Makhlouf warns on risk to financial system from non-bank sector

Central Bank of Ireland governor speaking in Washington in advance of International Monetary Fund and World Bank meetings

Central Bank of Ireland governor Gabriel Makhlouf has highlighted the risks posed to the global financial system from funds and other non-bank vehicles, calling for greater global co-ordination among policymakers and regulators.

Speaking in advance of the International Monetary Fund (IMF) and World Bank spring meetings in Washington this week, Mr Makhlouf noted that certain types of funds and their risk strategies had amplified recent financial shocks.

It was important that policymakers addressed “systemic risks” from the non-bank sector, he told a conference on capital markets and financial stability hosted by the IMF.

“History has shown us the potential for certain cohorts within the funds sector globally to amplify adverse shocks — we cannot forget the lessons of the global financial crisis, the Covid-induced market shock of March 2020, and the UK’s recent LDI [liability-driven investment] issues.”


Former British prime minister Liz Truss’s announcement of unfunded tax cuts in September 2022 triggered a big sell-off of UK government bonds and a liquidity scare across the pension sector, highlighting vulnerabilities in nonbank financial institutions.

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The episode prompted calls for greater regulation.

“Globally, the nonbank sector has grown rapidly over the past decade, and Ireland has one of the largest funds industries in the world with around €4.5 trillion in assets under management,” Mr Makhlouf said.

“It is playing an increasingly important role in the global financial system and real economy, and is also becoming a more important source of finance in Ireland,” he said.

“This can bring many benefits and support economic growth, but it can also generate, in certain circumstances, risks to the financial system,” he said.

Mr Makhlouf said it was vital that oversight of the system keeps pace with change.

“We in Ireland believe that this risk requires a macroprudential perspective and collaborative engagement between securities regulators, prudential regulators and central banks,” he said.

Mr Makhlouf was speaking in advance of the IMF’s global economic outlook report which will update the fund’s forecasts for economic growth in the coming years as well as highlighting the potential pitfalls and the risks posed by current tensions in the Middle East.

The report is also expected to acknowledge the recent fall-off in inflation while cautioning policymakers against reducing interest rates too early.

IMF chief Kristalina Georgieva warned last week that a premature lifting of the interest rate anvil could risk a resurgence in price growth.

“Where necessary, policymakers must resist calls for early interest rate cuts. Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening,” she said.

Ms Georgieva, the IMF’s managing director since 2019, last week secured a second term as head of the fund, a role that was once tipped for Minister for Public Expenditure Paschal Donohoe.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times