The Governor of the Central Bank John Hurley has said it is too early to reach a judgement on the economic impact of recent financial market developments but that Ireland's banks are solidly profitable and have good shock-absorption capacity.
In his speech to ACI Ireland last night on 'The Monetary and Financial Environment in the Euro Area' he said we are going through a period of considerable uncertainty.
'The outcome is heavily dependent on how market developments and financial conditions evolve and how banks, households and firms respond...while there have been some signs of recent improvement in financial markets, it is likely to take some further time yet before confidence fully returns', he said.
'One thing we can say with more certainty at this stage is that we are not at the end of the current episode yet', he said.
He said , as is the case for the rest of the global economy, the broad repricing of risk and tightening of financial conditions has tilted the balance of risks to euro area growth to the downside.
On inflation he said it is important that inflation expectations remain firmly anchored to price stability.
And on the impact of market turbulence on Ireland he said that : 'Our credit institutions do not have 'significant exposures to the subprime market, either directly or indirectly, and also have relatively low exposures to hedge funds and private equity risks'.
He said that the stress-testing of the banking system and extensive financial stability analysis indicates that Irish banks have the capacity to deal with risks from the current period of heightened stress in financial markets.
However, he said there is a is a need to improve transparency as the lack accurate and timely information on exposures and underlying risks has been an important factor in triggering the loss of investor confidence in recent months.
He warned that while securitisation and financial innovation have enhanced credit risk transfer, they have had other less benign effects also.
He said rating agencies play a very important role and should continue to do so, but there are some potential conflicts of interest and the question of a more differentiated scale of ratings for structured credit products needs to be examined.
And he said the issue of how to value complex products, many of which lack markets with genuine liquidity, needs further consideration.
