FIG Top 5 at 5 - 12/06/2025

1. Central Bank Financial Stability Review Update: (1) Central Bank of Ireland launches first Financial Stability Review of 2025 (2) Governor Makhlouf’s comments on the launch of the Central Bank of Ireland’s Financial Stability Review

1. Central Bank of Ireland launches first Financial Stability Review of 2025

On 11 June 2025, the Central Bank of Ireland (“Central Bank”), published its first Financial Stability Review (“Review”) of 2025. The Review provides an evaluation of the main risks facing the financial system and assesses its resilience to those risks, with the goal of ensuring the financial system can provide services to Irish households and businesses in both good and bad times.

The Review is the first edition of the year and focuses on the Central Bank's assessment of the main risks facing the Irish financial system over the short to medium term. However, given recent market turbulence, it also includes a review of the resilience of the internationally-focused non-bank financial intermediation sector (“NBFI”). The Review is informed by the deliberations of the Central Bank’s Financial Stability Committee and focuses on adverse outcomes that may materialise and their potential implications for domestic financial stability

A high level overview of both the global and domestic risk assessments detailed in the Review is provided in the note on the Governor’s remarks below. For the purposes of this note, we are focusing on the Review’s special focus on “Domestic banking sector conditions” and “NBFI sector during the April Market Volatility Episode”

Domestic banking sector conditions

The following should be noted regarding the Central Bank’s assessment of the domestic banking sector:

• Domestic banking sector is in a “robust position” with healthy balance sheets, low Non-Performing Loan ratios, and positive capital and liquidity conditions;

• Domestic bank profitability remains strong but is moderating from recent highs due to falling interest rates;

• Domestic banks are well-capitalised, with the median fully-loaded Common Equity Tier 1 capital ratio exceeding regulatory requirements; and

• Domestic banks maintain significant liquidity buffers, with an aggregate liquidity coverage ratio well above the regulatory minimum, supported by a strong deposit base.

The Irish NBFI sector during the April Market Volatility Episode

The inclusion of a focus on the Irish NBFI sector in the Review was a special addition due to what the Central Bank described as “recent market turbulence“ in April. Overall, during the April market turmoil, the NBFI sector globally and in Ireland “managed liquidity demands in an orderly manner”. Markets broadly functioned well, and there was no evidence of unmanageable liquidity demands. Despite the overall orderly functioning, the Review highlights that structural vulnerabilities persist within parts of the NBFI sector, particularly in certain cohorts of investment funds. These vulnerabilities, such as “liquidity mismatch and relatively high leverage”, make these funds more likely to amplify severe market stress if disruptions were more pronounced or long lasting. Specific fund cohorts were observed:

• Open-ended funds investing in corporate bonds, such as high yield and emerging market bond funds, saw net outflows in April as investors reduced exposure to illiquid assets. However, the scale of these outflows was significantly lower than at the onset of COVID-19;

• Money Market Funds (“MMFs”), continued to see inflows during the April volatility, unlike the March 2020 episode. Euro-denominated MMFs saw relatively large inflows, while US dollar-denominated MMFs had outflows in March but reversed to inflows in April. Overall, Irish-domiciled MMFs experienced significantly lower net outflows compared to the onset of COVID-19; and

• GBP LDI funds and hedge funds, were able to absorb the shock from increased gilt yields in April and “complied with the Central Bank's macroprudential measures”. Hedge funds saw a sharp increase in variation margin calls during April.

Some funds used price-based liquidity management tools (“LMTs”) during this period, but non-price based LMTs like side pockets and suspensions were not activated, indicating the level of redemptions experienced did not reach exceptional circumstances.

In response to the increased uncertainty, the Central Bank “stepped up monitoring and engagement” with the Irish-domiciled investment fund sector to quickly identify and respond to emerging stresses and enhance preparedness. The Central Bank explains that it continues to prioritise developing a robust macroprudential policy framework for the funds sector, including domestic measures for property funds and GBP LDI funds, and engages internationally on relevant issues.

2. Governor Makhlouf’s comments on the launch of the Central Bank of Ireland’s Financial Stability Review

On 11 June 2025, the Central Bank of Ireland (“Central Bank”), published its first Financial Stability Review (“Review”) of 2025. At the launch of the Review, Governor Gabriel Makhlouf, delivered opening remarks on the Review which provide a useful note on the Review.

At the outset, the Governor clarified that the Review is not about forecasting what is expected to happen, but rather focuses on ”what could happen”, assessing potential downside risks and the capacity of the financial sector to withstand adverse shocks. Since the last Review in December 2024, he confirms that the Central Bank’s assessment is that the “risks facing the financial system have increased”, primarily due to developments outside of Ireland that have important implications for the country.

