On 28 February 2025, the Central Bank of Ireland (Central Bank) published its 2025 Regulatory and Supervisory Outlook report (RSO), outlining its perspectives on the key trends and risks shaping the financial sector and its regulatory and supervisory priorities for the year ahead.
The annual RSO is intended to assist financial firms in their own engagement with the Central Bank and in understanding the Central Bank's expectations of them.
On the same date, the Central Bank published a Dear CEO Letter to notify firms of the RSO, outline its regulatory and supervisory priorities for 2025 and provide firms with a high-level overview of the recent changes to its supervisory model, which the Central Bank has helpfully outlined in its 'Our Approach to Supervision' document. The Central Bank highlights that senior executives and key decision-makers in regulated firms should incorporate the content of the RSO and other communications, such as Dear CEO Letters, into their ongoing work and decision-making.
The RSO follows the Central Bank Governor's letter to the Minister for Finance dated 12 February 2025, which also sets out its financial regulation priorities for the year ahead.
Financial Regulation Priorities 2025
The Central Bank's financial regulation priorities for the year ahead include:
- Finalisation of the Consumer Protection Code - Continuing to engage with stakeholders ahead of the revised code's publication and finalisation this year. For further information, please see here.
- Fitness and Probity - Embedding the Enria review recommendations. For further information, please see here.
- Markets in Crypto Assets Regulation (MiCAR) implementation - Implementing MiCAR including engaging with firms seeking authorisation and continuing to raise awareness of the risks related to crypto-assets for consumers. For further information, please see our MiCAR web page.
- Innovation Sandbox Programme - Delivering the first thematic Innovation Sandbox Programme focusing on combatting financial crime and expanding the Programme to continue supporting innovation while safeguarding the integrity of the financial sector. For further information, please see here.
- Effective Governance - Ensuring regulated firms have effective governance underpinned by strong ethical culture and robust systems of delivery. This work includes continuing to embed the Individual Accountability Framework for in-scope firms (including the extension of the Senior Executive Accountability Regime to non-executive directors and supporting external stakeholders through ongoing engagement. For further information, please see our Individual Accountability & SEAR web page.
- Credit Unions - Progressing changes to credit union lending regulations, including the proposed changes to concentration limits for house and business lending and practices for specific categories of lending.
- Anti-Money Laundering Agency (AMLA) - Contributing to AMLA establishment and preparing for changes to anti-money laundering supervision. For further information, please see here.
- Risk Management - Ensuring that regulated firms' risk management capabilities and practices, including stress and scenario modelling, are forward-looking and commensurate with the heightened risk environment.
- Operational Resilience - Enhancing operational resilience, including cyber-related resilience, across the financial sector, particularly, through the effective implementation of the Digital Operational Resilience Act (DORA). For further information, please see here.
- EU Artificial Intelligence Act (AI Act) – Preparing for the AI Act with further engagement in connection with the use of AI in financial services.
- Financial crime and market integrity - The Central Bank is taking an increasingly holistic approach to fulfilling its remit in this area. Firms are expected to develop and implement preventative measures to mitigate fraud, and the Central Bank will engage with technology providers to introduce protections for the public from scams and fraud.
- Enforcement mechanisms - Continuing to deploy appropriate enforcement mechanisms to address serious breaches of regulatory requirements.
- Climate and environment - Continuing to work in partnership with the wider financial sector to address these challenges.
Further domestic and EU-driven regulatory initiatives are set out in Appendix A to the RSO.
CENTRAL BANK NEW SUPERVISORY APPROACH
The Central Bank introduced a new supervisory approach in January 2025. This approach is still outcomes-focused and risk-based but is now delivered through a more integrated approach to the different aspects of the Central Bank's mandate and how it organises its work.
Under the new framework, the Central Bank considers the financial system as consisting of three overarching industry categories based on related products and services: 1. Banking & Payments, 2. Insurance, and 3. Capital Markets & Funds. Each category contains several sectors covering all supervised entities. Each sector is supervised in an integrated, holistic way with a multi-year supervisory strategy
The Central Bank expects this year to be a year of dialogue about its new approach as part of supervisory engagements with firms and FS industry sectors, as both firms and the wider system become more familiar with its implementation
THE GLOBAL MACRO ENVIRONMENT
This year's RSO is set against the backdrop of an increasingly fastmoving, interconnected, and uncertain world shaped by geopolitical, economic, technological, and environmental forces.
The Central Bank outlines that while the global economy is stabilising following several years of overlapping negative shocks, momentum on reducing inflation is slowing and the near-term growth outlook remains weak in many countries, with some facing significant fiscal challenges.
The expectation is that interest rates will stay higher for longer relative to pre-pandemic levels.
The current geopolitical situation is uncertain. Despite this highly uncertain backdrop, financial markets have been performing strongly. However, sentiment is fragile, and market volatility can rise quickly.
SUPERVISORY PRIORITIES
The Central Bank's supervisory priorities have not changed significantly from last year and are as follows:
1. Proactive risk management and consumer-centric leadership of firms.
Central Bank's expected outcome: The leadership of regulated entities adopt a more proactive and forward-looking approach to managing the risks and uncertainties facing their organisations and their customers.
2. Firms are resilient to the challenging macro environment.
Central Bank's expected outcome: Regulated entities have sufficient operational and financial resources, adaptability and recoverability, to be resilient and well-prepared in the face of risks in the macro environment, economic and financial market uncertainty and fragile sentiment.
This is highlighted in 2025 as being particularly important given the breakdown in previously stable international relations, protectionism, and other political, technological and environmental developments. This also includes being mindful of the consequences of this environment for their customers, who may face financial difficulty and vulnerable circumstances, and providing adequate support to them.
