CBI intensifies non-bank sector oversight, publishes new research
The Central Bank of Ireland is shifting its focus towards effective implementation and enhanced surveillance of the non-bank financial sector, Deputy Governor Vasileios Madouros announced today. The Bank also published new research on hedge funds and liquidity management tools.
Irish hedge funds: Large but resilient
The Central Bank of Ireland (CBI) published a Financial Stability Risk Assessment of Irish Hedge Funds, which manage approximately €400 billion in assets and account for around 6 percent of the global hedge fund sector.
Deputy Governor Vasileios Madouros stated that the sector is "unlikely to pose systemic risks on its own, given its relatively limited market footprint in core global markets.
" He added that the sector's diversity supports resilience.
However, the analysis reveals vulnerabilities if correlated with hedge funds following similar strategies in other jurisdictions.
Specifically, Relative Value funds are, on average, "around 30-45 times levered.
" Madouros warned that in times of stress, historical correlations might break down, leading to losses which, amid high leverage, can contribute to fire sale dynamics.
The assessment emphasizes the need for enhanced financial stability monitoring of vulnerable cohorts, supported by supervisory engagement and cross-border cooperation.
Liquidity tools: Bridging the usage gap
The CBI also published research on the 'Availability and use of Liquidity Management Tools (LMTs) in Irish-domiciled Investment Funds'.
It found that price-based LMTs are widely available, with 84 percent of funds possessing at least one, marking a significant increase.
However, a notable gap exists between availability and actual use, as only about one-third of funds employed P-LMTs during 2022-2023.
Deputy Governor Madouros stressed the need for greater and more consistent use.
The CBI published best practices for market impact determination, and LMT use by bond funds will be a supervisory focus this year.
Strengthening the financial stability lens in non-bank oversight remains a strategic priority for collective resilience.
Necessary shift, complex execution
The CBI's strategic pivot to non-bank surveillance is a crucial, timely adjustment.
While hedge fund risks are contained individually, correlated strategies and low liquidity tool adoption present persistent vulnerabilities.
This proactive approach necessitates robust enforcement and international cooperation to truly enhance systemic resilience.