He identified “three interrelated shocks” affecting the global economy since the start of the year, namely:

• A “material shift in trade policy”, specifically mentioning shifts by the US Administration and countermeasures by trading partners, leading to a marked increase in tariffs;
•  A “sharp increase in policy uncertainty”, noting it remains unclear where tariffs might settle over time; and
• An “increase in market volatility”, highlighted by a sharp, though short-lived, spike in April due to the unanticipated scale and scope of US "reciprocal" tariff announcements.

These global developments have resulted in a “weakened global growth outlook”, with short-term forecasts revised downwards and uncertainty particularly elevated due to potential outcomes around trade policy. Given Ireland's status as a small open economy reliant on foreign direct investment from the United States, it is particularly exposed to recent trade tensions and external macro-financial developments. The main way these developments are likely to affect Ireland is uncertainty and a reduction in external demand. The Governor went on to explain that from a financial stability perspective, a material slowdown in domestic economic growth could raise “credit risks for Irish banks” and negatively affect market sentiment towards the Irish sovereign.

Financial Markets

Turning to financial markets, the Governor explained that the sharp increase in global market volatility in April led to higher liquidity demands among certain investment funds based in Ireland, similar to global patterns. These demands were absorbed, and markets functioned in an orderly manner. Given the large non-bank financial intermediary (“NBFI”) sector in Ireland, a part of the Review is dedicated to how different segments responded to the heightened volatility. Structurally, vulnerabilities in parts of the global NBFI sector mean their behaviour could amplify future market stresses, highlighting the importance of strengthening the regulatory framework for NBFIs. Domestically, non-bank lenders or real estate investors heavily dependent on market-based financing may be sensitive to shocks in global financing conditions.

Regulatory Divergence

The Governor highlights that “regulatory divergence with the US” also presents financial stability challenges. The Central Bank is proactively engaging with the European simplification agenda while maintaining standards to deliver on its mandate and maintain resilience across the domestic financial system.

Financial Resilience

The Governor emphasised that borrowers and the domestic banking system have built “substantial resilience” in recent years, which provides an important buffer against potential adverse shocks. Despite this, he explained that it is important to be prepared for potential macro or market shocks and for the financial system to maintain and build both financial and operational resilience.

Opportunities

The Governor concluded that while external shifts present risks, there are also opportunities for Europe and Ireland, such as

• harnessing the power of the Single Market;
• remaining open to global capital;
• moving towards a genuine Savings and Investment Union;
• enhancing productivity growth; and
• forging new trade links.

These opportunities the Governor maintains, if executed well, have the potential to contribute to domestic and European financial stability while fostering long-run economic growth

2. Central Bank Director of Financial Operations delivers speech on the evolving digitalisation of the financial system, payments and the digital euro

On 5 June 2025, Anne Marie McKiernan, Director of Financial Operations at the Central Bank of Ireland (“Central Bank”), delivered a speech (“Speech”) at a Banking and Payments Federation of Ireland event.

The theme of the Speech centred around the evolving digitalisation of the financial system, payments and the digital euro.

The Director considered the digitalisation of the financial system, touching upon various matters such as the financial internet / tokenisation of assets /cyber and operational risks, concluding that while the “exact contours of the financial landscape of the future” are not yet clear, it is certain that the pace of change towards digitalisation is accelerating rapidly. The Director noted that every part of the financial system needs to engage in this digitalisation which will lead to faster and more efficient digital payment methods.      

Central Bank’s Role in Digitalisation

Director McKiernan highlighted some of the ways in which the Eurosystem central banks, including the Central Bank, seek to change things at a system level in order to foster innovation that will provide high quality outcomes for consumers, such as:

• through the financial market infrastructures (“FMI”), highlighting that the Eurosystem is picking up the pace as regards its efforts to support and foster innovation in wholesale central bank money. The Director noted that the Eurosystem recently announced its decision to develop and implement a safe and efficient platform for the use of wholesale central bank money settlement with DLT technologies, which, in the long term, will also include foreign exchange settlement; and
• on the retail side, the Director highlighted that the Central Bank is  taking measures to deal with the decline in the use of cash resulting from innovations in payments, pointing to the digital euro as a proactive measure to ensure that our currency remains fit for the digital age. Additionally, she cited the importance of the digital euro as regards reducing dependence on non – European owned systems.

