## _cr16258 — EXECUTIVE SUMMARY

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### Macro-Financial Background
- Ireland experienced an extreme boom and bust cycle in the first decade of the century, with price bubbles in CRE and RRE and massive, largely bank-funded, speculative building (§1).
- Banks became dependent on external wholesale funding; the downturn starting in 2008 evolved into a sovereign debt crisis after a blanket guarantee and government capital injections (§1).
- Unemployment rose to nearly 15 percent during the crisis; a substantial share of CRE NPLs was transferred to NAMA (§1).
- An effective policy response, IMF and European partner support, and a flexible, open economy contributed to stabilization and a rapid recovery (§2).
- Structural change: contraction and concentration of the banking system; expansion of the funds management industry; establishment of the SSM and the SRM.

### Key selected economic indicators (from Table 2)
- Real GDP: 2014: 5.2; 2015: 7.8; 2016: 4.9; 2017: 3.2.
- Final domestic demand: 2016: 5.3; 2017: 3.8.
- Exports of goods and services: 2016: 6.8; 2017: 5.2.
- House prices: annual change 2016: 6.6.
- Unemployment rate (in percent): 2014: 11.3; 2015: 9.5; 2016: 8.3; 2017: 7.7.
- General government gross debt (in percent of GDP): 2014: 107.5; 2015: 93.8; 2016: 89.0; 2017: 86.6.
- GDP per capita (in euros): 2014: 41,011; 2015: 46,301; 2016: 49,505; 2017: 51,436.
- Population (in millions): 2016: 4.7; 2017: 4.7.

### Stability analysis: vulnerabilities and risks
- Major banking vulnerabilities relate to the real estate sector (RRE and CRE), some parts of the corporate sector, the sovereign, and funding in pound Sterling.
- Pockets of weakness: highly leveraged households and smaller domestic firms.
- Cross-border connections from Irish banks to other financial centers—except the UK—appear to have attenuated.
- Medium-term challenges: technological innovations and shifts in competitive pressures pose profitability challenges for banks and NBFIs.
- Brexit: UK vote likely to have negative effects, especially through banks’ UK operations and potential slowdown affecting Irish firms, employment, and investment; immediate aftermath shifted the probability distribution of risk factors.

- Household and NFC balance sheets:
  - Credit-to-GDP has almost halved since the 2010 peak, but remains high by international standards (§3).
  - Almost 100,000 households were estimated to remain in negative equity on their homes at end-2015 (§3).
  - NFC debt-to-GDP ratio has declined as the multinational sector mainly relies on parent funding (§3).

- NPLs: system still holds a large stock of NPLs composed significantly of long-overdue mortgages and CRE loans (§4).

- Stability analysis recommendations (Table 1):
  - 3. Further develop bank stress testing, including risks in UK operations — NT.
  - 4. Close data gaps on cross-border exposures, the nonbank financial sector, the commercial real estate market, and the non-financial corporate sector — NT.

### Financial sector structure and oversight
- Transformation: contraction/concentration of banks; global-scale funds management industry; SSM and SRM in place.
- Most major financial institutions have built up buffers of capital and liquidity.
- Funds management industry is predominantly cross-border and of global scale; domestic commercial banks have limited connections with the funds industry.
- Prime MMFs (CNAV-seeking) currently hold comfortable buffers of liquid assets but face high portfolio turnover and potential future requirements from upcoming EU legislation.

- Oversight actions:
  - Joint Supervisory Teams (JSTs) for Irish banks operate effectively and supervision in Ireland is rigorous.
  - Irish insurers prepared for Solvency II; vigilance needed for risks not covered by regulation and for regulatory arbitrage.
  - Central Bank of Ireland leads analysis of collective investment vehicle activities.

- Key oversight recommendations (Table 1, Financial Sector Oversight):
  - 5. Build internal capacity that allows for regular stress testing of MMFs — NT.
  - 6. Improve data coverage and monitoring of all special purpose vehicles — NT.
  - 7. Develop better understanding of the use of investment fund portfolio leverage — NT.
  - 10. Continue to streamline options under national discretion and regulations in bank supervision — MT.
  - 11. Further enhance the effectiveness and enforceability of supervision of credit risk in banks with respect to loan classification and provisioning — NT.
  - 12. Remain vigilant that harmonization of SSM supervisory processes is balanced by proportionality — NT.
  - 13. Enhance assessment of credit risk in insurers’ portfolios — NT.
  - 14. Enhance analysis of unusual reinsurance transactions to ensure capital relief is warranted by true risk transfer — NT.
  - 15. Coordinate among insurance supervisors to ensure due scrutiny of license applications and limit improper “jurisdiction shopping” — NT.
  - 16. Require MMFs to report liquid assets and characteristics of the investor base — NT.
  - 17. Encourage existing MMFs to graduate away from the CNAV convention and discourage CNAV in new MMFs — NT.

### Macroprudential policy and consumer protection
- Forward-looking measures are justified given Ireland’s boom-bust history.
- Introduction of LTV and LTI limits on residential mortgages as permanent features is recommended despite normalized credit conditions and real estate prices estimated close to equilibrium.

- Macroprudential recommendations (Table 1):
  - 8. Maintain, and in due course review, LTV and LTI limits — NT.
  - 9. Operationalize the Central Credit Register as soon as possible, and, once operational, transform the LTI limit into a more comprehensive DTI limit — MT.

### Bank resolution and financial safety nets
- BRRD and SRM should provide a financial safety net and allow banks to exit with minimum disruption, but transition risks persist as SRM buffers are accumulated; SRM must be able to operate with necessary speed in a bank failure.
- Continued effort needed to maintain and strengthen operational preparedness.

- Financial safety net recommendations (Table 1):
  - 18. Continue to identify and address impediments to resolvability — On-going.
  - 19. Streamline the process for court approval of resolution measures — NT.
  - 20. Streamline the process of SRM decision making — MT.

### Institutional capacity and governance
- An independent, accountable, and well-staffed Central Bank is key; operational independence of supervisory authorities must be maintained, matched by strong accountability and transparency.
- Staff retention is a cross-cutting challenge.

- Cross-cutting recommendations (Table 1):
  - 1. Support independence of the Central Bank by continuing to demonstrate accountability to the Oireachtas and enhancing public transparency — On-going.
  - 2. Revise personnel policies to attract and retain experienced staff — NT.

---

### 5. Heightened uncertainties following the UK vote — Market reaction and immediate implications
- Shares in Irish financials declined sharply after the referendum, while sovereign bond spreads and bank funding costs were little changed.
- Irish real estate-related indicators showed gains—possibly reflecting prospect of more multinationals being attracted to Ireland.
- Immediate impact on Irish banks likely modest because:
  - banks have little exposure to market risk;
  - banks are overwhelmingly deposit-funded;
  - banks have access to central bank liquidity in euro and pound Sterling.
- Mortgages make up about 85 percent of household loans.
- Interest-only loans amount to about 10 percent of total mortgage loans.

### Vulnerabilities and transmission channels (Brexit-related)
- Key transmission channels and consequences:
  - slowdown in the UK and Sterling depreciation could reduce profitability of Irish bank subsidiaries in the UK;
  - traditional Irish corporate sector likely to be hit proportionately more than the globally-oriented multinational sector;
  - heightened uncertainty and market volatility may depress investment and activity across Europe, leading to deterioration in bank operating profits and asset quality.

- Possible macro-financial effects:
  - fall in UK and Irish property prices (particularly housing);
  - persistently elevated vulnerabilities as corporates and households find it harder to strengthen balance sheets;
  - potential return to higher risk premia on sovereign bonds;
  - policy responses (more prolonged very low interest rates) could negatively affect banks’ and NBFIs’ earnings.

### Mitigating factors
- Private sector is less leveraged relative to the crisis period.
- Real estate prices are well below past peaks.
- New CRE projects largely financed by foreign nonbanks (e.g., REITs).
- Local banks are much less dependent on market funding and have much less international exposure.
- Sovereign bond spreads have come down to modest levels; government able to raise funding at negative nominal interest rates.
- Regulatory reforms have strengthened prudential rules and crisis management capacity.

### Supervisory actions on impaired assets (selected timeline)
- 2011: banks required to develop mortgage arrears resolution strategies.
- 2013: introduced quarterly Mortgage Arrears Resolution Targets (MART) for the six main lenders and bank-specific non-public targets for distressed SME loans.
- 2013: Personal Insolvency Act enacted at end-2012; establishment of the Insolvency Service of Ireland.
- 2013 and 2015: shortening of bankruptcy discharge periods.
- 2014: “deep dives” (Balance Sheet Assessment) and 2014 Comprehensive Assessment; 2015 Impairment Provisioning Review.
- Remaining priorities: further cleanup of bank balance sheets focused on long-overdue mortgages; continued supervisory intervention for commercial loans; faster asset disposal in SME segment.

