Makhlouf: External risks intensify, domestic system resilient
Gabriel Makhlouf, Governor of the Central Bank of Ireland, highlighted intensifying external risks to the domestic financial system. He noted global energy supply sustainability, sovereign debt, and AI-related stock valuations as key concerns in the Financial Stability Review 2026:1.
Global headwinds gather force
Governor Makhlouf emphasized intensifying external risks to Ireland's financial system in 2026.
The primary concern now stems from global energy supply sustainability following the Middle East conflict.
This shock, coupled with weakened global growth and rising inflationary pressures, increases systemic tail risk potential.
Financial markets, though orderly, show a contained reaction at odds with economic narratives on prolonged energy price shocks, raising the risk of sudden global financial tightening.
Highly leveraged non-bank financial intermediaries further amplify this vulnerability.
High valuations in AI-related stocks, buoyed by strong earnings, also pose a market correction risk if the macro-financial outlook deteriorates.
Debt-funded AI investments and scrutiny of opaque private credit markets create additional contagion channels.
Evolving cybersecurity risks, driven by geopolitical tensions and rapid AI developments, demand continuous operational resilience from the financial system.
Domestic buffers hold firm
The domestic financial system exhibits accumulated resilience, with strong aggregate balance sheets and modest leverage, providing a buffer against external risks.
The Central Bank of Ireland promotes this through prudential policies, emphasizing operational strength, prudent lending, and maintaining loss-absorbing capital and liquidity buffers.
While direct exposures to private credit or US large technology equities are limited, the banking system is not immune to second-round effects from market shocks or worsening economic conditions.
Consequently, the Countercyclical Capital Buffer rate is maintained at 1.5 percent to preserve resilience.
Sustainable fiscal policy is also crucial for broader macro-financial resilience, particularly as growing sovereign debt limits fiscal capacity to absorb shocks.
Resilience under pressure
The review reveals a domestic financial system resilient to traditional risks, yet vulnerable to complex, interconnected global shocks.
Maintaining the Countercyclical Capital Buffer signals proactive vigilance against potential second-round effects from volatile AI-related stocks and private credit.
Despite robust domestic buffers, continuous adaptation and international cooperation are crucial to safeguard stability in this evolving external landscape.