in 2021Q2" from "10 percent in 2019Q4."
  - Withdrawal of policy support in 2022 likely to lead to rising NPLs and insolvencies.

### Banking sector funding, liquidity, and concentration
- Liquidity and funding:
  - LCR in total currencies well above regulatory requirement of 100 percent.
  - LDR at 86 percent in 2021Q3 (declining trend since GFC).
  - NSFR recently binding and fully met on aggregate.
- Concentration:
  - Five banking groups hold 85 percent of all banking assets and over 90 percent of household and private-sector lending.
  - Six institutions designated O-SIIs with additional capital buffers (phase-in completed as of January 1, 2022).
- Foreign currency liquidity:
  - Retail banks maintain USD and GBP LCR at or above 100 percent; international banks aggregate USD LCR 68.8 percent — potential exposure to dollar liquidity shocks and spillovers.

### Commercial Real Estate (CRE) and property funds
- Market size and holdings:
  - Invested CRE market estimated at EUR 53 billion (end-2020).
  - Asset holders: 43 percent property funds; 8 percent investment companies; 5 percent REITs; funding counterpart unknown for 44 percent due to data gaps.
  - Increasing share of CRE financed by foreign investment up to 79.3 percent in 2021.
- CRE exposures of Irish retail banks:
  - Loans to property funds EUR 3.2 billion; other investments EUR 7.3 billion.
- CRE sectoral exposures and valuation signals:
  - Property funds primarily invested in office (37 percent exposure for funds) and retail (26 percent).
  - Sectoral performance: industrial values recovered strongly; retail valuations below pre-pandemic levels; office values and rents not yet recovered.
  - One third of assets held by property funds with LTVs exceeding 70 percent; 58 percent of assets held by funds with LTVs exceeding 50 percent. By comparison, REITs required to maintain leverage below 50 percent.
- Liquidity characteristics:
  - Typical liquidity timeframes 180-210 days in normal times; 58 percent of assets held by funds with liquidity timeframes under 200 days.
  - Property funds hold 5 percent of total assets in liquid assets.
- CBI proposals and recommendations:
  - CBI proposes using Article 25 of AIFMD to implement a total loan to total asset value limit on leverage for property funds, with transition periods and reporting.
  - Recommendation to allow counter-cyclical adjustments to leverage limit, require higher reporting frequency (e.g., quarterly), and clarify compliance timelines (Recommendation 9) — Agency: CBI — Timing: I — Priority: H.
  - Recommendation 10: Broaden bank, non-bank, and borrower-based macroprudential toolkit to mitigate CRE vulnerabilities — Agency: CBI — Timing: MT — Priority: M.
  - Recommendation 11: Work with European institutions to develop macroprudential tools targeting non-bank risks, including leakages and cross-border issues — Agency: CBI, DoF — Timing: MT — Priority: H.

### Non-bank sector expansion and data/regulatory gaps
- Non-bank lending:
  - Non-bank lenders account for 32.2 percent of new loans and approximately 20 percent of total outstanding loans to SMEs.
  - Non-bank lenders’ highest exposures: real estate, construction, wholesale and retail.
  - Peer-to-peer and crowdsourced financing not classified as loans and not reported to the CCR; current levels very small but should be monitored (Recommendation 6) — Agency: CBI — Timing: ST — Priority: M.
- Data gaps and international coordination:
  - Significant data gaps on direct cross-border CRE exposures and ultimate investors hinder full risk accounting; Recommendation 7 addresses improving CRE data coverage — Agency: CBI, CSO — Timing: MT — Priority: H.
  - In the absence of a global framework for non-bank risks, CBI should continue working with European institutions to close data gaps and address reciprocity and cross-border policy leakage; activation of measures under AIFMD faces reciprocity risks.

### Macroprudential instrument settings (selected current settings)
- CCyB: Set at 0% (lowered from 1% effective April 1, 2020; released March 2020).
- SRB: Inactive.
- O-SII buffers: Phase-in completed as of January 1, 2022; example calibrations include AIB Group 1.50%; Bank of Ireland Group 1.50%; Bank of America Europe 0.75%; Barclays Bank Ireland 1.00%; Citibank Holdings Ireland 1.00%; Ulster Bank Ireland 0.50%.
- Sectoral capital requirements: Inactive for households and corporates; stricter requirements for certain residential and commercial property exposures removed effective November 2021.
- Flexibility measures: CCB set at 2.5%; LCR set at 100%; NSFR set at 100%; NSFR effective June 28, 2021. ECB flexibility measures during COVID-19 applicable until end-2022.
- Limits on LTV and LTI ratios: Restriction in issuing high LTV and LTI mortgages to a proportion of new lending; no changes announced November 25, 2021 (annual review).
- Limits on AIFM leverage: Inactive; CBI consulting on applying limits to leverage of property funds under Article 25 of AIFMD.

### Key prioritized recommendations (excerpted with timing and priority)
- 1. Open the MMC to external advisory members to strengthen diversity of perspectives and as a safeguard against potential future inaction bias. (¶11) — Agency: CBI — Timing: ST — Priority: H.
- 4. Prioritize work on the dynamic macroprudential stress-testing framework, including to inform the calibration of cyclical capital buffers. (¶24) — Agency: CBI — Timing: I — Priority: H.
- 7. Build on domestic and international work to address CRE data gaps and enhance understanding of financing and ownership of invested commercial property. (¶29) — Agency: CBI, CSO — Timing: MT — Priority: H.
- 9. Strengthen resilience of property funds by introducing the proposed macroprudential leverage limit and liquidity management guidance, while adjusting the leverage limit countercyclically. (¶73) — Agency: CBI — Timing: I — Priority: H.
- 11. Work with European institutions to develop macroprudential tools targeting non-bank risks, including leakages and cross-border issues. (¶81) — Agency: CBI, DoF — Timing: MT — Priority: H.
- Timing legend: C = Continuous; I = Immediate (within one year); ST = Short Term (within 1-3 years); MT = Medium Term (within 3-5 years).
- Priority legend: H = High; M = Medium; L = Low.

*Source: EXECUTIVE SUMMARY and institutional/systemic risk sections, Ireland: IMF Financial Sector Assessment Unit content unit 1irlea2022011*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Overview
- Ireland is a small open economy within the Euro Area (EA) comprising 3.4 percent of aggregate EA GDP, with a significant portion of GDP attributable to foreign-owned multinational enterprises (MNEs).
- The Irish financial system holds assets of EUR 7.9 trillion, over 18 times GDP.
- Monetary policy is set by the European Central Bank (ECB), making national macroprudential policy a critical stabilizing role for the Irish financial system.