### Banking sector soundness — key indicators (end-2015 unless noted)
- Regulatory Capital to Risk-Weighted Assets: 24.8 (2015).
- Regulatory Tier 1 Capital to Risk-Weighted Assets: 22.6 (2015).
- Capital to Assets: 14.0 (2015).
- Non-performing Loans Net of Provisions to Capital: 42.7 (2015).
- Non-performing Loans to Total Gross Loans: 14.8 (2015).
- Non-performing Loans (€bn.): 46 (2015).
- Gross Loans (€bn.): 312 (2015).
- Large Exposures to Capital: 17.8 (worst quartile reported).
- Return on Assets: 1.0 (2015).
- Return on Equity: 5.7 (2015).
- Interest Margin to Gross Income: 57.9 (2015).
- Liquid Assets to Total Assets: 12.4 (2015).
- Liquid Assets to Short-term Liabilities: 161.5 (2015).
- Liquidity Coverage Ratio: 126.8 (2015).
- Net Stable Funding Ratio: 111.5 (2015).
- Customer Deposits to Total Loans: 73.8 (2015).
- Geographic distribution of total loans—Domestic Economy: 85.9 (2015); Advanced Economies: 13.8 (2015).

- Additional points:
  - NPL ratios have declined by 10.9 percentage points since December 2013.
  - Loan book more focused on the Irish market; non-Irish lending almost entirely focused on the UK.
  - Liquidity indicators improved substantially as banks paid off wholesale funding and shifted to retail deposit funding.
  - Most banks appear well placed to meet the Net Stable Funding Ratio (NSFR) once it comes into force (NSFR to be implemented by 2018).

### Profitability and business model pressures
- Return on assets is still low in absolute terms although higher than returns achieved by European peers.
- Return on capital weakened as banks deleveraged while holding a large share of low-margin “tracker” loans.
- Interest income to total income ratio among the highest in Europe; fee income relatively low.
- Banks have reduced operating costs; write backs of provisions have contributed to profits.
- Shift to retail deposit funding likely reduced funding costs and short-term volatility.

### Nonbank financial sector risks (selected)
- Assets invested via Irish domiciled MMFs and investment funds (CIVs) rose to €2.7 trillion in Q4 2015, equivalent to 12.5 times GDP.
- Ireland is the domicile of choice for more money market and hedge fund assets than any other country in the euro area.
- Most assets and liabilities of these vehicles are held offshore; asset managers from more than 50 countries have established CIVs in Ireland.
- High portfolio turnover and reporting conventions that obscure leverage risks imply close monitoring is needed.

---

### Stress testing framework and scenarios
- Solvency stress tests combine top-down (FSAP team and Central Bank) and bottom-up (banks’) approaches.
- Coverage:
  - Banks’ bottom-up and FSAP top-down covered 5 significant institutions accounting for 70 percent of banking system assets.
  - Central Bank’s top-down covered 11 largest banks accounting for 85 percent of banking system assets.
- Tests project three-year earnings, costs, balance sheets, impacts on risk-weighted assets and capital, incorporating phasing-in of Basel III capital requirements and treatment of deferred tax assets.

- Scenarios:
  - Baseline: based on Fall 2015 World Economic Outlook, updated with 2015 outturn (baseline defined before stress tests and does not incorporate any impact from “Brexit”).
  - Moderate stress (euro area-wide): deteriorating sentiment reduces consumption and fixed investment; Irish growth slows rapidly; price deflation becomes generalized; real interest rates rise while bond and equity prices fall.
  - Severe stress: amplified effects on Irish domestic economy and stronger disruption in Ireland’s European partners, particularly the UK—viewed as a reduced-form representation of large, drawn-out negative effects of “Brexit” on traditional Irish exporters and real estate prices.

### Stress test results and sensitivities (top-down)
- Top-down solvency stress tests imply:
  - Irish banking system would be significantly impacted under the severe scenario, but overall risks remain manageable.
  - Main drivers of fall in capitalization: funding costs, loan loss provisions, Basel III capital adjustments, and valuation losses from sovereign exposures in available-for-sale portfolios.
  - Use of transitional arrangements towards Basel III yields similar aggregate results with a slightly reduced capital shortfall.
- Detailed severe-scenario solvency results (selected):
  - Fully-loaded Basel III:
    - Bottom-Up Stress Test: CET1 ratio 12.4 / Number of banks with 4.5%<CET1<7%: 1 / Number of undercapitalized banks (CET1<4.5%): 0 / Max. capital shortfall: 0.0
    - CBI Top-Down Stress Test: CET1 ratio 10.1 / Number of banks with 4.5%<CET1<7%: 1 / Number of undercapitalized banks (CET1<4.5%): 1 / Max. capital shortfall: -0.05
    - IMF Top-Down Stress Test: CET1 ratio 8.3 / Number of banks with 4.5%<CET1<7%: 4 / Number of undercapitalized banks (CET1<4.5%): 3 / Max. capital shortfall: 0.20
  - European framework for transitional arrangements:
    - Bottom-Up Stress Test: CET1 ratio 14.3 / Number of banks with 4.5%<CET1<7%: 1 / Number of undercapitalized banks (CET1<4.5%): 0 / Max. capital shortfall: 0.0
    - CBI Top-Down Stress Test: CET1 ratio 11.9 / Number of banks with 4.5%<CET1<7%: 1 / Number of undercapitalized banks (CET1<4.5%): 1 / Max. capital shortfall: -0.04
    - IMF Top-Down Stress Test: CET1 ratio 9.4 / Number of banks with 4.5%<CET1<7%: 2 / Number of undercapitalized banks (CET1<4.5%): 0 / Max. capital shortfall: 0.10

### Banks’ bottom-up stress test — results and drivers
- Banks’ bottom-up stress test results were more benign than the FSAP static stress test.
- Primary reason: bottom-up exercise followed a dynamic approach allowing restructuring of balance sheets; FSAP stress test assumed balance sheets grow in line with nominal GDP.
- Banks’ projected pension scheme balances also contributed to more favorable bottom-up results.
- Sensitivity tests highlight exposures to sovereign risk, property prices, and large corporate exposures.
- In the event of a default of its five largest exposures, one bank would become undercapitalized with regard to the Tier 1 capital hurdle rate of 6 percent.
- Market risk, including valuation changes from exchange rate movements, appears to be well contained.

### Liquidity stress tests — design and summary results
- Liquidity exercise: four tests — an LCR scenario with variants; a Basel III-based NSFR scenario; a cash-flow maturity bucket scenario; a reverse liquidity stress test.
- Under parameters more severe than the standard LCR, total liquidity shortfall would range between €7.1 and €7.4 billion, equivalent to between 3.3 percent and 3.4 percent of GDP.
- The “retail shock” and the “wholesale shock” have effects of comparable magnitudes.
- Reported liquidity stress summary (selected):
  - LCR - LCR Scenario with Ireland Delegated Act / LCR Scenario with retail shock / LCR Scenario with wholesale shock / GBP LCR retail shock / NSFR Outflow analysis:
    - System-wide liq. ratio (in percent): 124 87 87 79 108 ...
    - Liquidity shortfall:
      - EUR billions: 0.3 7.1 7.4 5.3 7.4 0.0 - 14.0
      - as a percent of GDP: 0.1 3.3 3.4 2.5 3.4 0.0 - 6.5
- Policy implication: importance of respective central banks making available liquidity in euro and pound Sterling during periods of potential funding stress, such as following the UK referendum.

### Contagion analyses and cross-border interlinkages
- Cross-border bank linkages have declined since pre-crisis, but tight linkages with the UK financial system remain.
- Ireland is exposed to financial distress in the UK, the US, Germany, and France through direct cross-border credit and funding exposures.
- Network analysis: distress in the UK banking system would directly hit Irish banks; distress in US, German, and French systems would generate domino effects through the UK, Belgian, and Dutch systems.
- Recommendation: enhance granular, higher frequency bilateral exposure data within and across bank and nonbank financial sectors; Central Bank has initiatives underway.

### Real estate market
- RRE prices are close to or moderately below equilibrium levels by non-parametric and parametric methods, but upward trends could become problematic.
- CRE valuation signals are mixed; price-to-rent ratio suggests CRE prices were moderately overvalued.
- Recommendation: enhance data collection; consider macroprudential tools for CRE if banks resume large-scale CRE lending.

### Household, corporate, insurance, pensions, and funds (selected findings)
- Household: deleveraged but remain mortgage-burdened; tracker loans currently at very low rates—rate rises would increase interest payments; stress tests show higher PDs for higher LTV buckets and for tracker loans.
- Corporate: vulnerabilities moderated but smaller firms remain vulnerable; small firms account for most firms under “technical default”; severe shock could raise share of risky debt to about 15 percent.
- Insurance/pensions: Solvency II reduced solvency ratios to 130 percent for nonlife insurers and 260 percent for VA writers; life sector resilient to interest rate shocks; ORSA framework use should be monitored.
- Funds industry: Ireland-domiciled CIV assets €2.7 trillion at end-2015 (12.5 times GDP); CNAV MMFs and leverage reporting conventions complicate assessment; MMF stress tests suggest very large rate increases needed for “shadow” NAVs to depart from amortized cost NAVs; spillovers to domestic economy limited but not negligible.

### Financial sector oversight and supervisory issues
- Post-crisis reforms strengthened oversight; SSM and SRM established; Solvency II implemented.
- Cross-cutting supervisory issues:
  - Independence: operational independence deficiencies persist; Minister of Finance’s ability to dismiss members of the Central Bank Commission remains a concern.
  - Accountability: Central Bank should strengthen proactive explanation to Oireachtas and public; publish summary records of in-house Financial Stability Committee meetings; enhance annual regulatory performance statement.
  - Staff resources: supervisory staff increases raised continuity and turnover challenges; Central Bank should examine personnel policies to enhance longer-term careers.