Digital Euro – Advantages

The Director then turned to consider the digital euro in some detail, pointing to the advantages offered, some of which are as follows:

• the preservation of monetary sovereignty;
• the digital euro would ensure that central bank money retains its role at the heart of the system, including as a safeguard to ensure price stability, especially under stressed conditions;
• the provision of an open and interoperable alternative to platform - based payment systems which would , in turn, prevent the further fragmentation of money and payments in Europe;
• the maintenance of European strategic autonomy;
• provides an opportunity for European banks to progress their digitalisation strategies in a clear and integrated way; and
• additional business opportunities, fostering innovation and competition in the digital payment market.

Having discussed the benefits, outlined above, in the context of the evolving payments and money ecosystem, the Director also set out the benefits that will accrue to European households and businesses, some of which are as follows:

• the draft digital euro legislation proposes safeguards to ensure a cap exists on merchant service charges;
• wider access to European consumers for merchants, as offering digital euro will be the only non - cash European owned universal means of payment;
• the digital euro will be free of charge for payment in shops, online or to an individual; and
• the digital euro will be designed in such a way that it will have enhanced privacy features ensuring a higher level of privacy than other digital payment methods.

European Progress Update

Director McKiernan provided an update on work on the digital euro at a European level, noting that over the last six months, work has focused on the sourcing of potential providers / the preparation of the scheme rulebook / experimentation and user research / further analysis into technical aspects.

She did acknowledge that the legislative package has progressed slower than expected but noted that important advances have been made as regards the compensation model and privacy. The Director highlighted that technical discussions will continue under the current presidency and will transition into the Danish presidency in July.

Irish Payment Providers 

The Director stated that over the next year, as the move to the next phase of the digital euro project progresses, the Central Bank expects to actively engage with the Irish banking and payments sector. She highlighted that once the digital euro becomes available, payment service providers authorised in the EU will be able to provide digital euro services. Credit institutions that operate a payment account will be required to distribute the set of basic payment services upon request by clients. 

Director McKiernan encouraged the Irish financial sector to engage in order to further understanding, and prepare the groundwork for, the digital euro and noted a number of fora for such engagement.

3. European Commission publishes Country Specific Report on Ireland as part of its 2025 European Semester Spring Package 

On 4 June 2025, the European Commission (“Commission”) published the 2025 European Semester Spring Package in which it proposes the key economic and social policy measures that Member States should take to deliver on stability and competitiveness, for people and businesses - in the current economic context. These proposed recommendations reflect the priorities of the Competitiveness Compass. For more details on the Competitiveness Compass please see the FIG Top 5 at 5 dated 6 February 2025. 

The recommendations to Member States focus on simplifying administrative and regulatory processes, increasing public and private R&D investment, addressing labour and skills shortages, further strengthening energy infrastructure, and phasing out fossil fuel subsidies.

In the Country Specific Report on Ireland, the Commission evaluates Ireland’s fiscal health, noting a projected decrease in government surplus and debt, while also identifying a risk of deviation from recommended net growth expenditure. The report highlights key policy challenges for Ireland, including a highly concentrated tax revenue base, the need for increased public R&D investment for domestic businesses, and persistent reliance on fossil fuels. Furthermore, it addresses critical infrastructure gaps in water and waste management, calls for increased social and affordable housing supply, and emphasises the importance of strengthening labour market inclusivity for disadvantaged groups. Finally, it details specific recommendations for Ireland to address these issues, aligning with the broader EU objectives for sustainable growth and competitiveness.

While the Report makes recommendations it also reflects on the current position of the country on a number of fronts. For the purposes of this note we are focusing on the commentary on Ireland's financial services sector. The Irish financial services sector is characterised as being a blend of strong domestic institutions and a significant international presence, acting as an important mediator of international capital flows. The report opines that the sector is generally stable, although some risks persist. The following observations are made:

Banking Sector:

• It comprises internationally-oriented investment banks and retail banks serving the domestic market:
• Domestic banks maintain “adequate capital buffers” and operate under strict loan-to-income and loan-to-value rules enforced by the Central Bank of Ireland (“Central Bank”);
• Internationally-oriented investment banks have limited exposure to the domestic economy;
• Irish retail banks have significantly reduced their NPLs since the 2008 financial crisis, with NPL ratios dropping to 1.9% by the end of 2024, aligning with the EU average;
• Profitability of domestic retail banks increased in 2023 and 2024 due to rising interest rates and increased loan volumes, but future profitability will depend on curbing structural costs;
• Mortgage quality remains solid due to house price support from supply shortages, but the commercial real estate sector faces headwinds;
• The Central Bank uses macroprudential capital tools such as the countercyclical capital buffer set at 1.5% since June 2024, and the Other Systemically Important Institutions buffer for systemic banks;

