Welcome to Banking News, the KPMG Ireland quarterly banking newsletter, which has been designed to bring together useful insights and developments that are relevant to the banking and capital markets industry.
Both global and domestic economic projections in the latest quarter are characterised by fragile improvements in economic outlook. Risks to recession have become somewhat less severe but remain tilted to the downside as was firmly ratified by the recent troubles in the financial sector. Thus, many economic publications predict a path of rocky recovery in the near future.
According to the ESRI’s Quarterly Economic Commentary (PDF, 20MB) growth both domestically and internationally will out-pace previous estimates, with Irish annual GDP growth striking 5.0% in 2023. This is largely due to the easing of inflationary pressures driven by falling energy costs, with inflation in Ireland projected to fall to 4.5% later in 2023 from 7.8% as of January 2023.
However, contrasting Irish projections the UK faces a slightly more downbeat outlook. Although the likelihood of a recession has fallen, growth is expected to be negative in 2023 on the back of a squeeze on household real incomes and the impact of past interest rate increases. Growth of the UK economy is expected to fall to -0.3% in 2023 from 4.0% in 2022 as per the March’s KPMG Global Economic Outlook (PDF, 4.2MB). Inflation is also expected to remain higher than it’s EU neighbours, with a projection of 6.3% inflation in 2023, before falling to 1.8% by 2024.
The ECB Economic Bulletin echoes a similar consensus as Ireland, quoting significant declines in energy prices steering inflation to tumble to 3.0% within the Eurozone by the end of 2023. This development has led to an adjustment of the December 2022 Eurosystem staff macroeconomic projections for Eurozone countries, with GDP growth expected to be 0.5% higher in 2023, totalling 1.0%. However, uncertainty remains high as the projections were finalised before the recent financial market tensions, namely the recent failures in US and EU banks.
The IMF’s World Economic Outlook has largely recited these concerns over the turbulence seen in the financial sector due to monetary tightening policies, stating in the event of further financial sector stress due to rising interest rates, global growth will decline to roughly 2.5% in 2023 with advanced economy growth falling below 1%. However, if the troubles in the financial sector subside, forecasted baseline global growth is projected to fall to 2.8% in 2023, before settling at 3.0% in 2024. Advanced economies are expected to see an especially pronounced growth slowdown to 1.3% in 2023.
Spotlight: EBA stress test 2023
The European Banking Authority (EBA) launched its biennial stress testing exercise on 31 January 2023 with the publication of the prescribed baseline and adverse scenarios. Ian Nelson and Adrian Toner of our Banking team explain the exercise and its implications for business.
The 2023 exercise is broadly similar to previous years, in terms of core methodology, operational structure and implementation timeframe.
However, given changes in the starting parameters (which are no longer dominated by Covid-19 uncertainty) and the increased scenario severity (baseline to adverse delta is significantly greater), the ultimate capital impact could be materially different.
There are some notable changes from the 2021 exercise which will present challenges for banks. These include:
- Accurately estimating the impact on stressed credit losses of persistent high inflation and increased interest rates – in both baseline and adverse scenarios.
- Increased sectoral disaggregation, which is required for the final templates. This will help banks analyse the impact of climate risk in stress scenarios by considering the Gross Value Added (GVA) shocks by sector.
- Overall, Stress Testing remains the primary supervisory mechanism for assessing banks’ financial resilience. The outputs will be published in July 2023 and will help determine capital requirements through the Supervisory Review and Evaluation Process (SREP) assessment
Read the full EBA stress test 2023 report here.
KPMG recently published Banking and Capital Markets thought leadership on several topics, linked below.
Central Bank of Ireland news
Markets dial down expectations for further ECB hikes after half-point increase: Markets have dialled down their expectations for further interest rate hikes after the European Central Bank (ECB) presented a more benign inflationary outlook.
Central bank starts consultation on banker accountability rules: The Central Bank launched an initial three-month consultation on the incoming rules to make it easier for regulators to hold senior individuals in banks and other financial firms to account for failings under their watch.
European Central Bank’s Philip Lane warns Irish business that higher debt costs will persist: Irish businesses need to “think quite a lot” about how to fund themselves given higher interest rates, the European Central Bank’s chief economist has advised. Philip Lane, the former head of the Central Bank of Ireland, told a business conference yesterday that market expectations are for rates to keep rising and to stay high
How KPMG can help
KPMG has a large team of professionals with extensive knowledge and expertise in Financial Services, Banking, Aviation Finance, Insurance and Asset Management. KPMG Ireland can leverage a network of multidisciplinary professionals, stretching across Europe and beyond. Supported by this global network, KPMG Ireland can provide a broad range of support, advice, and guidance on how to address the challenges you face.
Head of Management Consulting and Head of Banking and Capital Markets
KPMG in Ireland