### Macroprudential oversight — instruments, data gaps, and recommendations
- Data gaps include bilateral liability positions, transactions and construction activities in CRE, NFC balance sheet data, and credit information across financial institutions until central credit register is established.
- Existing instruments and dates (as implemented or available, as stated):
  - Limits on LTV and LTI ratios introduced in February 2015.
  - From October 2015, with phase-in until 2018, banks obliged to maintain a minimum LCR of 60 percent.
  - January 2016: counter-cyclical capital buffer introduced (currently set at zero).
  - Phase in of a 1.5 percent O-SII buffer (in the form of CET1) announced in 2015 (phase-in to July 2019 for O-SII buffer).
- Policy recommendations:
  - Maintain the LTV and LTI limits.
  - Ongoing impact analysis of LTV/LTI measures based on new loan-level data should be performed regularly.
  - Once Central Credit Register implemented, consider transforming proportionate LTI limit into a debt-to-income limit applied to households’ consolidated debt.
  - Streamline EU/euro area notification system to support timely macroprudential action.

### AML/CFT
- Ireland has made significant progress since its 2006 Mutual Evaluation Report; actions include publishing guidelines, facilitating recovery of proceeds of crime, prohibiting bearer shares.
- Ireland conducted its first Money Laundering and Terrorist Financing National Risk Assessment in 2016.
- Steps to implement, by June 2017, the European Commission’s 4th Directive on Money Laundering to ensure timely access to beneficial ownership information and extend PEP definition.
- Authorities encouraged to implement revised standards effectively and empower Central Bank to issue enforceable rules in this area.

### Resolution regime and operational preparedness
- BRRD and SRM align with FSB Key Attributes; Irish authorities did not adopt optional government stabilization tools in BRRD, increasing importance of resolvability without government support.
- Institutional arrangements:
  - January 2016: SRB assumed responsibility for resolution planning and decision-making for Irish banks directly supervised by the ECB under the SSM.
  - SRB planned to increase staff complement during 2016; Central Bank of Ireland planned to increase staffing by approximately 40 percent for LSIs resolution responsibilities.
- Recommendations to enhance agility:
  - Streamline decision-making for triggering resolution.
  - Reconsider requirements for ex ante court approval of resolution measures or introduce expedited timeframes (e.g., 24 hours).
  - Issue updated terms of reference for the Principal’s Group and undertake simulation exercises.
- Funding recovery and resolution:
  - Single resolution fund should reach at least one percent of covered deposits by end-2023.
  - DGS transposed into Irish law; authorities should commit to be able to pay out from the DGS within 7 days earlier than the 2024 deadline.

### Industry structure and key statistics (selected)
- Credit institutions: 493 (total assets €1,536 billion) in 2007; 406 (total assets €576 billion) in 2015 Q4.
- Banks licensed in Ireland: 41 (total assets €1,346 billion) in 2007; 22 (total assets €464 billion) in 2015 Q4.
- Collective investment schemes: 3,456 (total assets €1,108 billion) in 2011; 4,492 (total assets €2,259 billion) in 2015 Q4.
- Money Market Mutual Funds: 86 (total assets €288 billion) in 2011; 80 (total assets €474 billion) in 2015 Q4.
- Financial Vehicle Corporations: 701 (total assets €500 billion) in 2011; 822 (total assets €431 billion) in 2015 Q4.
- At end Q4 2015, net asset value of investment funds: €1,785.2 billion.

### Risk Assessment Matrix — key risks (summary)
- I. Structurally weak growth in key advanced and emerging economies: Overall Level of Concern: High; Relative Likelihood: Medium; Expected Impact: Medium.
- II. Sharp asset price decline and decompression of interest rate spreads: Overall Level of Concern: Medium; Relative Likelihood: Medium; Expected Impact: Medium.
- III. Higher-than-expected fallout from the UK referendum result: Overall Level of Concern: High; Relative Likelihood: Medium; Expected Impact: High.
  - Note: UK referendum on 23 June 2016 resulted in a majority for the UK leaving the EU.
- IV. Financial imbalances from protracted low interest rates: Overall Level of Concern: Medium; Relative Likelihood: Medium; Expected Impact: Low/Medium.
- V. Persistently lower energy prices: Overall Level of Concern: High; Relative Likelihood: High; Expected Impact: Low.
- VI. Domestic reform fatigue coupled with increased political fragmentation: Overall Level of Concern: Medium; Relative Likelihood: Medium; Expected Impact: Medium.

---

*International Monetary Fund — Ireland: FSAP Executive Summary (content unit: _cr16258 - EXECUTIVE SUMMARY).*

### EXECUTIVE SUMMARY ___________________________________________________________________________  6

### EXECUTIVE SUMMARY

### Macro-Financial Background
- Ireland experienced an extreme boom and bust cycle in the first decade of the century, with price bubbles in CRE and RRE and massive, largely bank-funded, speculative building (§1).
- Banks became dependent on external wholesale funding; the downturn starting in 2008 evolved into a sovereign debt crisis after a blanket guarantee and government capital injections (§1).
- Unemployment rose to nearly 15 percent during the crisis; a substantial share of CRE NPLs was transferred to NAMA (§1).
- An effective policy response, IMF and European partner support, and a flexible, open economy contributed to stabilization and a rapid recovery (§2).
- Structural change: contraction and concentration of the banking system; expansion of the funds management industry; establishment of the SSM and the SRM (Executive Summary opening).

Key selected economic indicators (from Table 2)
- Real GDP: 2014: 5.2; 2015: 7.8; 2016: 4.9; 2017: 3.2.
- Final domestic demand: 2016: 5.3; 2017: 3.8.
- Exports of goods and services: 2016: 6.8; 2017: 5.2.
- House prices: annual change 2016: 6.6.
- Unemployment rate (in percent): 2014: 11.3; 2015: 9.5; 2016: 8.3; 2017: 7.7.
- General government gross debt (in percent of GDP): 2014: 107.5; 2015: 93.8; 2016: 89.0; 2017: 86.6.
- GDP per capita (in euros): 2014: 41,011; 2015: 46,301; 2016: 49,505; 2017: 51,436.
- Population (in millions): 2016: 4.7; 2017: 4.7.

### Stability Analysis: vulnerabilities and risks
- Major vulnerabilities in the banking system relate to:
  - the real estate sector (RRE and CRE),
  - some parts of the corporate sector,
  - the sovereign,
  - funding in pound Sterling.
- Pockets of weakness remain among highly leveraged households and smaller domestic firms.
- Cross-border connections from Irish banks to other financial centers—except the UK—appear to have attenuated over time.
- Over the medium term, technological innovations and shifts in competitive pressures pose profitability challenges for banks and NBFIs.
- The UK vote to leave the EU is likely to have negative effects on the Irish financial system, especially through banks’ UK operations and a potential slowdown affecting Irish firms, employment, and investment; the immediate aftermath has shifted the probability distribution of risk factors. The impact could be large but should be manageable; longer-term consequences depend on the future UK–EU relationship (Executive Summary).

- Household and NFC balance sheets have strengthened but remain highly leveraged:
  - Credit-to-GDP has almost halved since the 2010 peak, but remains high by international standards (§3).
  - Almost 100,000 households were estimated to remain in negative equity on their homes at end-2015 (§3).
  - NFC debt-to-GDP ratio has declined as the multinational sector mainly relies on parent funding (§3).

- Dealing with the stock of NPLs remains a challenge; the system still holds a large stock of NPLs composed significantly of long-overdue mortgages and CRE loans (§4).

- Recommendations to improve stability analysis (Table 1):
  - 3. Further develop bank stress testing, including risks in UK operations — NT.
  - 4. Close data gaps on cross-border exposures, the nonbank financial sector, the commercial real estate market, and the non-financial corporate sector — NT.

### Financial Sector Structure and Oversight
- The financial landscape has been transformed: contraction/concentration of banks; global-scale funds management industry; SSM and SRM in place (Executive Summary).
- Most financial institutions, especially major banks, have built up buffers of capital and liquidity.
- The funds management industry is predominantly cross-border and of global scale; domestic commercial banks have limited connections with the funds industry (Executive Summary).
- Prime MMFs in Ireland (CNAV-seeking) currently hold comfortable buffers of liquid assets, but the sector faces high portfolio turnover and potential future requirements from upcoming EU legislation; remaining data gaps should be closed (Recommendations 5–7).
- The authorities have implemented a raft of regulations, increased Central Bank supervision resources, and made supervision more pro-active and systemically oriented.
  - Joint Supervisory Teams (JSTs) for Irish banks operate effectively and supervision in Ireland is rigorous.
  - Irish insurers prepared well for Solvency II, but vigilance is needed for risks not covered by the regulation and for regulatory arbitrage.
  - The Central Bank of Ireland leads in analysis of collective investment vehicle activities.

