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Impact of COVID-19 pandemic on real economy has yet to fully materialise – Central Bank of Ireland


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  • The macro-financial outlook has deteriorated significantly as a result of the COVID-19 pandemic.
  • The risks posed to domestic financial stability stem from the sudden halt in domestic activity, further financial market stresses and structural vulnerabilities of a small, open economy exposed to the downside risks in the recovery of global demand.
  • Fiscal, monetary, macro-prudential and micro-prudential actions are complementing each other to mitigate an amplification of the shock and enable the financial system to support households and businesses.

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

The COVID-19 pandemic has been an exceptional shock triggering the materialisation of long-identified risks to financial stability and a collapse in global economic activity. The full transmission of these risks to the real economy and the financial system will take time. In response to the shock, policymakers have reacted with a range of fiscal, monetary, macroprudential and microprudential actions to mitigate the risk of further amplification of the shock and enable the financial system to support households and businesses through this crisis.

The main findings of the Financial Stability Review are:

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

Commenting on the launch of the FSR, Governor Gabriel Makhlouf said:

“Today’s publication sets out the implications of COVID-19 for domestic financial stability. The economic shock has quite simply been unprecedented in scale and speed, and the medium to longer-term impact has yet to fully materialise. However, going into this period, households businesses, and the domestic banking system were in a significantly stronger position compared to the onset of the financial crisis a decade ago. Unlike the experience of a decade ago, the financial system is not the origin of the current challenges but, like the rest of the economy, it is affected by them.  We are perhaps only at the end of the beginning of seeing those challenges emerge.

“As we have taken stock of what this means for domestic financial stability, there are three key messages emerging. First, the speed, size and pervasive nature of the economic shock have presented both immediate challenges and tighter financing conditions, as well as a sharp deterioration in the macro-financial outlook, with further downside risks for households, businesses, the public finances and the financial sector. Secondly, households, businesses and the financial system have entered into the current phase in a more resilient position compared to the onset of the financial crisis a decade ago. Third, the policy actions taken in the area of fiscal and monetary policy – as well as macroprudential and supervisory policy – have been necessary to mitigate the amplification of the immediate shock, enable the financial system to support households and businesses through the crisis, and to minimise the extent of longer-term difficulties.

“At the Central Bank we have been working hard to do what we can to reduce the impact of Covid-19 on consumers, SMEs, the financial system and the wider economy. These actions have included releasing capital buffers, like the CCyB, or emphasising that other capital buffers, like the O-SII, can also be used to absorb losses.  These actions facilitate additional loss absorption and capacity for further sustainable bank lending. Through our membership of the Eurosystem, we are participating in the €1.35 trillion Pandemic Emergency Purchase Programme to provide additional liquidity and reduce funding costs in the economy.  We are also ensuring borrowers are treated consistently when availing of payment breaks. It is in the interests of everybody that the banking system plays a sustainable role in minimising the extent of the downturn and contributes to the recovery.

“However, as we begin to take the first tentative steps out of the crisis we have already seen that it has had a significant negative impact on many households and small businesses.  Some people will struggle to meet their financial commitments and some firms will not re-open.  Sustained and coordinated policy action will be required to reduce to the greatest extent possible the long-term effects of this crisis on people’s livelihoods and the economy as a whole.”


  • The Financial Stability Review evaluates the main risks facing the financial system and assesses the resilience of the financial system to those risks. A resilient financial system is one that is able to provide services to Irish households and businesses, both in good times and in bad. The Central Bank’s policy actions seek to ensure that the financial system is able to absorb, rather than amplify, adverse shocks.
  • A library of previous Financial Stability Reviews is available on the Central Bank website.

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