'Stretched valuations' and global uncertainty risk
Stretched valuations in global financial markets and persistent economic and trade uncertainty represent the most significant threats to Ireland’s financial stability, according to the Central Bank Financial Stability Review (17 November).
The twice-yearly assessment highlights the gap between buoyant market pricing and the uncertain macroeconomic environment, and points to growing vulnerabilities that could spill into the Irish economy.
The Central Bank notes that while clarity on certain tariffs has modestly improved global growth forecasts in the short term, these gains are conditional on existing trade agreements being preserved.
Shocks
The risk of further trade shocks remains elevated, particularly as geopolitical tensions persist.
Against this uncertain backdrop, financial market valuations have continued to rise sharply, driven in a large part by US technology and artificial-intelligence-related stocks, the report states.
Equity indices have reached record highs, and corporate bond spreads remain compressed, indicating that investors are demanding little compensation for taking on risk.
Governor Gabriel Makhlouf warned that this imbalance leaves markets susceptible to correction.
Speaking at the report launch, he said that any negative development affecting US tech and AI companies could prompt a sudden reversal in sentiment, triggering a broader repricing across global markets.
Given the significant exposure of international investors to US equities, the impact of such a correction would likely be felt far beyond the United States.
The governor also highlighted concerns about the resilience of the non-bank financial intermediation (NBFI) sector.
Role of non-bank lenders
Recent high-profile bankruptcies in the United States have raised questions about lending standards in private credit markets, where non-bank lenders play an increasingly prominent role despite limited public visibility into their practices.
Some parts of the NBFI sector, Makhlouf said, exhibit high leverage and liquidity mismatches that could amplify stress.
A further challenge is rising fiscal deficits across advanced economies.
The resulting increase in sovereign debt burdens reduces governments’ ability to respond effectively during a downturn.
Makhlouf warned that a sudden shift in sentiment could force unplanned fiscal tightening, potentially triggering wider financial disruption.
Ireland remains particularly exposed to shifts in global conditions due to its structural openness and reliance on US foreign direct investment, the report said.
A relatively small number of highly globalised sectors contribute disproportionately to national output, employment and corporate tax revenue, the report points out.
This concentration risk, combined with ongoing needs for infrastructure investment, underscores the importance of careful management of public expenditure, the Governor said.
Despite these external risks, the Central Bank emphasises that Irish households, businesses and financial institutions currently hold relatively strong balance sheets.
Credit growth has picked up, led by mortgage lending — especially to first-time buyers — but the Central Bank sees no evidence of the risky lending practices that characterised the pre-2008 period.
Instead, the main driver of house price inflation is a persistent shortage of housing supply. In commercial real estate, the domestic market shows signs of stabilisation, and sentiment indicators point to a gradual recovery.
Resilient
Stress-testing conducted by the Central Bank suggests the domestic banking system is resilient and has the capacity to absorb a severe economic shock while continuing to support households and businesses.
Irish property funds continue to make progress toward meeting the macroprudential leverage limit ahead of its November 2027 deadline.
Internationally, the Central Bank supports global reforms aimed at addressing leverage in non-bank institutions and enhancing the liquidity management tools used by open-ended funds.
Makhlouf cautioned against efforts to reduce regulatory burdens at the expense of financial stability.
While efficiency in regulation is important, he said, the erosion of standards can ultimately lead to significant costs for society, as shown in financial history.