Stretched valuations in global markets and economic uncertainty are the main risks facing Ireland’s financial system - Financial Stability Review
17 November 2025
Press Release
Stretched valuations in segments of global financial markets and continued trade and economic uncertainty represent the main risks facing the financial system in Ireland, according to the Financial Stability Review published today (17 November) by Central Bank of Ireland.
The report is published twice per year and marks one of the flagship publications from the Central Bank. Today’s review assesses some of the main risks faced by the Irish financial system, the resilience of the system to those risks, and the macroprudential policy stance of the Central Bank.
Clarity on tariffs in the short term has led to a modestly improved global outlook, but the improvements in growth forecasts rely on current agreements being maintained and the potential for further trade shocks remains.
US technology and AI-related stocks are driving equity markets to record levels while corporate bond spreads are compressed, leading to a disconnect between the pricing of risk in global markets and the elevated levels of economic uncertainty. Fiscal deficits are also rising and are increasing sovereign debt burdens.
While Irish households, businesses and financial institutions currently have relatively healthy balance sheets and the domestic banking system has the capacity to absorb a severe shock to the economy, risks from economic and trade uncertainty are significant given Ireland’s structural openness and reliance on US foreign direct investment.
In his opening remarks at today’s press conference, Governor Gabriel Makhlouf said uncertainty remains high, noting it will take time for the economic effects of new trading arrangements to become apparent, and the steady state of relationships over the medium remains unclear. Near-term global growth forecasts have improved modestly. By contrast, risks stemming from developments in global financial markets have increased.
Governor Makhlouf said: “There is a continued disconnect between high levels of economic uncertainty and stretched market valuations as equity indices reach record highs, while corporate bond spreads are compressed. A negative development in the outlook for US technology and artificial intelligent related companies could lead to a market correction. Given the significant exposure of global investors to US markets, this could in turn lead to a shift in broader risk sentiment and a repricing in other markets.”
Governor Makhlouf noted recent high-profile bankruptcies in the US have raised questions about lending standards by non-banks in private credit markets, amid a scarcity of information around lending practices in these markets. More broadly, he noted that “in light of elevated leverage or liquidity mismatches, certain segments of the NBFI sector have the potential to amplify adverse market shocks, given they provide funding for banks, hold sovereign debt and are significant investors in global equity markets.”
“Fiscal deficits are rising in many advanced economies leading to higher debt burdens. As well as increasing public debt ratios and placing pressure on government expenditure, this reduces the ability of fiscal policy to respond effectively and support the economy during a downturn. A sudden shift in sentiment could lead to unplanned fiscal corrections and wider market disruption.”
A broader backdrop to these global financial developments is an increased focus internationally on the efficiency and effectiveness of financial regulation. Governor Makhlouf said: “History tells us that there are clear political economy-driven cycles in financial regulation and supervision. At a global level, we seem to be at a turning point, albeit with differences across jurisdictions. In that context, it is particularly important that burden reduction is not confused for an erosion of standards, which could eventually entail significant costs for society.”
The Irish economy is particularly exposed to international developments given its structural openness and reliance on US FDI, with a small number of highly globalised sectors driving output, employment and corporate tax revenue. Given this concentration risk and at a time when growth in infrastructure investment is needed, Governor Makhlouf reiterated that public expenditure plans will continue to need careful management.
On the domestic economy, Governor Makhlouf said “Credit growth to the economy has picked up, driven by mortgage credit and particularly for first time buyers. Lending has grown broadly in line with rising incomes over a period of stable economic growth. The link between unsustainable lending practices and house prices – a strong feature of GFC-era property valuations – is not apparent. A more prominent driver of prices in the current environment is a shortage of housing supply. For commercial real estate, the domestic market shows signs of stabilisation and sentiment indicators point to a gradual recovery.”
Despite significant exposures to global developments, Governor Makhlouf said Irish households, businesses and financial institutions currently have relatively healthy balance sheets. Even in an adverse scenario, the Central Bank’s analysis suggests the domestic banking system has the capacity to absorb a severe economic shock and continue to support the broader economy.
The Central Bank’s macroprudential policies aim to promote resilience and are proportionate to the risks faced by the financial system. Governor Makhlouf said: “Given the backdrop of macro-financial risks and how global uncertainty can interact with Ireland’s open economy, we judge that maintaining the Countercyclical Capital Buffer rate of 1.5 per cent remains appropriate. In this year’s assessment, the number of identified Other Systemically Important Institutions (O-SIIs) is unchanged, while there was a small reduction in the O-SII buffer rate for one institution.”
On the mortgage measures, which have been in place for 10 years, Governor Makhlouf said the benefits have been evident in recent years. In an environment of heightened economic volatility, they have contributed to lower flows into mortgage arrears and supported prudent lending standards.
Irish property funds are making progress towards meeting the macroprudential leverage limit ahead of the end of the implementation period in November 2027. At an international level, the Central Bank supports the implementation of agreed reforms on non-bank leverage and on open-ended funds liquidity. “We are working to understand better how price-based liquidity management tools are used in Irish-domiciled funds. Relatedly, we are analysing the financial stability risks from Irish hedge funds,” added Governor Makhlouf.
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