Chapter News

IMF Staff Completes 2016 Financial Sector Assessment Program (FSAP) Mission to Ireland

In jurisdictions with financial sectors deemed by the IMF to be systemically important, including Ireland, financial stability assessments under the Financial Sector Assessment Program (FSAP) are a mandatory part of Article IV surveillance, and are supposed to take place every five years. IMF FSAPs are currently being conducted in a number of Euro area countries including Ireland, Germany, the Netherlands and Finland.

An International Monetary Fund (IMF) mission, headed by Daniel Hardy, visited Ireland during December 2015 and March 2016 to conduct an assessment under the FSAP. The mission held discussions with the Central Bank of Ireland (Central Bank); the Department of Finance; representatives of other government agencies; and representatives of the non-government financial and nonfinancial sectors. It held discussions also with the European Central Bank;1 the European Banking Authority; the European Insurance and Occupational Pension Authority; and the European Systemic Risk Board. It is anticipated that a final report will be presented to the IMF’s Executive Board in late July.

The context is of an Irish economy that is clearly rebounding. Since the crisis that began in 2008, the banking system has consolidated and shrunk. Over the same period, the internationally-oriented funds management sector has grown significantly. The regulatory and supervisory environment has been transformed by post-crisis reforms, notably the establishment of the European Banking Union.

Financial sector stability

The vulnerabilities of the Irish financial system reflect in large part the significant openness of the sector and the economy in general. Recent indicators of economic slowdown in some major countries must be of concern to a country such as Ireland that is dependent on trade in goods and services, and foreign direct investment. In particular, the tight linkages with the U.K. financial system warrant the ongoing attention of the authorities. The crisis legacies of heavy private and public debt burdens (especially for households with high loan-to-value ratios), a persistent stock of impaired loans, and high albeit declining unemployment mean that a large negative external shock could have a significant impact on the financial system. Purely domestic risks are, for the moment, contained, but there may be pockets of vulnerabilities: commercial real estate prices have been rising rapidly, though the prevalence of funding by foreign investors reduces domestic financial linkages. Domestic risks could regain importance if an economic boom accelerates.

The IMF FSAP team worked with the Central Bank to study aspects of the Irish funds management industry, which is of global scale. The analysis supports the notion that the international funds management industry is not closely linked to the rest of the Irish financial system and economy, but interconnections with the rest of the global financial system pose reputational risk. Also, money market and bond funds (based on a sample of larger funds) appear to have sufficient liquidity to enable them to meet a sharp increase in redemptions without disrupting underlying markets or resorting to redemption “gates.” Nonetheless, the activities of the sector should continue to be monitored closely, particularly with respect to the use of leverage in hedge and bond funds. Moreover, while recognizing the work undertaken to address data gaps to date, the authorities are encouraged to continue stepping up oversight of special purpose vehicles.

Prudential regulation and supervision

The FSAP focuses on Ireland-specific issues, with an emphasis on the effectiveness of supervisory practice. The authorities have been effective and vigorous in strengthening prudential regulation and supervision. Besides the introduction of new European and local regulations, the Central Bank has increased its resources and deployed them in on- and off-site supervision that is more pro-active than in the past, and innovative (for example, in looking at cyber-risks). In the banking area, the shift was partly occasioned by the advent of the Single Supervisory Mechanism, which has fundamentally changed the supervision of Irish banks both large and small. In the insurance area, the application of the Solvency II regulation from the start of 2016 represents a structural change that imposes new demands on insurers.

The Central Bank, with its European partners, has been developing new ways to spot emerging threats to the system as a whole, and introducing new macroprudential tools; Ireland’s boom-bust experience amply demonstrates the need for forward-looking action to head off incipient financial problems. The recently introduced limits on loan-to-value and loan-to-income ratios on residential mortgages should be seen in this light. There is some evidence that these tools have had a stabilizing effect on house prices and house price expectations. The measures, however, are still very new; more information is needed before trying to refine their calibration.

Financial safety nets

The FSAP included a focus on the crisis management framework for credit institutions. Significant progress is being made to ensure that problems, even in a large bank, can be corrected early on, and, if need be, it can be dealt with through the recently established Single Resolution Mechanism. The Single Resolution Mechanism has only just been launched, and some effort will be required to build up its operational efficiency.


The FSAP is a key instrument of the IMF’s surveillance and provides input to the Article IV consultation. It is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs analyze the resilience of the financial sector, the quality of the regulatory and supervisory framework, and the capacity to manage and resolve financial crises. Based on its findings, FSAPs produce recommendations of a micro- and macro-prudential nature, tailored to country-specific circumstances.

For more information on the FSAP, please see

1 Following the establishment of the Single Supervisory Mechanism, the ECB is responsible for the supervision of credit institutions in Ireland, in co-operation with the Central Bank.

Compliments of the IMF

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.