Economics: Like any car, an economy needs a dashboard and indicators to help the driver. The better the car, the more sophisticated the dashboard - some cars with satellite will now pinpoint your location on the planet to within 50 metres and tell you what's around the corner.

Last week's Central Bank financial stability report shows that the Irish "policy dashboard" is evolving in response to the economy's changing need for navigation. Oddly enough, next month's budget - along with the feast of economic numbers contained in the budget booklet - will get far more attention than last week's stability report. But make no mistake about it, for where the Irish economy is headed in the long term, the financial stability report is one to watch.

Public sector debt is falling - some might say to levels that are actually too low. According to pre-budget Government forecasts, it will fall from 28 per cent of Gross Domestic Product this year to just 25.5 per cent by 2008. While budgets are politically and electorally interesting, the still influential Stability Pact and a more vigilant public and media mean present and future governments have little opportunity to put the economy at risk by what they do in them.

By contrast - and as the Central Bank tell us in its report - between last year and this alone private sector credit as a share of GDP has jumped from 160 per cent to 192 per cent.

In one year alone we have added to our stock of private indebtedness an amount exceeding the total stock of our public indebtedness. This has happened because, as leading Central Bank economist and the main author of the report, Frank Browne, said last week, that mortgage lending criteria have eased significantly since 2003. In its usual deadpan language, the report states that "financial stability risks may be seen to have increased since the Financial Stability Report 2005 was published". You can bet your life on it.

Even if higher than last year, the financial risk level of the economy has still not reached critical, according to the report but it is closer to it. Having a highly indebted banking sector - particularly in an economy as exposed to the property market as Ireland's - is like speeding a car around a sharp corner. The question is, how much closer?

In Top-down Stress Testing: The Key Results, Central Bank economist Allan Kearns asks how well the banking system - as represented by 11 large key banks - is prepared for a banking crisis. Quite well, it seems. At present, non-performing bank assets are just 0.87 per cent of outstanding loans.

By looking at different types of risk - credit risk, liquidity risk and interest rate risk being the main ones - Mr Kearns turns the banking system upside down and shakes it vigorously to see what emerges. For the sector's capital ratio to fall below the critical 8 per cent level, non-performing assets would have to increase by a factor of six.

The banks' liquidity position is less certain: That liquidity ratio could fall below the required ratio of 25 per cent, but it would take either a 30 per cent withdrawal of deposits or a 20 per cent fall in the value of deposits to cause this. The risk from exchange rate and share price movements are deemed limited overall and confined to a few small banks.

Another paper, by Allan Kearns, Maurice McGuire, Ann Marie McKiernan and Diarmuid Smyth, develops the "what if" analysis to see how the financial system would react to whatever is around the corner. They look at two possible "worst case" crises.

The first involves a 6 per cent fall in world trade, a 25 per cent appreciation of the euro and a fall of 25 per cent in investment by foreign multinationals in Ireland. For an extra dose of misery they also assume a decline in housing construction to 50,000, down from last year's levels of 80,000.

Under this scenario, economic growth slows to 3 per cent in the year of the shock, grinds to a halt in the following year and then contracts sharply by 5 per cent in the year after that. Over that period, house prices fall in value by 20 per cent and unemployment rises to just under 10 per cent.

Notwithstanding these useful studies, one vital indicator is still missing from the Central Bank's dashboard, the extent of equity withdrawal in the economy.

The second crisis assumes a 10 per cent appreciation in the euro, higher interest rates (one quarter of a per cent) and the same fall in construction output and foreign direct investment as before. This slightly different scenario causes growth to decelerate from around 6 per cent in the year of shock to 4 per cent and 0.4 per cent in the following two years respectively. But house prices still fall by 20 per cent over the period and unemployment comes in at just under 9 per cent by the end of it.

There is an important caveat with these scenarios: In both cases, the extent of private sector indebtedness would make a recovery from shock more difficult. This is because of a factor that such studies find it very hard to measure, let alone test for, the degree of confidence in the economy.

Just as they push a car driver to higher speeds, the adrenaline of confidence can drive investment in anything to dangerous levels. Once danger appears, fight turns to flight. The Central Bank admits that its studies do not account for so-called "second round" effects and that this may affect the test outcomes favourably (although other caveats may have an offsetting effect).

Even if a more moderate shock occurs and the overall economy escapes lightly, two further issues need consideration. Firstly - as asked by Central Bank director general Liam Barron last week - where will banks turn to for profitability if and when the profitability of lending declines? Secondly, even if the overall economy shrugs it off, an economic shock could hit sectors of the economy and population very hard indeed. Younger borrowers strapped for cash and with more vulnerable employment could find themselves in particular pain.

So - if house prices fall - could older borrowers who have borrowed significant amounts based on housing equity.

Both papers are available from the Central Bank and Financial Services Authority website www.centralbank.ie