- Key oversight recommendations (Table 1, Financial Sector Oversight):
  - 5. Build internal capacity that allows for regular stress testing of MMFs — NT.
  - 6. Improve data coverage and monitoring of all special purpose vehicles — NT.
  - 7. Develop better understanding of the use of investment fund portfolio leverage — NT.
  - 10. Continue to streamline options under national discretion and regulations in bank supervision — MT.
  - 11. Further enhance the effectiveness and enforceability of supervision of credit risk in banks with respect to loan classification and provisioning — NT.
  - 12. Remain vigilant that harmonization of SSM supervisory processes is balanced by proportionality — NT.
  - 13. Enhance assessment of credit risk in insurers’ portfolios — NT.
  - 14. Enhance analysis of unusual reinsurance transactions to ensure capital relief is warranted by true risk transfer — NT.
  - 15. Coordinate among insurance supervisors to ensure due scrutiny of license applications and limit improper “jurisdiction shopping” — NT.
  - 16. Require MMFs to report liquid assets and characteristics of the investor base — NT.
  - 17. Encourage existing MMFs to graduate away from the CNAV convention and discourage CNAV in new MMFs — NT.

### Macroprudential policy and consumer protection
- Ireland’s boom-bust experience supports forward-looking measures to head off incipient financial threats.
- Introduction of loan-to-value (LTV) and loan-to-income (LTI) limits on residential mortgages as permanent features is well-justified even though credit conditions have normalized and real estate prices are estimated to be close to equilibrium (Recommendations 8–9).
- Macroprudential recommendations (Table 1):
  - 8. Maintain, and in due course review, LTV and LTI limits — NT.
  - 9. Operationalize the Central Credit Register as soon as possible, and, once operational, transform the LTI limit into a more comprehensive DTI limit — MT.

### Bank resolution and financial safety nets
- The BRRD and the SRM should provide a financial safety net and allow banks to exit with minimum disruption, but transition risks persist as SRM buffers are accumulated; SRM must be able to operate with necessary speed in a bank failure (Executive Summary).
- Continued effort is needed to maintain and strengthen operational preparedness.

- Financial safety net recommendations (Table 1):
  - 18. Continue to identify and address impediments to resolvability — On-going.
  - 19. Streamline the process for court approval of resolution measures — NT.
  - 20. Streamline the process of SRM decision making — MT.

### Institutional capacity and governance
- An independent, accountable, and well-staffed Central Bank is key to fostering a strong financial system; de facto and de jure operational independence of supervisory authorities must be maintained, matched by strong accountability and transparency (Recommendation 1).
- Staff retention is a cross-cutting challenge across supervision (Recommendation 2).

- Cross-cutting recommendations (Table 1):
  - 1. Support independence of the Central Bank by continuing to demonstrate accountability to the Oireachtas and enhancing public transparency — On-going.
  - 2. Revise personnel policies to attract and retain experienced staff — NT.

*International Monetary Fund — Ireland: FSAP Executive Summary (content unit: _cr16258 - EXECUTIVE SUMMARY).*

### 5. Heightened uncertainties following the UK vote

### 5. Heightened uncertainties following the UK vote

### Market reaction and immediate implications
- Shares in Irish financials declined sharply after the referendum, while sovereign bond spreads and bank funding costs were little changed.
- Irish real estate-related indicators showed gains—unlike their peers—possibly reflecting the prospect of more multinationals being attracted to Ireland.
- Immediate impact on Irish banks likely modest because:
  - banks have little exposure to market risk;
  - banks are overwhelmingly deposit-funded;
  - banks have access to central bank liquidity in euro and pound Sterling.
- Mortgages make up about 85 percent of household loans.
- Interest-only loans amount to about 10 percent of total mortgage loans.

### Vulnerabilities and transmission channels
- Brexit-related uncertainties increase the risk of a major slowdown in Ireland, the UK, and the rest of Europe.
- Key transmission channels and consequences:
  - slowdown in the UK and Sterling depreciation could reduce profitability of Irish bank subsidiaries in the UK;
  - traditional Irish corporate sector (major employers and bank clients) likely to be hit proportionately more than the globally-oriented multinational sector;
  - heightened uncertainty and market volatility may depress investment and activity across Europe, including Ireland, leading to deterioration in bank operating profits and asset quality.
- Possible macro-financial effects:
  - fall in UK and Irish property prices (particularly housing);
  - persistently elevated vulnerabilities as corporates and households find it harder to strengthen balance sheets;
  - potential return to higher risk premia on sovereign bonds;
  - policy responses (more prolonged very low interest rates) could negatively affect banks’ and NBFIs’ earnings.
- Severity depends on the future UK–EU relationship on trade, financial flows, and labor movement, and on the persistence of uncertainty.

### Legacy issues and structural vulnerabilities
- High indebtedness and prevalence of variable-rate loans increase sensitivity to slowdown, higher lending rates, or a reversal in real estate recovery—leading to more provisioning/write-offs and higher loss-given-default rates.
- Consolidation in the domestic banking sector reduced diversification.
- Insufficient capital investment during the crisis left banks with antiquated IT systems.
- Bank profitability has been squeezed mainly because of a decline in earnings.

### Nonbank financial sector risks
- Value of assets invested via Irish domiciled money market and investment funds (collective investment vehicles, CIVs) had risen to €2.7 trillion in Q4 2015, equivalent to 12.5 times GDP.
- Ireland is the domicile of choice for more money market and hedge fund assets than any other country in the euro area.
- Most assets and liabilities of these vehicles are held offshore; asset managers from more than 50 countries have established CIVs in Ireland.
- Constant changes in portfolio composition and underlying trading volumes, plus reporting conventions that obscure economic risks associated with leverage in some CIVs, imply the funds management sector needs close monitoring.

### Mitigating factors
- Private sector is less leveraged relative to the crisis period.
- Real estate prices are well below past peaks.
- New CRE projects are largely financed by foreign nonbanks (e.g., in the form of Real Estate Investment Trusts—REITs).
- Local banks are much less dependent on market funding and have much less international exposure.
- Sovereign bond spreads have come down to modest levels; the Irish government has been able to raise funding at negative nominal interest rates.
- Regulatory reforms have strengthened prudential rules and crisis management capacity.

### Supervisory actions on impaired assets (Box 1)
- Central Bank of Ireland measures:
  - 2011: banks required to develop mortgage arrears resolution strategies;
  - 2013: introduced quarterly Mortgage Arrears Resolution Targets (MART) for the six main lenders and bank-specific non-public targets for distressed SME loans;
  - conducted “deep dives” via credit file reviews and supervisory exercises (2013 Balance Sheet Assessment, 2014 Comprehensive Assessment, 2015 Impairment Provisioning Review);
  - strengthened dedicated credit inspection team.
- Legal reforms:
  - Personal Insolvency Act enacted at end-2012;
  - establishment of the Insolvency Service of Ireland;
  - shortening of bankruptcy discharge periods in 2013 and 2015;
  - courts empowered to review and, where appropriate, approve proposed insolvency deals rejected by banks;
  - changes to court rules and procedures to reduce number of repossession adjournments.
- Remaining priorities:
  - further cleanup of bank balance sheets focusing on long-overdue mortgages, including streamlining legal processes;
  - continued supervisory intervention for resolution of commercial loans;
  - faster pace of asset disposal in the SME segment.

### Banking sector soundness and key indicators
- Positive developments but legacy issues persist.
- Notable statistics (end-2015 unless otherwise indicated):
  - Regulatory Capital to Risk-Weighted Assets: 24.8 (2015).
  - Regulatory Tier 1 Capital to Risk-Weighted Assets: 22.6 (2015).
  - Capital to Assets: 14.0 (2015).
  - Non-performing Loans Net of Provisions to Capital: 42.7 (2015).
  - Non-performing Loans to Total Gross Loans: 14.8 (2015).
  - Non-performing Loans (€bn.): 46 (2015) [table truncated in source].
  - Gross Loans (€bn.): 312 (2015) [table truncated in source].
  - Large Exposures to Capital: 17.8 (worst quartile reported).
  - Return on Assets: 1.0 (2015).
  - Return on Equity: 5.7 (2015).
  - Interest Margin to Gross Income: 57.9 (2015).
  - Liquid Assets to Total Assets: 12.4 (2015).
  - Liquid Assets to Short-term Liabilities: 161.5 (2015).
  - Liquidity Coverage Ratio: 126.8 (2015).
  - Net Stable Funding Ratio: 111.5 (2015).
  - Customer Deposits to Total Loans: 73.8 (2015).
  - Geographic distribution of total loans—Domestic Economy: 85.9 (2015); Advanced Economies: 13.8 (2015).
- NPL ratios have declined by 10.9 percentage points since December 2013.
- Loan book more focused on the Irish market; non-Irish lending almost entirely focused on the UK.
- Large exposures have diminished.
- Liquidity indicators improved substantially as banks paid off wholesale funding and shifted to retail deposit funding.
- Most banks appear well placed to meet the Net Stable Funding Ratio (NSFR) once it comes into force (NSFR to be implemented by 2018).

### Profitability and business model pressures
- Return on assets is still low in absolute terms although higher than returns achieved by European peers.
- Return on capital weakened as banks deleveraged while holding a large share of low-margin “tracker” loans from the pre-crisis period.
- Ratio of interest income to total income has been among the highest in Europe; fee income is relatively low.
- Banks have been reducing operating costs and write backs of provisions have contributed significantly to profits in recent years.
- Shift to retail deposit funding likely reduced funding costs and short-term volatility.