### Institutional framework and powers
- The Central Bank of Ireland (CBI) is the national macroprudential authority under ESRB Recommendation 2011/3.
- The CBI’s macroprudential powers derive from:
  - EU Capital Requirements Regulation and Directive (CRR/CRD) (including CRR II/CRD V) as the designated authority.
  - Central Bank (Supervision and Enforcement) Act 2013 providing broad regulatory powers, including borrower-based measures such as loan-to-value (LTV) and loan-to-income (LTI) caps.
- Within the CBI:
  - Financial Stability Directorate established in 2016 to consolidate macroprudential policy, resolution, and crisis management responsibilities.
  - Macroprudential Measures Committee (MMC) established in 2016 to advise and recommend calibrations.
- Inter-agency coordination:
  - Financial Stability Group (FSG) formed in 2017 as a non-statutory coordination mechanism.
- European-level interactions:
  - Under the Single Supervisory Mechanism (SSM) Regulation, the ECB has “top up” powers over CCyB, SyRB, and SIIs; the CBI must notify the ECB, ESRB, and in some cases EBA and the European Commission of macroprudential actions.
  - For non-banks, the CBI coordinates with ESRB, EIOPA, ESMA and other international bodies (FSB, IOSCO).

### Implementation and past actions
- The CBI introduced borrower-based measures in February 2015:
  - Loan-to-value (LTV) and loan-to-income (LTI) limits to increase bank and borrower resilience and dampen credit-house price feedback.
  - These measures are subject to annual review and empirical evidence indicates they have been working as intended.
- Macroprudential capital actions:
  - Additional buffer for other systemically important institutions (O-SII) introduced in July 2019.
  - Countercyclical capital buffer (CCyB) released in April 2020 in response to the COVID-19 shock.
- Transparency improvements since the 2016 FSAP:
  - Publication of MMC meeting minutes.
  - Refreshed Financial Stability Review and launch of Market-Based Finance Monitor (2021).
  - Central Credit Register (CCR) established and fully operational, though LTI coverage does not include non-mortgage debt.

### Institutional strengths and areas to strengthen
- Strengths:
  - Clear financial stability mandate for the CBI.
  - Decision-making on tools divided between the Central Bank Commission and the Governor, with MMC advisory role.
  - Broad powers and information access to implement macroprudential measures.
- Areas to strengthen:
  - Opening the MMC to external advisory members to strengthen diversity of perspectives and guard against potential inaction bias.
  - Completion and prioritization of a dynamic macroprudential stress-testing framework to inform capital buffer calibration.
  - Closing data gaps—notably in commercial real estate (CRE)—and expanding non-bank monitoring and international coordination.

### Systemic risk monitoring
- Monitoring process:
  - Structured around bi-annual Financial Stability Review with multi-stage exchange of views.
  - Ongoing development of macroprudential stress-testing (dynamic framework) is a priority.
- Data and non-bank coverage:
  - Some progress on data gaps but notable gaps remain, especially CRE and direct cross-border CRE exposures.
  - Expand monitoring to better assess interactions between banks and investment funds and to capture non-bank lending outside CCR (peer-to-peer, crowdsourced).

### Vulnerabilities and risk assessment
- Broad-based vulnerabilities: moderate.
- Financial cycle position: currently neutral, but cyclical indicators suggest the CCyB could be increased in the near term to respond to an upswing in the financial cycle.
- Households:
  - Increased liquidity buffers since the COVID-19 pandemic, contributing to upward pressure on residential real estate (RRE) prices.
  - Accumulated savings, constrained supply, and accelerating construction costs likely to intensify the housing supply-demand imbalance in the near term, leading to higher RRE prices and possible overvaluation.
- Corporates:
  - Irish-resident corporates continue to deleverage, but withdrawal of policy support in 2022 will likely lead to rising NPLs and insolvencies.
- Commercial real estate (CRE):
  - Uneven recovery across sectors; retail property valuations still below pre-pandemic levels.
- Non-banks:
  - Irish property funds investing in real estate largely financed by overseas investors; a cohort has high leverage relative to EU peers and a moderate liquidity mismatch.
  - Non-bank lending to SMEs is increasing; a small share (peer-to-peer and crowdsourced) is not included in the CCR.

### Policy measures and considerations for non-banks and property funds
- The CBI has proposed:
  - A leverage limit and liquidity management guidelines for property funds; details remain to be finalized.
- Policy design considerations:
  - Consider counter-cyclical adjustments to property fund leverage limits.
  - Introduce more regular reporting requirements for property funds.
  - Balance timeliness of remediation when a fund breaches leverage limits against the risk of provoking fire sales when returning a fund to compliance.
  - Conditional on policy leakages, consider broader measures to safeguard CRE finance resilience and mitigate macro-financial feedback.
- International coordination:
  - In the absence of a global framework for non-bank risks, the CBI should continue working with European institutions to close data gaps (including direct cross-border CRE investments) and address reciprocity and cross-border policy leakage.
  - The CBI’s proposal to activate macroprudential measures for non-banks under AIFMD faces risks from lack of reciprocity, increasing policy leakage risk.

### Specific recommendations (Table 1: Ireland: Recommendations on the Macroprudential Policy Framework)
- 1. Open the MMC to external advisory members to strengthen diversity of perspectives and as a safeguard against the risk of potential future inaction bias. (¶11) — Agency: CBI — Timing: ST — Priority: H
- 2. Ensure that government policies with potentially material financial stability implications are presented and discussed in the FSG. (¶18) — Agency: DoF — Timing: C — Priority: L
- 3. Review the relative utility of systemic risk measures, developing and streamlining new indicators as needed. (¶23) — Agency: CBI — Timing: C — Priority: L
- 4. Prioritize work on the dynamic macroprudential stress-testing framework, including to inform the calibration of cyclical capital buffers. (¶24) — Agency: CBI — Timing: I — Priority: H
- 5. Enhance systemic risk monitoring to deepen understanding of interconnections between the bank and non-bank sectors. (¶26) — Agency: CBI — Timing: ST — Priority: M
- 6. Expand monitoring of non-bank lenders beyond those engaged in mortgage activities. (¶27) — Agency: CBI — Timing: ST — Priority: M
- 7. Build on work undertaken at the domestic and international level to address CRE data gaps and to enhance understanding of the type of financing and ownership of the invested commercial property market in Ireland. (¶29) — Agency: CBI, CSO — Timing: MT — Priority: H
- 8. Monitor possible leakages from unsecured credit and be ready to expand borrower-based measures to include DTI/DSTI limits. (¶54) — Agency: CBI — Timing: MT — Priority: M
- 9. Strengthen the resilience of property funds by introducing the proposed macroprudential leverage limit and liquidity management guidance, while adjusting the leverage limit countercyclically. (¶73) — Agency: CBI — Timing: I — Priority: H
- 10. Broaden the bank, non-bank, and borrower-based macroprudential toolkit aimed at mitigating CRE market vulnerabilities as needed. (¶75) — Agency: CBI — Timing: MT — Priority: M
- 11. Work with European institutions to develop macroprudential tools targeting risks from non-banks, including for leakages and cross-border issues. (¶81) — Agency: CBI, DoF — Timing: MT — Priority: H

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

Priority legend:
- H = High; M = Medium; L = Low.