Non-Bank Financial Intermediaries:

• Ireland is the second largest domicile for investment funds in the EU, with assets reaching approximately EUR 4.6 trillion in November 2024. These funds primarily invest globally, with limited domestic exposure;
• Irish property funds, however, have close links to the domestic economy and are highly leveraged, leading the Central Bank to impose a 60% leverage limit by 2027;
• Ireland hosts the fifth largest insurance sector in the European Economic Area by assets, with assets totalling EUR 489 billion in mid-2024;
• Non-bank lenders have become significant suppliers of credit for Irish companies, especially SMEs in the real estate sector, stabilising their share of new lending to SMEs at 35% in Q3 2023. They also account for 20% of outstanding home loans.

Capital Markets and Access to Finance:

• Euronext Dublin (Irish Stock Exchange) is a global hub for bond and fund listings, despite a small number of equity listings (only 29 companies in March 2025):
• The credit demand of Irish companies has been subdued over the past decade, partly due to elevated interest rates, which are higher than in most other EU countries;
• The market-funding ratio is high (87.4%), though this masks a reliance of indigenous companies (predominantly SMEs) on bank loans, while multinational corporations easily access capital markets;
• Irish SMEs often suffer from late payments, with delays from both public and private sources exceeding the EU average;
• The availability of growth capital, including private equity and venture capital, is slightly below the EU average, though Ireland offers attractive start-up support programs through agencies like Enterprise Ireland and the Ireland Strategic Investment Fund;
• Household participation in financial markets is low, largely dominated by insurance products and pension funds, with direct holdings in investment funds, listed equities, and bonds being significantly below the EU average. This could be influenced by a 41% exit tax and a "deemed disposal rule" on investment funds.

4. MiCA Updates: (1) EBA publishes important “No action letter” on PSD2 and MiCA overlap (2) Commission adopts delegated regulation on RTS for authorisation application for issuers of ARTS under MiCA (3) Delegated regulations on record keeping and conflicts of interest under MiCA published in OJEU

1. EBA publishes important “No action letter” on PSD2 and MiCA overlap

On 10 June 2025, the European Banking Authority (“EBA”) published its advice regarding the interplay between the payment services directive (“PSD2/3”) and the regulation on markets in crypto assets (“MiCA”). The advice takes the form of a No Action Letter (“Letter”).

Background

On 6 December 2024, the European Commission (“Commission”) wrote to the European Securities and Markets Authority (“ESMA”) and the EBA asking both institutions to consider the overlap between crypto asset services provided by crypto asset service providers (“CASPs”) under MiCA and  payment services regulated under PSD2, notably in the case of certain services relating to e-money tokens (“EMTs”). For more information, see FIG Top 5 at 5 dated 19 December 2024. 

Letter

The Letter seeks to clarify the interplay by providing advice to:

• the Commission, the European Parliament and the European Council as to how the matter can be solved in the long term through the use of the ongoing legislative process of PSD3 and the payment services regulation (“PSR”); and
• national competent authorities (“NCAs”) in respect of the intervening period of two to three years during which PSD2 still applies until the application date of the future PSR and the transposition date of the future PSD3.

Some of the matters highlighted in the Letter include:

• NCAs are advised to regard the transfer of crypto assets as a payment service under PSD2 where they involve EMTs and are carried out by the entities on behalf of their clients;
• custody and administration of EMTs should be regarded as a payment service as should a custodial wallet where the wallet is held in the name of one or more clients and allows the sending and receiving of EMTs to and from third parties;
• as regards the forgoing services, NCAs are advised to require an authorisation under PSD2 only from 2 March 2026 onwards. Further, during the authorisation process, it is advised that NCAs should apply streamlined procedures that make maximum use of information provided by legal entities during the CASP authorisation process;
• although NCAs are advised not to prioritise the supervision and enforcement of several elements of PSD2 once an authorisation as a payment services provider is held, they are, however, advised to insist on compliance with other PSD2 provisions, such as:
  • strong customer authentication for accessing custodial wallets that qualify as payment account and the initiating of EMT transfers;
  • the reporting of payment fraud; and
  • the cumulative calculation of own funds requirements.
• NCAs are advised not to consider the “exchange of crypto-assets for funds” and “exchange of crypto-assets for other crypto-assets”, as defined in MiCA, as payment services. Additionally, NCAs are also advised not to consider cases where CASPs intermediate the purchase of any crypto assets with EMTs as a payment service and consequently, are not to enforce the application of PSD2 or require an authorisation under PSD2.

