The Irish central bank has requested the government to enforce new regulations, which would require the country’s banks to hold systemic risk buffers.
The aim is to enhance the loss-absorbing capacity of lenders and safeguard the economy in the event of crisis.
This was highlighted by Central Bank of Ireland governor Philip Lane in a lecture delivered to UCD School of Economics.
In his lecture, Lane highlighted “tail risks” that are unlikely to occur. However these risks had the potential to affect the financial system significantly.
“In particular, the underlying structural factors driving macroeconomic performance and financial conditions may either undergo slow-moving trend shifts over time or, more acutely, experience discrete shocks that are realised over a relatively short time horizon,” Lane noted.
Lane flagged Ireland’s over-dependence on multinational firms as one of such risks in addition to Brexit.
According to Lane, a continuous shock to the sector would bring about a cumulative economic decline. Furthermore, this would “dwarf a normal cyclical recession, with attendant implications for the financial system”.
Lane said: “The Central Bank of Ireland is committed to safeguarding financial stability through the active deployment of macroprudential tools, including the mortgage rules and the already-activated counter-cyclical capital buffer.
“As indicated above, our plan now is to examine the potential additional contribution of the systemic risk buffer in ensuring that the banking system would be resilient in the event of a structural shock to the Irish economy.”