### Notable update since analysis conclusion
- Since the analysis was concluded, the CBI announced the outcome of its Capital Framework Review, including its intention to increase the CCyB to 0.5% effective June 15, 2023, and subsequently to announce a further increase as risk conditions warrant (CBI, 2022).

*Source: EXECUTIVE SUMMARY, Ireland: IMF Financial Sector Assessment Unit content unit 1irlea2022011*

### 5.      This note is structured as follows. Section II reviews the current institutional arrangements

### INSTITUTIONAL FRAMEWORK

### A. Willingness to Act
- The Central Bank of Ireland (CBI) has a clear financial stability mandate under Section 6A of the Central Bank Act 1942, in addition to its price stability mandate, including objectives: (i) the stability of the financial system overall; (ii) the proper and effective regulation of financial service providers and markets, while ensuring that the best interests of consumers of financial services are protected; (iii) the efficient and effective operation of payment and settlement systems; (iv) the resolution of financial difficulties in credit institutions; (v) the provision of analysis and comment to support national economic policy development; and (vi) the discharge of such functions and powers as are conferred on it by law.
- Decision-making on macroprudential tools under the CBI’s power is divided between the Central Bank Commission and the Governor:
  - The Central Bank Commission is the highest decision-making body at the CBI, chaired by the Governor, and comprising the Deputy Governor for Monetary and Financial Stability, the Deputy Governor for Financial Regulation, the Secretary General of the Department of Finance, and six external members appointed by the Minister for Finance.
  - Powers of the CBI as the designated authority for the purposes of CRR/CRD have been delegated by the Commission to the Governor, but the Commission retained decision-making power over mortgage measures that impose caps on LTV and LTI ratios.
- The Macroprudential Measures Committee (MMC) advises the Commission and the Governor on macroprudential policies:
  - Established within the CBI in 2016 to advise on the regular review and calibration of macroprudential measures.
  - Membership includes the Governor, the Deputy Governor for Monetary and Financial Stability, the Deputy Governor for Financial Regulation, the Director of Economics and Statistics, the Director of Credit Institutions Supervision, the Director of Financial Stability and the Head of the Macro-Financial Division as Secretary.
  - The MMC typically meets twice per quarter; accounts of each meeting are published on the CBI’s website.
  - Where MMC considers non-bank issues, additional relevant CBI officials are invited to attend.
- External advisory membership considerations:
  - Inclusion of external members as advisors may guard against inaction bias by strengthening diversity of perspectives; evidence from monetary policy committee literature cited (Besley et al., 2008; Hansen and McMahon, 2008; Bhattacharjee and Holly, 2014; Groth and Wheeler, 2008; Jung and Kiss, 2012; Eijffinger et al., 2018; Hansen et al., 2014).
- Recommendation 1:
  - Open the MMC to external advisory members to strengthen diversity of perspectives and as a safeguard against the risk of potential future inaction bias.
  - Due consideration should be given to appointing members outside the Commission in order to avoid conflation of mandates, given the delegation of powers by the Commission to the Governor.
- Accountability and communication:
  - The CBI is accountable to the Minister for Finance and Houses of the Oireachtas through an annual report, an annual performance statement, and a strategic plan presented every three years.
  - The Minister may request consultations with the Governor or Commission; certain Governor functions under the ESCB are excepted.
  - The CBI must arrange at least every four years for review of its regulatory functions by another national central bank or an appropriate body following consultation with the Minister.
  - Communication improvements since the last FSAP: renewed FSR, publication of Commission minutes since 2016, accounts of MMC meetings, public engagement (Mortgage Measures Framework Review, consultation on macroprudential measures for property fund sector).

### B. Ability to Act
- Legal powers and instruments:
  - The CBI has direct (hard) powers over a wide range of macroprudential tools and soft powers to issue opinions or warnings.
  - The CBI can initiate and implement tools under CRR/CRD, coordinating with European institutions; the CBI must notify the ECB prior to changes in these tools and consider any objections; the CBI also notifies the ESRB of macroprudential policy decisions.
  - The CBI has powers to change levels or regulatory perimeter of macroprudential tools under national law, following consultation with the Minister.
- Information-gathering powers:
  - Broad information-gathering power under the Central Bank (Supervision and Enforcement) Act 2013 for regulated financial service providers.
  - Powers to collect information from unregulated entities including: (i) securitization and other special purpose entities (SPEs); (ii) unregulated entities’ holdings of regulated instruments; (iii) anti-money laundering (AML) data; and (iv) credit information from a range of credit providers for the purposes of the Central Credit Register (CCR).
  - These powers are essential to assess activities of the large non-bank financial sector.

### C. Effective Coordination and Cooperation
- Internal coordination within the CBI:
  - Integrated model of financial supervision fosters coordination across the CBI.
  - High-level committees include: Financial Stability Committee (FSC), Macroprudential Measures Committee (MMC), and Supervisory Risk Committee (SRC).
  - A designated Financial Stability directorate established in 2016 brings together macroprudential policy, crisis management and resolution responsibilities.
  - Formal and informal channels for coordination support flagship outputs such as the Financial Stability Review (FSR) and the Market-based Finance Monitor.
- Inter-agency domestic coordination:
  - Financial Stability Group (FSG) formed in 2017 as a non-statutory forum for senior officials from the Department of Finance (DoF), the CBI, and the National Treasury Management Agency (NTMA).
  - FSG principal objectives: (i) monitoring and sharing assessments of risks to the Irish financial system and the economy; (ii) coordination of systemic crisis management; (iii) discussion of economic or financial policies with repercussions for financial stability.
  - The FSG typically meets bi-monthly and publishes minutes of its meetings; the FSG Crisis Coordination Framework has been invoked three times (twice for Brexit, once for COVID-19) to coordinate public policy per members’ statutory obligations.
- Recommendation 2:
  - Ensure that government policies with potentially material financial stability implications are presented and discussed in the FSG.
- International cooperation:
  - CBI engages regularly with multilateral institutions and cooperates bilaterally with foreign countries.
  - Active participation in ECB and ESRB working groups and committees, and collaboration with FSB, IOSCO, ESMA, ESRB non-bank focused groups due to large outward-facing non-bank sector in Ireland.
  - Memoranda of understanding (MoU) with European and third countries support information exchange and cross-border crisis preparedness (examples referenced for EU cross-border cooperation and MoUs with UK, US, Switzerland).