Avoidance of Dual Authorisation

The EBA acknowledges that the advice in the Letter will result in a large number of EMT transactions falling outside the scope of PSD2 during the time while it is still applicable, stating that the advice is based “solely on the acknowledgement that any alternative advice would require a much larger number of CASPs to obtain a second authorization. The EBA considers such an alternative to be undesirable, given the burden that dual authorisation would impose on CASPs.”

 2. Commission adopts delegated regulation on RTS for authorisation application for issuers of ARTS under MiCA

On 5 June 2025, the European Commission (“Commission”) adopted Delegated Regulation C(2025)322 (“Delegated Regulation”), supplementing the regulation on markets in crypto assets (“MiCA”) with regard to regulatory technical standards (“RTS”) specifying the information in an application for authorisation to offer asset referenced tokens (“ARTs”) to the public or to seek their admission to trading.

The RTS in the Delegated Regulation sets out a list of information that is to be provided in an application by legal persons or other undertakings (other than credit institutions) seeking to obtain an authorisation as an issuer of ARTS. The matters addressed in the RTS are as follows:

• the identification details of the applicant issuer;
• the programme of operations, including the main features of the intended issuance;
• the internal governance arrangements and structural organisation, including:
  • information on third-party providers of critical and important functions; and
  • information regarding the internal control framework, including the ICT risk management framework that has to be compliant with the requirements set out in DORA.
• the liquidity management, reserve of assets and redemptions rights, including a description of the stabilisation mechanism for the asset-referenced token for which the authorisation is sought;
• suitability of the members of the management body; and
• the sufficiently good repute of members of the management body, shareholders or members with direct or indirect qualifying holdings.

Next Steps

The European Council and the European Parliament will now scrutinise the Delegated Regulation. If neither has any objection, it will enter into force 20 days following its publication in the official journal of the European Union.

3. Delegated regulations on record keeping and conflicts of interest under MiCA published in OJEU

On 10 June 2025, three delegated regulations, supplementing the regulation on markets in crypto assets (“MiCA”), were published in the official journal of the European Union (“OJEU”), as follows:

1. Commission Delegated Regulation with regard to regulatory technical standards (“RTS”) specifying records to be kept of all crypto asset services, activities, orders and transactions undertaken;
2. Commission Delegated Regulation with regards to RTS specifying the requirements for policies and procedures on conflicts of interest for issuers of asset referenced tokens (“ARTs”); and
3. Commission Delegated Regulation with regard to RTS specifying the requirements for policies and procedures on conflicts of interest for crypto-asset service providers and the details and methodology for the content of disclosures on conflicts of interest.

The delegated regulations were adopted by the European Commission on 27 February 2025, for more information, see FIG Top 5 at 5 dated 6 March 2025.

Next Steps

The delegated regulations will enter into force on 30 June 2025, being 20 days following their publication in the OJEU.

5. European Commission adopts Delegated Regulation amending list of high risk third countries under MLD4

On 10 June 2025, the European Commission (“Commission”) adopted a Delegated Regulation to update the list of high-risk third countries that present strategic anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) deficiencies pursuant to article 9(2) of the Fourth Money Laundering Directive (“MLD4”).

The Delegated Regulation will amend the Annex to Delegated Regulation (EU) 2016 / 1675 by:

• adding Algeria, Angola, Cote d’Ivoire, Kenya, Laos, Lebanon, Monaco, Namibia, Nepal and Venezuela to the table in point I of the Annex as they are currently considered as third-party jurisdictions that have strategic deficiencies in their AML and CFT regimes; and
• deleting Barbados, Gibraltar, Jamaica, Panama, the Philippines, Senegal, Uganda and the United Arab Emirates (UAE) from the list of third countries that were previously identified as having strategic AML and CTF deficiencies.

The updated list takes into account the work of the Financial Action Task Force (“FATF”) and in particular its list of “Jurisdictions under Increased Monitoring”. As a founding member of FATF, the Commission, in its press release announcing the Delegated Regulation, explains that it has been closely involved in monitoring the progress of the listed jurisdictions, helping them to fully implement their respective action plans agreed with FAFT. Alignment with FATF is important for upholding the EU´s commitment to promoting and implementing global standards.

The Commission has advised that EU entities covered by the AML framework are required to apply enhanced vigilance in transactions involving these countries. This, it maintains, is “important to protect the EU financial system”.

Next Steps

The Delegated Regulation will be submitted to the Council of the EU and the European Parliament for scrutiny. If neither objects, it will enter into force 20 days after it is published in the Official Journal of the European Union.