### Credit unions
- Credit unions face low profitability, a contracting loan book, and impaired legacy loans.
- They have ample liquidity from retail deposit base and low leverage.
- Fragmented sector makes investment in modern information and payments technology difficult.
- Selected indicators (end of period):
  - Capital to assets: 16.1 (2015).
  - Average Arrears: 12.8 (2015).
  - Return on Assets: 1.1 (2015).
  - Liquid Assets to Unattached Savings: 40.6 (2015).
  - Total Loans (Euro millions): 3,921 (2015).
  - Total Assets (Euro millions): 15,176 (2015).

### Stress testing framework and scenarios
- Bank solvency stress tests combine:
  - “Top-down” estimates by FSAP team and Central Bank of Ireland using public and supervisory data;
  - “Bottom-up” estimates prepared by banks using internal processes.
- Coverage:
  - Banks’ bottom-up and FSAP top-down covered 5 significant institutions accounting for 70 percent of banking system assets;
  - Central Bank’s top-down covered 11 largest banks accounting for 85 percent of banking system assets.
- Tests project three-year earnings, costs, balance sheets, and impacts on risk-weighted assets and capital, incorporating phasing-in of Basel III capital requirements and treatment of deferred tax assets.
- Scenarios:
  - Baseline: based on Fall 2015 World Economic Outlook, updated with 2015 outturn (baseline defined before stress tests and does not incorporate any impact from “Brexit”).
  - Moderate stress (euro area-wide): deteriorating sentiment reduces consumption and fixed investment; Irish growth slows rapidly; price deflation becomes generalized; real interest rates rise while bond and equity prices fall.
  - Severe stress: amplified effects on Irish domestic economy and stronger disruption in Ireland’s European partners, particularly the UK—can be viewed as a reduced-form representation of large, drawn-out negative effects of “Brexit” on traditional Irish exporters and real estate prices, leading to lower bank earnings and a more persistent rise in credit default rates.

### Stress test results and sensitivities
- Tests include sensitivity analyses to interest rate and foreign exchange shocks, declines in sovereign debt and house prices, unemployment shocks, operational risk, and concentration risks.
- Top-down solvency stress tests imply:
  - Irish banking system would be significantly impacted under the severe scenario, but overall risks remain manageable.
  - Main drivers of fall in capitalization: funding costs, loan loss provisions, Basel III capital adjustments, and valuation losses from sovereign exposures in available-for-sale portfolios.
  - Use of transitional arrangements towards Basel III (e.g., phase-in of deduction of deferred tax assets from CET1 in line with European rules) yields similar aggregate results with a slightly reduced capital shortfall.
- Results confirm persistence of credit risks, but also reflect restructuring of the banking sector and balance sheet cleaning evidenced in much lower exposure to the CRE sector.

*Source: _cr16258 - 5. Heightened uncertainties following the UK vote*

### 18. Results from banks’ bottom-up stress test were more benign. The different result stems

### _cr16258 - 18. Results from banks’ bottom-up stress test were more benign. The different result stems

### Stress test results and drivers
- Banks’ bottom-up stress test results were more benign than the FSAP static stress test.
- Primary reason: bottom-up exercise followed a dynamic approach allowing restructuring of balance sheets; FSAP stress test assumed balance sheets grow in line with nominal GDP.
- Banks’ projected pension scheme balances also contributed to more favorable bottom-up results.
- Sensitivity tests highlight exposures to sovereign risk, property prices, and credit risks from large corporate exposures.
- In the event of a default of its five largest exposures, one bank would become undercapitalized with regard to the Tier 1 capital hurdle rate of 6 percent.
- Market risk, including valuation changes from exchange rate movements, appears to be well contained.

### Bank liquidity stress tests
- Liquidity stresses reveal some vulnerabilities among banks.
- Every bank meets the standard liquidity coverage ratio (LCR) according to the phase-in calendar, but:
  - Some banks would face liquidity pressures under an alternative, more severe retail funding shock.
  - Some banks would face liquidity pressures under an additional wholesale funding shock.
- Liquidity stress test based on the Basel III NSFR suggests only moderate maturity transformation by Irish banks.
- Separate stress test on pound Sterling positions revealed potential liquidity shortfalls.
- Policy implication: importance of respective central banks making available liquidity in euro and pound Sterling during periods of potential funding stress, such as following the UK referendum on “Brexit.”
- Some banks are relatively vulnerable due to combined solvency and liquidity exposures and need particular supervisory attention to improve liquidity and solvency positions in parallel.
- The Central Bank of Ireland should further enhance stress testing capacity to better challenge banks’ risk modeling and complement analysis of evolving business models.

### Contagion analyses and cross-border interlinkages
- Cross-border bank linkages have declined since the pre-crisis period, but tight linkages with the UK financial system remain.
- Ireland is exposed to financial distress in the UK, the US, Germany, and France through direct cross-border credit and funding exposures.
- Network analysis: Irish banking system would be directly hit by distress in the UK banking system; distress in the US, German, and French systems would generate domino effects through the UK, Belgian, and Dutch systems.
- The Central Bank’s close monitoring of UK exposures of Irish banks is welcomed, including development of loan-loss forecasting models for stress testing.
- Intense monitoring will need to be maintained while uncertainties related to “Brexit” are resolved.
- Authorities need to work with other European countries and agencies to close data gaps on cross-border bilateral financial exposures; information on foreign bilateral liability positions is still incomplete.
- Expanding statistics on securities holdings by euro area residents will help monitor systemic risk related to cross-border linkages.

### Domestic financial interconnectedness
- Banking sector tightly connected with the real economy; linkages with other financial sectors are limited.
- Tight bank-sovereign linkages arise from banks’ government bond holdings and the government’s holdings of bank equity.
- Linkages between the domestic banking system and nonbank financial sector are limited; exceptions include Financial Vehicle Corporations (FVCs) and some asset management companies.
- Connections between banks and nonbank sectors mainly reflect intra-company transactions between corporate treasuries and parent multinationals.
- Contagion risks from interbank exposures among the three largest domestic banks are now very limited.
- Recommendation: enhance granular, higher frequency bilateral exposure data within and across bank and nonbank financial sectors; Central Bank has relevant initiatives underway.

### Real estate market
- Real estate prices have been rising rapidly, raising concerns about possible overvaluation and a build-up of new imbalances.
- Analysis using non-parametric and parametric methods suggests RRE prices are close to or moderately below their equilibrium levels, but the upward trend could become problematic if unchecked.
- CRE valuation signals are mixed; price-to-rent ratio suggests CRE prices were moderately overvalued.
- Frequency and HP filters show CRE prices have recently converged to long-term trends, but authorities should closely monitor banks’ CRE exposure and early imbalance signals.
- Recommendation: enhance collection of relevant data; consider macroprudential tools for CRE if banks resume large-scale provision of CRE loans.
- Foreign investment inflows or equity funding can reverse quickly, possibly leading to sharp CRE price declines and collateral value collapse.
- Current juncture does not suggest immediate macroprudential action in CRE, but tools should be ready if needed.

### Household sector
- Households have deleveraged but remain burdened with mortgage debt.
- Interest rates on existing tracker loans are currently very low; when rates rise, interest payments will increase and some households may face difficulty servicing debt.
- Stress test findings (three-year scenario of PDs for performing loans, end 2014) show higher probabilities of default across higher LTV buckets and for tracker-rate loans versus fixed or SVR loans.

### Corporate sector
- Vulnerabilities among NFCs have moderated, but the sector—especially smaller firms—remains vulnerable.
- Interest coverage ratio (ICR) and share of “risky” debt (debt of firms with ICR < 1) have improved to pre-crisis levels.
- Small firms account for most firms under “technical default” (ICR < 1); share of risky debt among small domestic firms constituted nearly half of their total debt in 2013.
- Even a severe but not extreme shock to profitability and interest rates could push many firms into vulnerability; in such a scenario the share of risky debt would increase to about 15 percent, similar to the level observed during the financial crisis.
- A deterioration in corporate balance sheets would lead to a significant increase in new corporate defaults, but, ceteris paribus, banks’ regulatory Tier 1 capital would still be above the minimum requirement given moderate corporate loan shares and current capital positions.

### Insurance and pension sectors
- Overall solvency position of the insurance sector under Solvency II remains high, yet important transitional risk remains.
- Introduction of Solvency II reduced solvency ratios to 130 percent for nonlife insurers and 260 percent for variable annuity (VA) writers.
- The 2014 EIOPA stress test confirmed strong resilience of the life sector to interest rate shocks; low interest rates are not an immediate concern for the life sector where few products carry guarantees on principal or rates of return.
- Authorities’ VA stress tests suggest hedging, liquidity and operational risks are contained.
- Complexity of Solvency II presents implementation challenges; outstanding prudential issues expected to be captured in Own-Risk and Solvency Assessments (ORSA).
- Recommendation: Central Bank should continue monitoring and ensure firms use the ORSA framework appropriately.
- Nonlife sector profits under pressure: reliance on investment return has been affected by reinvestment at lower rates; increased frequency and average cost of claims have impacted underwriting results.
- Recommendation: Central Bank should use increased granularity and frequency of Solvency II assets reporting to track possible deterioration in insurers’ investment credit quality.
- Operational pension sector is relatively large but does not give rise to systemic risks; almost all open schemes operate on defined-contribution basis; legacy defined-benefit schemes are substantial and not normally guaranteed by a sponsor or financial institution, with current contributors bearing the primary burden.