### D. Macroprudential Instruments and Current Settings (Tables summary)
- Table of main macroprudential instruments (responsible authority: CBI, EU legal bases include CRD and CRR articles, and Irish legal bases such as S.I. No.158/2014 and S.I. No.47/2015).
- Examples of instruments and objectives:
  - CCyB — Excessive credit growth and leverage — CBI — CRD Article 136 — S.I. No.158/2014.
  - SRB — Excessive credit growth and leverage; concentration and interconnectedness — CBI — CRD Article 133 — S.I. No.158/2014.
  - G-SII and O-SII buffers — Systemically important institutions — CBI — CRD Article 131 — S.I. No.158/2014.
  - Sectoral capital requirements (including higher risk weights and higher loss given default floors for RRE and CRE exposures) — Excessive credit growth and leverage — CBI — CRR Articles 124, 164 — Directly applicable.
  - Flexibility measures (various objectives including funding risk and market illiquidity) — CBI — CRR Article 458 — Directly applicable.
  - Limits on LTV and LTI/DTI ratios — Excessive credit growth and leverage — CBI — S.I. No. 47/2015 and Central Bank (Supervision and Enforcement) Act 2013, Section 48.
  - Limits on LDR ratio — Funding risk and excessive maturity mismatch — CBI — Central Bank Act 1971, Section 23.
  - Limits on the level of leverage that an AIFM is entitled to employ — Mitigate investment fund leverage — CBI — AIFMD Article 25 — S.I. No. 257/2013.
- Current macroprudential settings (status and recent changes):
  - CCyB: Set at 0%. Lowered from 1% effective April 1, 2020.
  - SRB: Inactive.
  - G-SII and O-SII buffers: AIB Group: 1.50%; Bank of America Europe: 0.75%; Bank of Ireland Group: 1.50%; Barclays Bank Ireland: 1.00%; Citibank Holdings Ireland: 1.00%; Ulster Bank Ireland: 0.50%. Phase-in of the O-SII buffer completed as of January 1, 2022.
  - Sectoral capital requirements: Inactive for sectoral requirements households and corporates. Application of stricter requirements for certain residential and commercial property exposures, introduced in 2006, removed effective November 2021.
  - Flexibility measures: CCB set at 2.5%. LCR set at 100%. NSFR set at 100%. Reciprocation of French large exposure limit for highly indebted large NFCs. ECB flexibility measures during COVID-19 applicable until end-2022; ECB committed to a flexible approach to approving capital conservation plans. From January 1, 2022, ECB expects banks to comply with general LCR minimum level. NSFR brought into effect June 28, 2021.
  - Limits on LTV ratio: Restriction in issuing high LTV mortgages to a proportion of new lending (see Table 4). No changes announced November 25, 2021, as part of the annual review.
  - Limits on LTI/DTI ratios: Restriction in issuing high LTI mortgages to a proportion of new lending (see Table 4). No changes announced November 25, 2021, as part of the annual review.
  - Limits on LDR ratio: Inactive. LDR targets for individual banks replaced in September 2012 by non-core deleveraging targets and requirements to establish an Advanced Monitoring Framework.
  - Limits on AIFM leverage: Inactive. The CBI is consulting on applying limits to the leverage of property funds based on Article 25 of AIFMD.
- Note: Since the analysis was concluded, the CBI announced the outcome of its Capital Framework Review, including its intention to increase the CCyB to 0.5% effective June 15, 2023, and subsequently to announce a further increase as risk conditions warrant (CBI, 2022).

*Source: IMF staff summary of the institutional framework and systemic risk monitoring section of the provided document.*

### 20.      Macroprudential policy must be based on a continuous assessment of evolving risks. In

### Macroprudential policy must be based on a continuous assessment of evolving risks

### Framework for systemic risk assessment and CBI analytical capacity
- The CBI’s analytical approach to systemic risk assessment employs:
  - Monitoring of a range of macro-financial indicators.
  - Developing analytical tools to provide quantitative, forward-looking measures of tail risk and resilience.
  - Conducting additional analysis through “deep dives” into specific areas where structural changes may mean historical data provide imperfect signals.
- Outputs and communication:
  - Risks and resilience judgments are communicated through the Financial Stability Review (FSR), the CBI’s bi-annual report on financial stability.
  - The CBI maintains a heatmap of indicators in the Systemic Risk Pack.
- Quantitative model coverage areas include:
  - (i) early warning (O’Brien and Wosser, 2018, 2021);
  - (ii) asset price valuation (Kennedy et al., 2016; Kennedy et al., 2021);
  - (iii) single-institution and sector risk (Wosser, 2017);
  - (iv) contagion risk (Hallissey, 2016; Bianchi et al., 2020; Emter et al., 2021);
  - (v) macro-financial linkages (Parla, 2021);
  - (vi) bank stress testing (CBI, 2020).
- Recent methodological emphasis:
  - Increased focus on the distribution rather than the mean of risk measurements (e.g., growth-at-risk, CRE growth-at-risk, house price growth-at-risk; distribution of indebtedness vs. aggregate indebtedness).
  - Development of alternative cyclical risk indicators where standard measures (e.g., “standard” credit-to-GDP gap) have low usefulness for Ireland.

### Key recommendations on methodology and tools
- Recommendation 3: Review the relative utility of systemic risk measures, developing and streamlining new indicators as needed.
- Recommendation 4: The CBI should prioritize work on the dynamic macroprudential stress-testing framework, including to inform the calibration of cyclical capital buffers.
- Recommendation 5: Enhance systemic risk monitoring to deepen understanding of interconnections between the bank and non-bank sectors.
- Recommendation 6: Expand monitoring of non-bank lenders beyond those engaged in mortgage activities.
- Recommendation 7: Build on work undertaken at the domestic and international level to address CRE data gaps and to enhance understanding of the type of financing and ownership of the invested commercial property market in Ireland.

