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COVID-19 impact on real economy yet to fully materialise says Central Bank

Written by Robert McHugh, on 16th Jun 2020. Posted in Financial

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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 review states 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 Central Bank warns that the full transmission of these risks to the real economy and the financial system will take time. 

In response to the shock, it says 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:
1. 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.
2. 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.
3. 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.
4. 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. 
5. 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.
6. 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 at the launch of the FSR (opening statement attached), 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."

He added, "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."

Source: www.businessworld.ie

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