### Funds industry
- Ireland-domiciled CIVs (collective investment vehicles) are outward-oriented; potential for cross-border spillovers cannot be excluded.
- Risks noted: CNAV structure prevalent in high-portfolio turnover in MMFs, and current leverage reporting conventions complicate assessment.
- Large Ireland-domiciled MMFs have substantial buffers with strong liquidity positions relative to historical redemption shocks.
- MMF stress tests suggest very large interest rate increases would be needed for “shadow” NAVs to depart from amortized cost NAVs.
- High portfolio turnover and prevalence of prime CNAV MMFs imply risk of widespread redemption shock cannot be ruled out.
- Ireland-domiciled open-end bond funds invested in emerging market debt and high-yield credit appear able to accommodate plausibly sized redemption shocks.
- Portfolio leverage in Irish-domiciled investment funds appears concentrated in a relatively small number of bond and hedge funds; reporting conventions make true economic risk assessment difficult.
- Spillover risks from MMFs and IFs to domestic economy appear limited because only a small fraction of liabilities issued by Irish entities are held by Irish-domiciled CIVs; however, shocks could transmit via large holdings of US NFC claims or investor redemptions prompted by UK economic disruptions.
- Brexit implications: funds may re-domicile from the UK to Ireland to use the “EU passport,” but a reduction in capital flows between the UK and Ireland could dampen the Irish funds management industry over the medium term.

### Financial sector oversight and supervisory issues
- Post-crisis reforms created a strengthened oversight regime with new Irish and European institutions, strengthened regulations, a more intrusive supervisory approach, and a new focus on macroprudential issues.
- Key institutional events: establishment of the SSM and SRM for banks, commencement of Solvency II for insurance; FSAP focuses on changes in supervisory practice since 2013–2014 assessments.
- Cross-cutting supervisory issues to address:
  - Independence: operational independence deficiencies persist; legal framework not fully satisfactory (e.g., Minister of Finance’s ability to dismiss members of the Central Bank Commission remains a concern).
  - Accountability: Central Bank should maintain and strengthen proactive explanation of its actions to the Oireachtas and public; recent decision to publish results of Commission meetings is welcomed; further transparency recommended (e.g., publish summary records of in-house Financial Stability Committee meetings, enhance annual regulatory performance statement).
  - Staff resources: supervisory staff increased substantially; growth and turnover have generated challenges; continuity of assignments improves supervision and reduces burdens on supervised institutions; Central Bank should examine personnel policies to enhance attractiveness of longer-term careers.

*International Monetary Fund*

### 40. The prudential regulation and supervision of banks in Ireland has improved since the

### 40. The prudential regulation and supervision of banks in Ireland has improved since the

### Banking supervision and SSM implementation
- The 2013 BCP assessment found regulation and supervision were already generally effective and thorough; most identified areas for improvement have since been addressed.
- The effective operational implementation of the SSM is well established in Ireland, and the authorities are actively engaged and committed to the new ECB-led supervisory framework.
- Prudential regulation and supervision of banks have been further strengthened, and supervision is better shielded from undue pressures from special interests.
- Transition to SSM operational implementation has not resulted in major gaps, but challenges remain:
  - Current supervisory practices seem to emphasize uniformity of treatment at the expense of the principle of proportionality, potentially creating unnecessary burdens on supervisors and credit institutions.
  - Regulatory and supervisory demands can be further adjusted to the diverse profiles of individual institutions; FSAP stress test results show the importance of various risk factors differs significantly across Irish banks.
  - The Supervisory Review and Evaluation Process might be better attuned to each bank’s particular risk profile.
  - Remaining areas of national discretion and ancillary national regulations should be revisited to simplify and harmonize and enhance supervisory effectiveness and reduce regulatory burden.
  - In some areas, the ECB needs to take into account national legislation for significant and less significant institutions (SIs and LSIs) alike, e.g., in licensing applications and “fit and proper” authorizations.
  - Other competences are not clearly defined, for example, regarding limits to related parties.
- Supervisors should have effective powers to require credit institutions to adjust their classification of individual assets and increase levels of provisioning for prudential purposes; international experience suggests the supervisory power to require reclassifications and increase loss provisioning is more effective and efficient than capital add-ons.

### Non-performing loans (NPLs) and provisioning
- FSAP stability analysis suggests NPLs and provisioning (especially on mortgages and loans to SMEs) should remain an area of supervisory concern.
- Ireland would benefit from an enhanced SSM-wide approach to effective and active supervision of credit risk and related provisioning and write-backs.
- Current SSM initiatives, such as the NPL task force and steps to develop timely, active, and intrusive supervisory guidelines, are welcome.

### C. Insurance and Pension Sectors
- Several recommendations of the 2014 assessment of the insurance core principles have been implemented; Solvency II is now in force in Ireland.
- Since 2014 the Central Bank has made significant progress on:
  - governance;
  - risk management for solvency purposes;
  - reporting requirements for groups and individual insurers;
  - approval of internal models;
  - disclosure to the public;
  - cross-border crisis preparedness.
- Implementation is ongoing and the Central Bank has reviewed and modified its prioritization model to reflect key risk areas under Solvency II.
- Reinsurance concerns:
  - Shifting model of reinsurers under Solvency II requires supervisory attention.
  - Putative risk reduction using reinsurance could represent regulatory arbitrage rather than risk transfer or risk mitigation.
  - The Central Bank should analyze unusual reinsurance transactions (of substantial size) to ensure sufficient risk has been mitigated or transferred to justify capital benefits.
- International character of insurance sector challenges supervision:
  - Concern about undertakings locating in jurisdictions relatively weak in supervising overseas activities or engaging in “jurisdiction shopping.”
  - While the Central Bank is not group supervisor of any G-SII, in its host role it should closely follow the FSB/IAIS framework on G-SIIs and introduce necessary tools to supervise companies exposed to VA business.
- Occupational pensions:
  - Oversight of very fragmented occupational pension schemes by the Pensions Authority focuses on consumer protection and enhancing industry efficiency.
  - The current review of the oversight framework should spur debate on whether more could be done with existing powers and what measures might encourage consolidation to reap economies of scale without sacrificing customization.

### D. Securities Markets
- Size, diversity, and pace of innovation in securities market and CIV sector, plus numerous EU directives and regulations, place heavy demands on Irish supervisors.
- 2013 IOSCO assessment findings (generally favorable) point to need to strengthen implementation regarding regulator’s powers and resources, use of inspection and enforcement powers, management of large exposures and disruption, and oversight of hedge funds.
- Regulatory changes:
  - CRD IV strengthens capital requirements and governance and remuneration rules for investment firms.
  - Amendment of the Transparency Directive affects publication of information on sanctioning.
  - Forthcoming application of MiFID II and associated regulation widens scope and enhances rules on reporting, conduct of business, and investor protection.
  - Domestic: Irish Collective Asset Management regulation offers a more tailored legal framework for Irish authorized funds.
  - Client Assets and Investor Monies regulations should reinforce processes to safeguard client assets and investor monies, important where a fund service provider is wound down.
- Central Bank actions:
  - Increased staff resources dedicated to supervision of securities and a more proactive approach.
  - Specialized teams established, e.g., to address IT-related risks.
  - More thematic reviews undertaken; lower-impact regulated entities subject to more supervision.
  - Enforcement powers actively used.
  - Innovative development of securities sector analysis; collects and analyzes information on widening range of nonbank, noninsurance financial intermediaries and monitors regulatory perimeter, particularly shadow banking and new financial technologies.
  - Active cooperation with bilateral and multilateral partners.
- Measures to consider for Irish domiciled MMFs and IFs to minimize cross-border regulatory arbitrage and safeguard financial stability:
  - Liquidity and “run” risk:
    - Increase monitoring, on asset side, of liquidity risk in MMFs with reference to a minimum weekly liquid asset ratio and suitable indicators for other IFs.
    - On liability side, step up monitoring of characteristics and concentration of investor base.
    - More frequent liquidity-based stress tests should be informed by granular security level fund holdings.
  - Market risk:
    - Build internal capacity to allow for more frequent stress testing with respect to market shocks for MMFs and IFs that avail of significant leverage.
  - Spillovers:
    - Require evidence of communication from MMFs to investors that clearly spells out the nature of contingent parental sponsor.
    - In line with regulatory momentum in the US and EU, encourage CNAV MMFs to graduate away from the CNAV accounting structure (beginning with new prime funds) to better reflect variability in value of underlying security holdings.
    - Ensure appropriate risk management safeguards where CNAV MMFs continue to operate.
  - Remaining data gaps:
    - Continue closing data gaps relating to residual OFIs that do not belong to familiar categories, and leverage in IFs, particularly hedge and bond funds.
    - Standardize cross-jurisdictional data sharing.
    - Advocate at the EU level for reporting conventions on leverage that would strengthen stability related oversight of funds management industry.

