Central Bank expects Brexit relocation decisions early in 2017

Regulator ‘confident’ that staffing issues involving relocations can be managed

The Central Bank identified persistent low interest rates as a particular risk. Photograph: Matt Kavanagh

The Central Bank identified persistent low interest rates as a particular risk. Photograph: Matt Kavanagh

 

The Central Bank expects UK financial services firms affected by Brexit to make a decision on relocating here or elsewhere in the EU in the first half of 2017. At a press briefing to launch its latest macrofinancial review, Ed Sibley, director of credit institutions, said firms had visited Ireland on factfinding missions, but he expected to see “more definitive deliberations” around which jurisdictions they would choose for relocation in the first and second quarters of next year.

The bank declined to speculate on how many firms might move here, but its review stated that a “increasing number” of global insurance firms were looking to locate their European headquarters here, while UK insurers who have branches into the domestic market here would have to consider alternative structures.

The Central Bank’s deputy governor, Sharon Donnery, said the UK-based relocation of firms to Ireland “may have implications in terms of staffing” for the Irish regulator, but she was confident these could be managed.

The overall review found that risks to European financial stability remain “elevated” as a result of the UK’s decision to leave the EU, with “downside” risks for the Irish economy over the medium term.

Risks

“In the financial sector, the high stock of non-performing loans continues to constrain the lending activity of European banks.

“Finally, public and private debt in some member states remains high, thereby increasing their vulnerability to both economic downturns and tensions in financial markets.”

The review found that the overall stock of credit for corporations declined, with an annual rate of growth of -5 per cent in October 2016.

“Such a trend reflects loan repayments, driven by SMEs, continuing to outpace new lending,” Ms Donnery said. “Nevertheless, gross new lending to SMEs reached its highest level in Q2 2016, since 2010.”

Irish household debt remains high in spite of significant deleveraging in recent years. The number of mortgage arrears cases continues to fall, with loan modifications a contributory factor.

The Central Bank found residential property price growth has declined from recent peaks, but while residential construction activity is increasing, annual new supply does not meet projected long-term demand.

Returns on Irish commercial property continued to decline in the first half of 2016, but remain higher than those in other countries.

Retail banks

“The reduction of NPLs has occurred across all major loan categories, with commercial property portfolios experiencing the strongest decline,” Ms Donnery said.

In terms of the domestic non-life insurance industry, the Central Bank said it continued to experience “operating challenges”.

It found that all of the domestically focused large non-life firms reported underwriting losses in the first half of 2016, although at lower levels than a year earlier.

Those losses are mainly concentrated in the motor insurance market but the review said the overall solvency position of the non-life sector remained high.

The Central Bank has also announced that the countercyclical capital buffer (CCyB) rate on Irish exposures is to be maintained at 0 per cent, with effect from January 1st.

The CCyB is a capital requirement that applies to large banks and investment firms, and is designed to make the banking system more resilient and less pro-cyclical.