The Central Bank is preparing an "early warning system" to help it avert the risk of a potential financial crisis among Irish banks but insists the move is a precautionary one and does not indicate any immediate concerns about their viability.

In its annual report, the Central Bank's head of monetary policy, Mr Frank Browne, says Irish banks are in a very strong financial position to withstand economic shocks but warns against complacency.

A recession in the US economy, a collapse in the value of the dollar relative to the euro and a sharp fall in asset prices are among the chief economic pressures that could potentially hurt the banks, according to Mr Browne.

"No significant risks to the system's stability are evident at the moment. Areas that need close monitoring are developments in wages, credit growth and the evolution of asset prices," he says.

Using information gathered by the International Monetary Fund and other agencies which have examined the collapse of banks in regions such as Asia and South America over the past 15 years, the Central Bank is compiling its own index of potential pressure points specific to the Republic.

Research has shown that crises tend to follow imbalances in an economy that build up during periods of rapid economic growth.

Another common feature is that people's expectations become unrealistic in so far as they tend to believe that even if the economy slows, the effect will not be as severe as in previous recessions.

In terms of homegrown vulnerabilities, the bank has been highlighting the strong growth in bank lending for some time. It has been carrying out stress tests on the banks' loan books over the past three years to see how well borrowers could withstand sharp increases in interest rates, a drop in property prices or lower incomes.

These tests, the last of which was carried out last December, have reassured the Central Bank in so far as it is satisfied that borrowers are generally well positioned to be able to pay back their borrowings.

Expectations that interest rates will remain low will also relieve pressure on borrowers. Mr Browne suggests though that the Central Bank's stress tests may not cover all eventualities.

He refers to some slowdown in the rate of increase of residential and commercial property prices from very high levels and does not believe the risk of a substantial decline is excessive.

He notes the commercial property sector looks to be more vulnerable to falling prices than the residential market.

And while the Bank believes the factors that have sustained strong property prices will largely remain in place it warns that a substantial "correction" could not be ruled out at some stage.

Foot-and-mouth disease is another factor being monitored by the Central Bank as a potential threat to the financial system.

The Irish economy is particularly vulnerable to external shocks, mainly in the US, which accounts for a high proportion of trade and investment.

Recent economic growth statistics from the US provide some comfort in the short term that the economy may be recovering. Mr Browne suggests it is too early to be confident about such an improvement.

A recession in the US might adversely affect the flow of capital by US multinationals in the Republic as well as investment plans.

"The bank is aware of the need continually to review, develop and refine its tools of analysis to improve its understanding of the mechanisms giving rise to financial fragility." The Central Bank is compiling these warning systems to try to identify problems and hopefully prevent them.