### E. Macroprudential Oversight
- The Central Bank’s analyses of systemic vulnerabilities are sophisticated and timely, but room for improvement remains, particularly in filling data gaps.
- Data gaps include:
  - bilateral liability positions among financial institutions;
  - transactions and construction activities in the CRE market;
  - NFC balance sheet data;
  - credit information of borrowers across financial institutions until establishment of a central credit register.
- The Central Bank’s ex ante identification of possible effects of “Brexit” on the financial system is an example of its analysis.
- Recent tightening of some macroprudential measures address emerging vulnerabilities identified in the FSAP.
- Range of macroprudential instruments at disposal of the Central Bank of Ireland and the ECB includes (as implemented or available):
  - Limits on the proportion of mortgage loans with high LTV and LTI ratios introduced in February 2015.
  - From October 2015, with a phase-in until 2018, banks are obliged to maintain a minimum LCR of 60 percent.
  - In January 2016 a counter-cyclical capital buffer was introduced, although currently set at zero.
  - The phase in of a 1.5 percent “other systemically important institutions” buffer (in the form of CET1) was announced in 2015.
- Table (instrument availability and implementation as stated):
  - Countercyclical capital buffer: January 2016 / January 2016
  - G-SII buffer: January 2016 / ...
  - O-SII buffer: January 2016 / July 2019
  - Systemic risk buffer: ... / ...
  - Risk weight for RRE and CRE exposures: 2007 / 2007
  - Loss given default for RRE and CRE exposures: January 2014 / ...
  - Flexibility measures: January 2014 / ... (The Irish authorities have not activated flexibility measures.)
  - Liquidity coverage ratio: January 2014 / October 2015
  - Pillar II: January 2014 / ...
  - Macroprudential tools under national law:
    - Limits on LTV and LTI ratios: 2013 / February 2015
    - Asset-to-liability ratio: 1971 / ...
  - Note: 1/ The Department of Finance has discretion to transpose the systemic risk buffer provision into national law in the future.

- Policy recommendations:
  - Maintain the LTV and LTI limits given importance of mortgage lending to financial stability.
  - Ongoing impact analysis of LTV/LTI measures based on new wave of loan-level data is welcome and should be performed regularly.
  - Once Central Credit Register is implemented, consider transforming the proportionate LTI limit into a debt-to-income limit applied to households’ consolidated debt.

- EU/euro area notification system:
  - A more streamlined notification system would support timely macroprudential action while allowing adequate consideration of cross-border issues.
  - In urgent cases, national authorities should be allowed to include a clause in the CRR to accelerate approval, or the European Council should have a standing delegation of decision-making power to the European Commission.

### F. Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
- Ireland has made significant progress since its last AML/CFT assessment and has substantially addressed main deficiencies identified in its 2006 Mutual Evaluation Report (e.g., ML offense and customer due diligence measures).
- Actions taken include publishing relevant guidelines, facilitating recovery of proceeds of crime (e.g., reversing burden of proof in certain circumstances), and prohibiting bearer shares.
- Implemented most AML/CFT recommendations made by the Fund in the context of the 2013–14 assessments of Ireland’s observance of supervisory standards.
- Onsite and offsite inspections in 2013/14 revealed banking and credit unions sectors were not adequately assessing and mitigating ML/TF risks; the Central Bank has taken general and individual actions to enhance compliance.
- Ireland is aligning its AML/CFT framework with the 2012 FATF standard, notably on assessment of ML/TF risks and transparency of legal persons and trusts.
- The authorities established the Anti-Money Laundering Steering Committee and conducted Ireland’s first Money Laundering and Terrorist Financing National Risk Assessment in 2016 (ahead of Ireland’s November 2016 assessment against the current standard).
- Steps to implement, by June 2017, the European Commission’s 4th Directive on Money Laundering, to ensure timely access by competent authorities to beneficial ownership information of legal persons and extend definition of politically-exposed persons.
- Authorities are encouraged to:
  - pursue efforts to implement the revised standard effectively;
  - implement the 2014 ICP assessment recommendation to empower the Central Bank to issue enforceable rules in this area.

### Bank resolution and financial safety nets

- A. Resolution Regime and Institutions
  - The BRRD and the SRM have transformed the Irish framework for dealing with failing banks and align closely with the FSB’s Key Attributes of Effective Resolution Regimes.
  - Irish authorities did not adopt optional government financial stabilization tools in the BRRD that would allow recapitalization or acquisition of shares of a failing bank; absence of this ‘safety valve’ places greater importance on ensuring systemic entities are resolvable without government support.
  - Institutional arrangements for the SRM are still being put in place:
    - In January 2016, the Single Resolution Board (SRB) assumed responsibility for resolution planning and decision-making (together with the European Commission) for Irish banks directly supervised by the ECB under the SSM, as well as certain other banks established in Ireland.
    - The SRB is building operational capacity (plans to double staff complement during 2016).
    - The Central Bank of Ireland, responsible for resolution planning and decision-making with respect to LSIs not covered by the SRB, and resolution execution for all banks, plans to increase staffing by approximately 40 percent to fulfill these responsibilities.
  - Triggering resolution under the SRM entails a complex and potentially lengthy process; measures should be taken to enhance agility:
    - Decision-making process for triggering resolution could be streamlined.
    - Irish authorities should reconsider requirements for ex ante court approval of bank resolution measures, or introduce expedited timeframes for judicial action (for example, 24 hours).
    - Authorities should issue updated terms of reference for the Principal’s Group (a domestic coordination body) and undertake simulation exercises.

- B. Enhancing Recoverability and Resolvability
  - Recovery planning for Irish banks is progressing in line with Banking Union requirements.
  - SIs have submitted full scope recovery plans and received feedback from their JSTs.
  - Key issues and common themes include need to calibrate specific indicators and recovery actions (such as divesting business lines) and need to take steps now to make recovery plans implementable (including with respect to shared critical services).
  - Most LSIs are subject to simplified requirements for recovery planning.

*IMF staff report content.*

### 63. Reaching cross-border agreement on resolution plans is a crucial objective given the

### 63. Reaching cross-border agreement on resolution plans is a crucial objective given the

### Resolution planning and cross-border cooperation
- Reaching cross-border agreement on resolution plans is crucial given the significance of cross-border business.
- The Irish authorities are making significant progress on resolution planning.
- Cooperation with the UK has benefited from the formal coordination arrangements established by the BRRD.
- For the Irish SIs that have links to the UK, the Central Bank has worked through resolution colleges to:
  - identify preferred resolution strategies,
  - conduct resolvability assessment processes,
  - draft resolution plans.
- With the transfer of competence to the SRB, the next phase—reaching joint decisions on the resolution plans—will be undertaken by the SRB and Bank of England during 2016.
- The SRB is also responsible for any Irish LSIs that operate cross-border within the EU or that will rely on the Single Resolution Fund.

### Impediments to resolvability and preferred strategies
- The authorities should continue to work on identifying and addressing impediments to resolvability.
- Single point of entry bail-in strategies are being considered for the resolution of significant banks.
  - Potential benefit: avoiding further concentration in the Irish banking system.
  - Implementation would require significant reforms by banks, including:
    - issuing minimum requirement of eligible liabilities that could be bailed in,
    - enhancing IT systems to allow for rapid valuation of balance sheets.

### Funding recovery and resolution
- Irish banks will have access to the single resolution fund established as part of the SRM.
- The single resolution fund should reach at least one percent of covered deposits by end-2023.
- Recent changes have improved the deposit guarantee scheme (DGS), but further reforms could be undertaken.
- The DGS Directive has been transposed into Irish legislation.
- The Irish authorities should commit themselves to be able to pay out from the DGS within 7 days earlier than the 2024 deadline provided for in the DGS Directive.
- Together with other participating jurisdictions, agreement should be reached on a euro area wide deposit insurance scheme.

### Institutional framework and responsibilities
- The 2010 Central Bank Reform Act assigned all financial oversight functions (microprudential, macroprudential, and conduct supervision) to the Central Bank of Ireland.
- The Central Bank Commission was created, with representation from the Central Bank and the DoF, and external members.
- Under the SSM, the ECB is the competent authority for banking supervision in the euro area, in collaboration with the Central Bank of Ireland as the national competent authority.
- Macroprudential policy is a shared competency between the Central Bank of Ireland and the ECB in the SSM Member States.
  - The ECB can apply higher requirements for capital buffers and can set more stringent measures—but not lower requirements—than those applied by national authorities (“topping-up power”).
  - The Central Bank of Ireland has full powers over instruments outside of the CRR and CRD IV, such as limits on LTV and LTI ratios; the ECB can suggest national authorities use these powers.
- For the nonbank financial sector (insurance, pension, securities markets), the Central Bank framework for macroprudential policy is coordinated with the ESRB, the EIOPA, and the European Securities and Markets Authority.
- Because of the unitary structure, there is strong coordination of micro- and macroprudential policy within the Central Bank of Ireland.
  - The in-house Financial Stability Committee (FSC) and the Supervisory Committee are advisory committees.
  - The “Principals Group” coordinates among other Irish agencies, including the Central Bank, DoF, and National Treasury Management Agency.
  - Most macroprudential decision powers (except limits on LTV and LTI ratios) are delegated to the Governor; the FSC advises the Governor on financial stability issues.
- Bank resolution responsibilities are split:
  - In January 2016, the SRB assumed direct responsibility for resolution planning and decision-making (in conjunction with the European Commission) for Irish banks directly supervised by the ECB under the SSM, as well as other pan-European banks established in Ireland.
  - The Central Bank of Ireland, as the national resolution authority, is responsible for resolution planning, resolution decision-making and implementation with respect to LSIs not covered by the SRB.

