Moody's Investors Service, the international credit rating agency, has said there is a medium-term risk of "some credit quality stress", in the Irish banking sector, especially if signs of market overheating become more visible. These pressures exist, the agency added, because the domestic loan growth exceeded 24 per cent in the past 12 months.

Moody's was making its observation as it upgraded the longterm deposit rating of Bank of Ireland from A1 to Aa3, and of its subsidiary, Bristol & West, from A2 to A1. The upgrades, Moody's said, reflect Bank of Ireland's important banking franchise in Ireland and its strong profitability. It expects the growth to continue.

However, it cautions that it would be assessing the degree to which the business cycle evolution in Ireland, as it enters EMU next year, would affect the earnings stability of Bank of Ireland and of the other Irish financial institutions.