### Data and coverage issues
- New and improving data sources:
  - Central Credit Register (CCR) and AnaCredit are expected to be invaluable for monitoring credit from regulated and unregulated entities.
  - Phase 1 of the CCR began on June 30, 2017 (credit to consumers only). Phase 2 reporting obligation began on March 31, 2018. From June 30, 2019, hire purchase, leasing, and similar agreements were deemed reportable. Mandatory reporting requirements will be tightened through 2024.
- Remaining gaps:
  - Residuals in coverage for CRE funding and ownership persist; the CBI does not currently have complete sight of all investment in Irish CRE.
  - Some Irish commercial property is held by foreign counterparties regulated elsewhere; some CRE held by domestic counterparties (private individuals/developers, syndicates, or non-financial firms) may not be required to report to the CBI.
  - International and European cooperation (e.g., ESRB Recommendation on closing Real Estate Data Gaps) and continued domestic stakeholder liaison are necessary to close gaps.

### Systemic risks and macroprudential toolkit — Broad-based vulnerabilities
- Credit cycle indicators used:
  - Three credit gaps: (i) credit-to-GDP gap (one-sided HP filter, BIS methodology); (ii) credit-to-GNI* gap (BIS methodology); (iii) alternative credit-to-GDP gap (O’Brien and Velasco, 2020) using a multivariate filter with stochastic volatility.
  - Findings: credit-to-GDP and credit-to-GNI* gaps are significantly negative while gradually reversing/increasing, respectively. The alternative gap has remained stable around zero since 2019Q1 (neutral cyclical risk stance).
- Credit growth and composition:
  - Credit growth remains subdued but increasing; banks have shifted from NFC to households, especially mortgages.
- Financial conditions and tail risks:
  - Tightening external financial conditions and gradually increasing credit growth have contributed to increased downside risks.
  - The Irish FCI is strongly correlated with external volatility measures (VIX and VSTOXX).
  - Tail risks as measured by growth-at-risk have slightly increased.
- Countercyclical Capital Buffer (CCyB) policy:
  - The CBI examines macroeconomic, labor market, credit, risk premia, banking sector position, RRE and CRE developments, and model outputs when setting the CCyB.
  - The CBI intends to build the CCyB to 1.5 per cent when risk conditions are deemed to be neither elevated nor subdued.
  - If cyclical risk conditions reflect emerging imbalances or an elevated risk environment, the CCyB is expected to be above 1.5 percent.
  - CCyB recent history: reduced from 1 percent to 0 percent in response to the Covid-19 pandemic; released in March 2020 and effective as of April 2, 2020. The rate remains at 0 percent currently.
  - Re-activation of the CCyB in the near term may prove appropriate as the cycle phase is confirmed to address accumulating risks early or to set a neutral position.

### Vulnerabilities from residential housing and the household sector
- Primary structural issue:
  - Constrained supply relative to demand since 2012 has driven valuation indicators such as price-to-income (PTI) and price-to-rent (PTR).
  - Contributing supply factors: increasing construction costs, availability and price of developed land, diminished construction sector capacity post-GFC.
- Recent house price and construction data:
  - Housing prices increased 8 percent in real terms year-on-year in 2021Q4 (14.2 percent in nominal terms).
  - Estimated new housing demand: approximately 33,000 units per year (Conefrey and Staunton, 2019; Bergin and Garcia-Rodriguez, 2020).
  - Completions are recovering and commencements (lagged by 1 year) indicate that the estimated demand will be met by 2023.
  - Expected shortfall: 15,000 fewer units will be available over 2020-2023 as a result of the pandemic (CBI, 2021a).
  - Construction costs rising 8.5 percent and materials costs rising 15.7 percent y-o-y in 2021Q4.
- Regional price dynamics and valuation signals:
  - Price growth outside Dublin y-o-y in 2021Q4: 9.1 percent real, 15.3 percent nominal.
  - Price growth in Dublin y-o-y in 2021Q4: 6.9 percent real, 12.9 percent nominal.
  - On a historical basis, house prices are slightly elevated compared to incomes (1.8 percent deviation from average) and relatively in line with rents (0.1 percent deviation from average); both indicators compare favorably to peers.
- Tail-risk assessment for house prices:
  - The FSAP used a quantile regression framework to assess drivers across the distribution of real RRE prices.
  - Key predictors include current prices, financial conditions, leverage, valuation misalignment, economic growth, and construction costs; predictors’ significance varies across conditional quantiles.
  - At the median (1-year ahead): construction costs and misalignment point to negative impact on median house prices; leverage becomes more important in the medium term (3-years ahead).
  - At the 10th percentile: misalignment and growth have a strong impact; persistence of current prices is much stronger than at the median, supporting the view that downside risks, once materialized, are difficult to overcome.

*Source: Excerpt from IMF Financial Sector Assessment / FSAP material provided in the source PDF.*

### 42.      Tail risks to real RRE prices are estimated to be low in the near term, while current

### 1irlea2022011 - 42.      Tail risks to real RRE prices are estimated to be low in the near term, while current

### House-price tail risks and projections
- Near-term tail risks to house prices at the 10th percentile are described as "mild", weighed down by structural factors and "hangover effects from the pandemic".
- Over the medium term, house prices are expected to accelerate significantly as growth and construction costs feed through:
  - House prices are expected to accelerate to "almost 7 percent at the 10th percentile".
  - Under this modelling approach, downside risks to house prices are effectively eliminated by that point.
- Rapid acceleration in house prices could outpace incomes and generate feedback with credit, increasing damage if an adverse shock materializes.
- Persistence, misalignment, and leverage are identified as the biggest drivers of tail risk.
- Current dynamics predict "a significant acceleration in house prices 3 years ahead."

### Mortgage market structure and trends
- Mortgage term and rate structure:
  - "60 percent of new mortgages and 30 percent of all existing mortgages have fixed rates for longer than 3 years."
- Mortgage balances and originations:
  - Total outstanding mortgage balances continue to decline.
  - New mortgage loans have resumed an upward trend driven primarily by first time buyers (FTB).
- Arrears and legacy vulnerabilities:
  - "The overwhelming majority of mortgages in arrears (80 percent) involves loans that have been in arrears longer than two years."
  - "Non-banks currently hold the largest share (60 percent of accounts in arrears over two years)."
  - Non-banks’ share of outstanding mortgage loans has risen to "almost 20 percent", mainly from sales of pre-GFC mortgage loans.

### Household balance sheets and resilience
- Household net worth and assets:
  - Household net worth has increased since 2012, driven by increases in financial assets and housing assets.
- Indebtedness and debt service:
  - Household indebtedness relative to GDP and disposable income has continued to decrease since 2012.
  - The ratio of interest payments to disposable income has continued to decrease.
- Non-performing loans (NPLs) and pandemic effects:
  - "NPL flows increased slightly in 2020Q3 but have declined even after the expiry of payment breaks."
- Note on projections:
  - "The latest projections are made based on data from 2021Q4 and assume no policy changes or other developments. Rises in interest rates after 2021Q4 may have a cooling effect on credit demand and thereby contain some of the growth in house prices."