### Industry structure and key statistics
- The structure of the banking sector was transformed during the crisis: two of the six major banks and many smaller institutions (including in effect the entire building society sector) were closed or resolved.
- Remaining banks reoriented assets and liabilities towards domestic retail business and cut staffing.
- The government retains large stakes in major domestic banks, although there have been some disposals.
- The credit union sector is continuing to consolidate.
- The nonbank financial sector, especially fund management activity, has continued to thrive.
  - Assets held in CIVs (CIS and FVCs) administered in Ireland totaled €2.7 trillion at end-2015, equivalent to 12.5 times GDP.
- The insurance sector:
  - Eighty-two percent of the insurance business is written outside Ireland.
  - The sector is the third largest reinsurance business in Europe.
  - Approximately €20 billion of assets under management emanating from VA business is on the balance sheets of Irish regulated insurers.
- Selected table figures (as presented):
  - Credit institutions: 493 (total assets €1,536 billion) in 2007; 406 (total assets €576 billion) in 2015 Q4.
  - Banks licensed in Ireland: 41 (total assets €1,346 billion) in 2007; 24 (total assets €508 billion) in 2011; 22 (total assets €464 billion) in 2015 Q4.
  - Majority foreign owned banks: 35 (total assets €959 billion) in 2007; 21 (total assets €246 billion) in 2011; 19 (total assets €214 billion) in 2015 Q4.
  - Branches of foreign banks: 28 (total assets €140 billion) in 2007; 30 (total assets €97 billion) in 2015 Q4.
  - Credit unions: 422 (total assets €14 billion) in 2007; 354 (total assets €15 billion) in 2015 Q4.
  - Insurance (total): 306 (total assets €164 billion) in 2007; 228 (total assets €321 billion) in 2015 Q4.
  - Private pension funds: 230,511 (total assets €88 billion) in 2007; 305,547 (total assets not specified) in 2015 Q4.
  - Collective investment schemes: 3,456 (total assets €1,108 billion) in 2011; 4,492 (total assets €2,259 billion) in 2015 Q4.
  - Money Market Mutual Funds: 86 (total assets €288 billion) in 2011; 80 (total assets €474 billion) in 2015 Q4.
  - Investment Funds: 3,370 (total assets €820 billion) in 2011; 4,412 (total assets €1,785 billion) in 2015 Q4.
  - Financial Vehicle Corporations: 701 (total assets €500 billion) in 2011; 822 (total assets €431 billion) in 2015 Q4.
  - Other (nonbank financial sector): total assets rose to 626 ( €524 billion) in 2014 (noted increases largely attributable to restructuring).
- Notes and data caveats preserved as in source:
  - Values for certain categories are consolidated or resident-office based as specified.
  - At end Q4 2015, the net asset value of investment funds was €1,785.2 billion.

### Risk Assessment Matrix — key risks and assessments
- I. Structurally weak growth in key advanced and emerging economies
  - Overall Level of Concern: High
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Key points:
    - Exports were equivalent to 120 percent of GDP in 2015, with the EA taking 35 percent of the total.
- II. Sharp asset price decline and decompression of interest rate spreads
  - Overall Level of Concern: Medium
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Key points:
    - Ireland’s high levels of private and public debt make it susceptible to financial contagion.
- III. Higher-than-expected fallout from the UK referendum result
  - Overall Level of Concern: High
  - Relative Likelihood: Medium
  - Expected Impact: High
  - Key points:
    - The UK referendum on 23 June 2016 resulted in a majority for the UK leaving the EU.
    - The vote is expected to lead to a period of heightened uncertainty regarding cross-border trade, financial, and migration relationships between the UK and EU.
    - Potential adverse effects on exports to the UK, banks’ profitability, and asset quality.
    - Possible mitigating factor: relocation of firms from the UK to Ireland could increase FDI inflows over the medium term.
- IV. Financial imbalances from protracted period of low interest rates
  - Overall Level of Concern: Medium
  - Relative Likelihood: Medium
  - Expected Impact: Low/Medium
  - Key points:
    - Search for yield is a significant factor driving Irish CRE markets; further inflows could generate over-building and future price slumps.
- V. Persistently lower energy prices
  - Overall Level of Concern: High
  - Relative Likelihood: High
  - Expected Impact: Low
  - Key points:
    - Lower oil prices could reduce inflation and inflation expectations, with mixed effects on savings, investment, and private debt burdens.
- VI. Domestic reform fatigue coupled with increased political fragmentation
  - Overall Level of Concern: Medium
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Key points:
    - Public pressure to reverse prudential measures could increase vulnerabilities to adverse shocks.

*IMF staff summary extracted from the provided content.*

### Appendix III. Detailed Stress Test Results

### Appendix III. Detailed Stress Test Results

### Data and methodological constraints
- Data access was constrained by the modality of a data room, lack of a unified reporting framework, and the absence of time series on the credit quality parameters (probability of default and loss given default) for some loan segments.
- The FSAP team restricted supervisory data use to the Irish residential mortgage segment for the credit risk satellite model estimation and used publically-available data for the other segments; publically-available data are in some cases only proxies.
- These data limitations might have affected the risk analysis.

### Integration of solvency and liquidity testing
- The solvency and liquidity stress tests were integrated through the projection of banks’ funding costs in the solvency stress test by an econometric model.
- Projections were based on the LCR parameters to capture interactions between funding availability and costs, and banks’ solvency (banks’ funding costs rise when funding evaporates).

### A. Solvency Stress Tests — scenarios and design
- The solvency tests are based on three scenarios reflecting external risks and domestic vulnerabilities:
  - Baseline scenario: based on the Fall 2015 World Economic Outlook, updated with information on the 2015 outturn.
  - Euro-area wide scenario (moderate stress): combines elements from the RAM; envisages structurally weak growth in advanced economies, revival in risk aversion (including the European “periphery”), a sharp slowdown in emerging market economies; reduced consumption and fixed investment; rapid slowdown in Irish growth; generalized price deflation; higher real interest rates; falls in bond and equity prices. Designed by staff based on the IMF Global RAM and the EA-RAM.
  - Ireland-specific scenario (severe stress): much more severe stress with amplified effects on the Irish domestic economy and stronger disruption in Ireland’s European partners, in particular the UK (as might occur if “Brexit” proves very disruptive). Key features:
    - FDI inflows would drop.
    - Growth would be persistently well below potential and unemployment would rise.
    - Higher financial volatility and renewed sovereign stress in the EA (including Ireland) would sharply raise banks’ funding costs, affecting corporate creditworthiness with imperfect pass-through to lending rates partly due to the large share of tracker loans.
    - Decline in economic confidence and higher interest rates would depress domestic demand, reversing RRE and CRE price recovery back towards trough levels experienced during the last crisis.
    - Collapse in property prices would trigger adverse wealth effects, creating a negative feedback loop with falling domestic demand and a deflationary process.
    - Simultaneous substantial UK property price falls.

- The two negative scenarios include milder GDP growth shocks than 2008/2009 because they consider the still-negative output gap of the Irish economy in 2015 and structural rebalancing since then.

### A. Solvency Stress Tests — results (Severe Scenario)
- Table of Top-Down and Bottom-Up Solvency Stress Test Results in the Severe Scenario (as reported):
  - Banking system's CET1 ratio (in percent) / Number of banks with 4.5%<CET1<7% / Number of undercapitalized banks (CET1<4.5%) / Number of undercapitalized banks (leverage ratio<3%) / Max. capital shortfall in terms of CAR, T1, CET1 or leverage ratio (percent of GDP)
  - Fully-loaded Basel III
    - Bottom-Up Stress Test12.410-0.00
  - CBI Top-Down Stress Test10.111-0.05
  - IMF Top-Down Stress Test8.34030.20
  - European framework for transitional arrangements
    - Bottom-Up Stress Test14.310-0.00
  - CBI Top-Down Stress Test11.901-0.04
  - IMF Top-Down Stress Test9.44020.10
- Sources: Central Bank of Ireland and IMF staff calculations

### B. Liquidity Stress Tests — design
- The liquidity stress exercise consists of four tests:
  - an LCR scenario with variants;
  - a Basel III-based NSFR scenario;
  - a cash-flow based scenario analyzing different maturity buckets;
  - a reverse liquidity stress test.
- The exercise was carried out by bank and by currency, with attention to coincident exposures to liquidity and solvency risks.

### B. Liquidity Stress Tests — summary results
- Under parameters more severe than the standard LCR, total liquidity shortfall would range between €7.1 and €7.4 billion, equivalent to between 3.3 percent and 3.4 percent of GDP.
- It is noted that the “retail shock” and the “wholesale shock” have effects of comparable magnitudes.
- Reported liquidity stress tests summary results (as presented):
  - LCR - LCR Scenario with Ireland Delegated Act / LCR Scenario with retail shock / LCR Scenario with wholesale shock / GBP LCR retail shock / NSFR Outflow analysis
  - System-wide liq. ratio (in percent)124878779108...
  - Liquidity shortfall 1/ 2/
    - EUR billions0.37.17.45.37.40.0 - 14.0
    - as a percent of GDP0.13.33.42.53.40.0-6.5
  - Notes:
    - 1/ Liquidity shortfall is the amount required so that the Liq. Ratio in each bank in the sytem be equal to or above 100 percent.
    - 2/ For the outflow analysis, the range of shortfalls under different assumptions and aggregated across maturities is reported.
- Sources: Central Bank of Ireland and IMF staff calculations

*Source: Central Bank of Ireland and IMF staff calculations*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16258.pdf_