Central Bank governor John Hurley said today while the outlook for financial stability had deteriorated in recent months, Irish banks remain in a solid position.
"The strength of the Irish economy is continuing to support the stability of the financial system, and Ireland has a healthy domestic banking sector with good shock-absorption capacity," Mr Hurley said.
Speaking at the Irish Institute of Internal Auditors today, Mr Hurley said Ireland's large trading sector and foreign multinationals meant the economy and financial system was "not immune to the current disruption in international financial markets."
The origins of this disruption were in part down to the low interest rates over recent years, he said. The availability of credit at low rates resulted in an increased desire by investors to acquire assets earning a higher return, without properly considering the risks.
The international banking system had compensated for falling margins on traditional business by investing in structured finance products or originating collateralised debt obligations without fully taking on board the risks inherent in these products", Mr Hurley, who is also a member of the European Central Bank Governing Council, said.
However, the liquidity arrangements for Irish banks were good and they were well-positioned to access central bank funding, he added.
Although Irish banks had shared in the fall in margins on traditional businesses, because of the high level of demand in Ireland "profitability was maintained without recourse to investing in structured products or conduits as described earlier".
Looking forward, Mr Hurley said the International Monetary Fund expected the global economy was expected to grow at around 3.7 per cent this year, down from 4.9 per cent last year. He said the euro zone economy is set to grow moderately and inflation should ease gradually this year but there are risks attached to both scenarios.
"Despite continuing problems in financial markets, the latest economic data remain consistent with moderate but ongoing real GDP growth in the euro area," Mr Hurley said in the speech.
"While growth is expected to moderate somewhat from its 2007 rate, euro area economic activity is still expected to continue to expand this year.
"However, the risks to this outlook would appear to be on the downside," he added. The risks arose from "significant uncertainty" in financial markets and the global economic growth outlook.
"The implications for growth stemming from developments in the United States remain highly uncertain," Mr Hurley said. "The full implications of financial market developments for the US economy, and subsequently for the global economy, may not be fully apparent yet. Hopefully, the initiatives discussed by the G7 last weekend will help reduce these uncertainties."
The Governer added there were increased signs the deterioration in the US housing market was starting to spill over to the broader economy and that the outlook for consumer spending appeared to have weakened.
"Many observers are of the view that the US economy may experience little or no growth for some time," he said. Sharp increases in food and energy prices had had a significant impact on inflation.
"The headline rate is expected to moderate gradually over the course of the year, but the risks to the outlook are clearly on the upside," he said. "The ECB Governing Council has signalled that it will continue to monitor very closely all developments over the coming weeks."
The duration of international market turmoil was now highly uncertain and had already lasted longer than many commentators would have predicted, he said.
"Pending a return to more normal conditions, we continue to monitor the situation very closely," he said, adding that term premia were expected to remain elevated for some time because of wider problems in the financial system," Mr Hurley noted.
Additional reporting: Agencies