### Mortgage measures (CBI macroprudential framework) — design and impact
- Introduction and exemptions:
  - Mortgage measures introduced in February 2015: LTV and LTI limits for residential mortgages.
  - Exemptions: borrowers in negative equity (from LTV limit), Buy-to-Let (BTL) borrowers and lifetime mortgages (from LTI limit), and refinanced and restructured mortgages (from both limits).
  - In 2021H1, "10 percent of new mortgage lending qualified for an exception, with 96 percent of those mortgages constituting refinancing with no increase in loan size."
- Evolution of measures (Table 4 highlights):
  - February 2015 LTV: For FTBs, "90% LTV limit applied to first EUR 220,000" and "80% LTV limit on value thereafter"; SSBs "80% LTV limit applied"; BTL "70% LTV limit applied". Allowances: "15% of the value of new lending for FTBs and SSBs."
  - February 2015 LTI: "3.5 LTI ratio limit applied." Allowances: "20% of new lending."
  - January 2017 LTV and January 2018 LTI adjustments; July 2019 lifetime mortgages exempted from LTI; January 2022 unused allowances carryover rule.
- Concentration around limits and allowances:
  - Average LTV in 2021H1: FTBs "80.8", SSBs "66.8" (compared to 81.7 and 67.9 in 2020H1).
  - Among mortgage loans to FTBs in 2021H1:
    - "42.7 percent had an LTV of 89-90 percent"
    - "43.8 had an LTI of 3.25-3.5"
  - For SSBs in 2021H1:
    - "31 percent of mortgage loans had an LTV of 79-80"
    - "24 percent of loans had an LTI of 3.25-3.5"
  - The share of mortgage loans with allowances:
    - Varied around "20 percent" since 2015, declined to "17 percent in 2020" and "12 percent in 2021H1".
  - Loans with allowances are primarily used to purchase more expensive properties in Dublin.
- Representative loan statistics (2021H1):
  - Table 5 (LTI allowances):
    - FTBs without allowance — Loan size (EUR) "229,368"; Value (EUR) "289,855"; Income (EUR) "77,179"; LTV "80.6"; LTI "3.0"; Loan term (years) "29"; Interest rate "2.7".
    - FTBs with allowance — Loan size (EUR) "357,702"; Value (EUR) "431,333"; Income (EUR) "88,197"; LTV "83.5"; LTI "4.1"; Loan term (years) "32"; Interest rate "2.6".
    - SSBs without allowance — Loan size (EUR) "291,653"; Value (EUR) "451,169"; Income (EUR) "118,577"; LTV "66.5"; LTI "2.6"; Loan term (years) "24"; Interest rate "2.6".
    - SSBs with allowance — Loan size (EUR) "474,590"; Value (EUR) "657,312"; Income (EUR) "119,054"; LTV "73.4"; LTI "4.0"; Loan term (years) "29"; Interest rate "2.6".
  - Table 6 (LTV allowances for SSBs):
    - Without allowance — Loan size (EUR) "286,970"; Value (EUR) "455,365"; Income (EUR) "115,709"; LTV "65.1"; LTI "2.6"; Loan term (years) "24"; Interest rate "2.6".
    - With allowance — Loan size (EUR) "433,323"; Value (EUR) "489,863"; Income (EUR) "155,398"; LTV "88.5"; LTI "2.9"; Loan term (years) "27"; Interest rate "2.7".
- Effectiveness and empirical findings:
  - Mortgages with higher LTIs were more likely to have received payment breaks and extensions (Gaffney and Greaney, 2020).
  - CBI (2019) counterfactual PTI analysis indicates house prices "may have been 13 to 25 percent higher in 2019" absent the measures.
  - Quantile-regression HaR analysis: a "10 percent tightening in both the LTV and LTI limits reduces the 5 percent HaR from -7.2 percent to -6.4 percent", indicating mitigation of downside risks.

### Risks, leakages, and policy monitoring
- Limits and tail risk:
  - There is "no hard upper limit on LTV and LTI ratios", which could lead to significant tail risk in a context of accelerating house price growth.
  - The CBI monitors new mortgage lending biannually and reviews calibration annually.
- Recommendation 8:
  - "Monitor possible leakages from unsecured credit and be ready to expand borrower-based measures to include DTI/DSTI limits."
- Concern about non-bank credit:
  - Increased unsecured credit, particularly from non-banks, and increased demand for credit during the upswing of the financial cycle may produce vulnerabilities not covered by current macroprudential measures.

### Government housing policies and potential price effects
- "Housing for All" plan:
  - Government committed "EUR 4 bn per year up to 2030" (initial commitment over "EUR 4 bn per annum between 2021-25, continuing through 2030") to increase supply and support homeownership.
  - The plan aims to develop "300,000 new homes over the next decade."
  - Estimated annual demand of "33,000 housing units per year" divided into components: "11,800" new private ownership homes; "6,500" new private rental homes; "4,100" new affordable homes; "10,300" new social housing homes.
- Affordable housing schemes and price impacts:
  - The Affordable Housing Act of 2021 and schemes (Local Authority Affordable Purchase Scheme from January 2022; First Home Scheme from July 2022) provide equity-based support to FTBs.
  - First Home Scheme: government may pay "up to 30 percent of the cost of a new home in exchange for an equity stake."
  - Over 2022-26, "EUR 400 million" allocated to the First Home scheme with a target of "8,000 homes" and an expected average equity payout of "EUR 50,000 per household", corresponding to approximately "1,600 households per year on average."
  - Aggregate coverage: "8 percent of all FTBs (6 percent of new mortgages by FTBs as of 2021Q4)."
  - The First Home scheme is characterized as relatively small but potentially creating price pressures and a potential floor for prices; authorities plan to review regional price caps to align with medians.

### Corporate sector vulnerabilities (summary)
- Corporate debt composition:
  - High corporate debt in Ireland is driven by foreign-owned NFCs (multinational corporations); foreign financing accounts for "65 percent of total NFC financing."
  - The corporate debt burden measured relative to aggregate NFC balance sheets remains on a declining trend.
- Irish-resident NFCs:
  - Irish-resident NFCs continue to deleverage; cash holdings and deposits have increased faster than new credit origination.
  - At "2019Q1, less than 50 percent of Irish SMEs had some form of credit."
- Pandemic impacts and near-term vulnerabilities:
  - SME profitability: "50 percent of SMEs were loss-making in the six months leading to October 2020," while "20 percent of SMEs remained loss-making in the six months leading to March 2021."
  - NFC loans exhibiting increase in credit risk (stage 2) rose to "34.4 percent in 2021Q2" relative to "10 percent in 2019Q4", indicating near-term vulnerabilities.
  - Corporate insolvencies have remained low to date, supported by government support and forbearance, but withdrawal of policy support may lead to deterioration.

*Source: 1irlea2022011 - 42.      Tail risks to real RRE prices are estimated to be low in the near term, while current*

### 58.      The banking system has ample aggregate liquidity, but vulnerabilities remain. The LCR

### 58.      The banking system has ample aggregate liquidity, but vulnerabilities remain. The LCR

### Banking funding, liquidity ratios, and structural concentration
- LCR in total currencies is well above the regulatory requirement of 100 percent.
- Loan-to-deposit ratio (LDR) has been on a strong declining trend since the GFC and standing at 86 percent in 2021Q3.
- The NSFR, which has recently become binding, is also fully met by banks on aggregate.
- Five banking groups hold 85 percent of all banking assets and over 90 percent of household and private-sector lending.
- Six institutions have been deemed O-SIIs and have additional capital buffers; the CBI is considering overall strategy for its macroprudential bank capital toolkit and the development of a dynamic macroprudential stress test.

### Foreign currency liquidity and international banks
- Retail banks maintain a USD and GBP LCR at or above 100 percent.
- International banks in aggregate have a USD LCR of 68.8 percent.
- The international banks segment is potentially exposed to dollar liquidity shocks with possible spillovers into the domestic financial system.
- Temporary relief from the total currency LCR requirement provided during the pandemic was not used by any of the international banks; there was continuous availability of USD, CAD, and GBP liquidity from parent groups.
- The CBI currently monitors, but does not implement, any foreign currency liquidity requirements.

### Reliance on unsecured wholesale funding and contingent exposures
- International banks rely on unsecured wholesale funding, largely parent funding, and have exposures to contingent credit lines.
- Parental and corporate deposit funding is generally more stable than other wholesale funding but remains susceptible.
- Contingent credit lines and off-balance sheet exposures are material and drawdowns are monitored regularly.
- Despite an adequate NSFR on aggregate for international banks, the CBI should continue monitoring funding risks carefully.

### Commercial Real Estate (CRE) market size, exposures, and valuation
- Invested CRE market in Ireland at end-2020 is estimated to have a total value of EUR 53 billion.
- Of the estimated total invested CRE market:
  - 43 percent of assets are held by property funds,
  - 8 percent by investment companies,
  - 5 percent by REITs,
  - 44 percent of funding counterparts are not known due to data gaps on cross-border exposures.
- Irish retail banks’ exposures to the CRE market include:
  - loans to property funds of EUR 3.2 billion,
  - other investments of EUR 7.3 billion.
- Increasing share of CRE financed by foreign investment up to 79.3 percent in 2021.
- Property funds are financed equally by equity—73 percent of investors are overseas—and debt from domestic and international banks (53 percent of debt financing).
- Property funds are primarily invested in office (37 percent exposure for funds) and retail (26 percent).

### CRE performance, risks, and model-based findings
- CRE capital value and rent growth turned negative in 2020; sectoral divergence observed:
  - Industrial properties: vacancies have begun to decline and capital values have recovered strongly.
  - Retail market: vacancies rising and capital values continuing their decline.
  - Office sector: values and rents have not yet recovered.
- Valuation misalignment indicators (average) do not suggest overvaluation on aggregate, but sectoral findings:
  - Industrial properties appear presently overvalued relative to historical average.
  - Office properties are not significantly misaligned.
  - Retail properties seem undervalued.
- FSAP quantile regression for CRE returns:
  - At the 10th percentile, misalignment shocks have the strongest predictive power; over-valuation (under-valuation) shocks lead to strong negative (positive) corrections in CRE values; tighter financial conditions weigh on CRE values across horizons.
  - Current CRE returns show significant persistence; higher leverage inflates CRE values strongest over the medium term.
  - At the median quantile, economic growth and misalignment shocks drive CRE values in the medium term.
- Tail risk and return projections:
  - 1-year ahead tail risks at the 10 percent level declined from -10.1 percent in 2020Q4 to 0.1 percent in 2021Q4.
  - 3-year ahead tail risks at the 10 percent level declined from -7.5 percent in 2020Q4 to -4.3 percent in 2021Q4.
  - 1-year ahead median return: from -1.2 percent in 2020Q4 to 10.1 percent in 2021Q4.
  - 3-year ahead median return: from -1.1 percent in 2020Q4 to 12.3 percent in 2021Q4.
  - The predicted distribution shifted right, driven mainly by misalignment indicators suggesting slight undervaluation on average; extreme skewness implies downside tail risks are increasingly unlikely.

### Property funds: leverage, liquidity mismatch, and proposed measures
- Leverage:
  - One third of assets are held by property funds with LTVs exceeding 70 percent.
  - 58 percent of assets are held by funds with LTVs exceeding 50 percent.
  - By comparison, REITs are required to maintain leverage below 50 percent.
- Liquidity:
  - Liquidity timeframes of Irish property funds typically 180-210 days in normal times.
  - 58 percent of assets are held by property funds with liquidity timeframes under 200 days.
  - Property funds hold 5 percent of total assets in liquid assets, meaning redemption requests of this size can be met.
  - Most Irish property funds are closed-end or open-ended with limited dealing frequency (most deal annually), reducing susceptibility to first-mover runs.
- Measurement caveat: some debt is provided by shareholders and may behave differently in stress compared with third-party loans.
- CBI proposals and recommendations:
  - CBI has proposed using powers under Article 25 of the AIFMD to implement a total loan to total asset value limit on leverage and granting a transition period for funds above this limit to comply, while funds continue to report their positions annually.
  - The CBI should consider allowing counter-cyclical adjustments to the leverage limit and require higher reporting frequency (for instance, quarterly) to enforce compliance.
  - The CBI should clarify a timeline for funds to comply if leverage limits are breached.
- Recommendation 9: Strengthen the resilience of property funds by introducing the proposed macroprudential leverage limit and liquidity management guidance, while adjusting the leverage limit countercyclically.

### Non-bank sector expansion, SME lending, and regulatory gaps
- Market-based finance has expanded significantly; investment funds generally hold assets overseas with limited connections to the domestic economy, except property funds invested in Irish CRE.
- Non-bank lenders account for an increasing share of lending to SMEs:
  - 32.2 percent of new loans,
  - approximately 20 percent of total outstanding loans.
- Highest exposures of non-bank lenders are to real estate, construction, and wholesale and retail sectors.
- Non-bank lenders often engage in asset-backed finance and may pair with international lenders to originate loans off their balance sheets.
- There is no prudential regulation for non-bank lending as these entities do not take deposits.
- Peer-to-peer and crowdsourced financing are not classified as loans and are therefore not reported to the CCR; current levels are very small but should be monitored as materiality increases (see Recommendation 6).

### Macroprudential policy gaps, data needs, and recommendations
- Data gaps, especially direct cross-border exposures to CRE, prevent a complete accounting of potential risks; Recommendation 7 addresses improving data coverage on ultimate CRE investors.
- Recommendation 10: Broaden the bank, non-bank, and borrower-based macroprudential toolkit aimed at mitigating CRE market vulnerabilities as needed.
- Ireland’s large, internationally focused funds sector and cross-border exposures imply macroprudential risks that require EU-level and international action.
- Recommendation 11: Work through European institutions to develop macroprudential tools targeting risks from non-banks, including for leakages and cross-border issues.
- CBI consideration: The CBI has not yet activated the systemic risk buffer and is considering its strategy; the CBI should prioritize completing a dynamic macroprudential stress test to assess appropriate through-the-cycle capital, potentially employed through the CCyB rather than activating an additional structural buffer.

*Source: Content unit 1irlea2022011 (IMF country report excerpt).*

### References

### References

### Key bibliographic sources
- Lists major empirical and methodological works used in the analysis, including:
  - Acharya, V., Bergant, K., Crosignani, M., Eisert, T., and F. McCann (2020), “The Anatomy of the Transmission of Macroprudential Policies,” IMF Working Papers 2020/058, International Monetary Fund.
  - Adrian, T., Boyarchenko, N., and D. Giannone (2019), “Vulnerable Growth,” American Economic Review, Vol. 109(4): 1263-89.
  - Elekdag, S., Prasad, A., Jeasakul, P., Alter, A., Lafarguette, R., Feng, A. X., and C. Wang (2019), “Growth at Risk: Concept and Application in IMF Country Surveillance,” IMF Working Paper no. 2019/036, International Monetary Fund.
  - Deghi, A., Katagiri, M., Shahid, S., and N. Valckx (2020), “Predicting downside risks to house prices and macro-financial stability,” IMF Working Paper no. 2020/011, International Monetary Fund.
  - Kennedy, G., Killeen, N., Skouralis, A., Velasco, S., and M. Wosser (2021), “COVID-19 and the commercial real estate market in Ireland,” Financial Stability Notes, Central Bank of Ireland, Vol. 2021(4).
- Numerous Central Bank of Ireland publications and IMF policy and staff guidance papers are cited for frameworks, empirical estimates, and country-specific analysis (multiple entries across 2014–2021).

### Annex I — Growth-at-Risk Models: model specifications and methodology
- Model framework:
  - Quantile regression specification used: y_{t+h,q} = b_{h,q} X_t + e_{t+h,q}.
  - Purpose: assess tail risks to growth, house prices (RRE), and commercial real estate prices (CRE).
  - Approach builds on Adrian et al. (2019), Elekdag et al. (2019), Deghi et al. (2020), and country applications in O’Brien and Wosser (2021) and Kennedy et al. (2021).

- Growth model (GNI*):
  - Dependent variable: y-o-y growth of real modified demand (GNI*), denoted ΔGNI*_{t+h,q}.
  - Estimated equation:
    - ΔGNI*_{t+h,q} = b_{1,q} + b_{2,q} ΔGNI*_{t} + b_{3,q} FCI_{t} + b_{4,q} Leverage_{t} + b_{5,q} VIX_{t} + e_{t+h,q}.
  - Covariates:
    - FCI: financial conditions index for Ireland (estimated as in IMF (2018)).
    - Leverage: alternative credit gap from O’Brien and Velasco (2020).
    - VIX: volatility index for the S&P 500.
  - Inference: standard errors are bootstrapped to avoid the generated regressor problem (Pagan, 1984).

- Residential real estate (RRE) model:
  - Dependent variable: y-o-y growth in real residential real estate prices, ΔRRE_{t+h,q}.
  - Estimated equation:
    - ΔRRE_{t+h,q} = b_{1,q} + b_{2,q} ΔRRE_{t} + b_{3,q} FCI_{t} + b_{4,q} Leverage_{t} + b_{5,q} Misalignment_{t} + b_{6,q} ΔGNI*_{t} + b_{7,q} ΔCCI_{t} + e_{t+h,q}.
  - Covariates and measurements:
    - Leverage: first principal component of the alternative credit gap, LTI, and LTV for mortgages.
    - Misalignment: first principal component of PTI and PTR ratios expressed as the percentage deviation from the sample average.
    - CCI: construction cost index for RRE.
  - Methodology follows IMF (2019).

- Commercial real estate (CRE) model:
  - Dependent variable: y-o-y growth in commercial real estate prices, ΔCRE_{t+h,q}.
  - Estimated equation:
    - ΔCRE_{t+h,q} = b_{1,q} + b_{2,q} ΔCRE_{t} + b_{3,q} FCI_{t} + b_{4,q} Leverage_{t} + b_{5,q} Misalignment_{t} + b_{6,q} ΔGNI*_{t} + e_{t+h,q}.
  - Covariates and measurements:
    - Leverage: measured only as the alternative credit gap.
    - Misalignment: average of various value indicators including CRE returns to rent, CRE returns to GNI*, CRE returns to private consumption, and CRE returns to employment (following Kennedy et al. (2021)).

- Sample and model validation:
  - Sample span: 2001Q1 through 2021Q4.
  - Fit assessed with probability integral transform (PIT) test: if model correctly specified, PIT should be IID uniform on [0,1].
  - Divergence test statistic referenced to Kullback and Leibler (1951).
  - Result: For each model (growth, RRE, CRE) the hypothesis that the PIT is IID uniformly distributed is not rejected.

- Density construction and projection horizons:
  - After estimating conditional quantiles, a parametric t-skew distribution is fitted for each period to summarize variance, skewness, and kurtosis.
  - Projections produced at 1- and 3-year ahead horizons.
  - Each projection is indexed by the date it is made; density projections reflect current conditions and the term structure of growth, RRE prices, and CRE prices.

### Quantifying macroprudential policy effects
- Policy shock exercise:
  - The analysis quantifies effects of macroprudential policies by computing conditional forecasts of house prices given a 10 percent shock in the LTV and LTI ratios.
- Caveats and identification issues highlighted:
  - Macroprudential policies, credit, and asset prices may respond to common developments, creating endogeneity concerns.
  - Impacts of macroprudential policies may be difficult to disentangle from monetary, fiscal, and microprudential policies.
  - The analysis uses a reduced-form setup; implications for causal interpretation are subject to the caveats above.

*Source: References and Annex I. Growth-at-Risk Models, 1irlea2022011 - References.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022011.pdf_