3. Firms address operating framework deficiencies.
Central Bank's expected outcome: Deficiencies identified in the governance, risk management, and control frameworks of regulated entities are addressed to ensure their effectiveness in the current environment and in the future.
4. Firms manage change effectively.
Central Bank's expected outcome: Regulated entities keep pace with changes in the financial system and consumer needs and expectations through the well-managed evolution of their business strategies. The adequacy of firms' investment in, and their ability to adapt to, rapidly developing technology will have consequences for firms' business models, their interaction with consumers, their operational resilience, resource contention, and cost profile.
5. Climate change and net zero transition are addressed.
Central Bank's expected outcome: Regulated entities continue to improve their responsiveness to climate change and its implications for their businesses and customers. They must also manage its impact and enhance their role in the transition to a net zero economy.
6. The Central Bank enhances its regulatory and supervisory approach.
Central Bank's expected outcome: Continuous improvement in and transformation of the approach to regulation and supervision to ensure that the Central Bank can continue to fulfil its mission in a rapidly changing financial ecosystem, which is exemplified by the Central Bank's new supervisory approach and framework mentioned above. This includes continuing to enhance authorisation processes, continuing to develop a proportionate, responsive regulatory framework, and evolving the Central Bank's supervisory approach.
RISK OUTLOOK
In this year's RSO, the Central Bank also uses certain indicators to assess the risk level for each risk area over a two-year horizon, its trajectory since last year, and its outlook.
SECTORAL FOCUS
For each sector covered, Key Takeaways and a Key Risks Overview are provided, which describe the key trends, risks and vulnerabilities that the Central Bank considers to be most material from a supervisory perspective over a two-year time horizon. These sections of the RSO are detailed and feature the following key sectors:
1. Banking and Payments sector
Banking
Domestically, banks' lending portfolios have performed well, with several credit indicators improving in 2024. However, certain portfolios, notably non-residential commercial real estate (CRE), leveraged finance, and the accommodation and food service activities sector, remain vulnerable.
Maintaining financial resilience is essential as firms navigate through change and as interest rates trend down. Bank income is expected to normalise in response to lower interest rates, while banks' costs may not adjust proportionately. Banks need to ensure that they adopt a balanced loan pricing strategy to generate sustainable profitability while securing their customers' interests. Capital planning, stress testing and scenario analysis continue to be viewed by the Central Bank as central to sound risk management practices.
Well-executed investments in systems and enhancements to digital capabilities are encouraged as are further efforts to foster a consumer-focused culture across the sector and improve consumer risk frameworks.
The Central Bank's supervisory activities are conducted as part of the European Central Bank's Single Supervisory Mechanism.
Financial risks and resilience can be affected by geopolitical and macroeconomic conditions. Key supervisory activities include financial resilience assessments (including the 2025 EU stress test, capital and liquidity management, and recovery planning); assessment of banks' ability to identify and manage new and emerging risks to their business models and including these in their risk management frameworks; and assessment of banks' proactivity in identifying and assessing transmission channels, cross-cutting risks, and cross-sectoral interlinkages arising from macroeconomic and geopolitical risks.
Data, AI, and modelling capabilities are influenced by available structures and unstructured data, as well as data management and modelling effectiveness, including the impact of AI deployment.
Culture, governance and risk management risks are driven by organisational culture, individual behaviours and any misalignment of incentives. Key supervisory activities include a continued focus on the strategic oversight from boards of culture, governance and risk management practices. This includes challenges arising from the lack of local board autonomy, digital transformation, the green transition, and data aggregation. Central Bank assessment of the level of customer service (including complaints handling) provided by firms is also expected.
Business model and strategic risks include challenges from fintech competitors, shifting customer expectations and growing competition from non-bank financial institutions.
Operational risks and resilience are impacted by constraints of legacy platforms and increased operational complexity as well as geopolitical tensions and rising cyber threats. General deficiencies in operational resilience frameworks and practices and increasing reliance on critical third-party service providers, with some having a dominant global position, may create concentration vulnerabilities. The Central Bank will be monitoring the implementation and development of incoming regulations focused on improving operational resilience and customer functionality and safety in the payments space.
Financial crime risks are increased by the volume of cross-border financial transactions and the expanding use of digital payments. Firms can expect an assessment of the adequacy and effectiveness of AML/CFT risk management frameworks.
Climate change and other environmental-related risks can be heightened by the increasing frequency and severity of extreme weather events, the transition to net zero, and litigation risk (where banks have financed firms that caused environmental harm). Banks should also be mindful of the consequences of inadequate finance provision for the transition to a low-carbon economy. The Central Bank can be expected to continue engaging to ensure sufficient remediation actions to address gaps in meeting the ECB supervisory expectations on climate and environmental risks.
There will also be a supervisory focus on credit risk management and loan origination reviews, with an emphasis on vulnerable portfolios and long-term mortgage arrears. These reviews will include how firms are continuing to meet Central Bank expectations in resolving distressed debt, including how firms are meeting the Central Bank's expectations regarding the appropriate and sustainable nature of Alternative Repayment Arrangements.
Payments and E-Money
The Central Bank highlights that this sector provides a range of innovative and valued services to consumers in Ireland and across Europe. It once again emphasises the responsibility of firms to safeguard user funds and underlines that firms should have strong systems and processes in place to manage the sector's inherently higher risks from money laundering, terrorism financing, and financial crime.
Safeguarding of user funds continues to be monitored by the Central Bank and risk in this regard is driven by ineffective control frameworks (including board oversight of safeguarding) and concentration risk in where safeguarded funds are held. Firms can expect the Central Bank to focus on safeguarding, with the completion of a sectoral thematic inspection on safeguarding arrangements, review of board attestations on safeguarded funds and completion of 2023 audit remediation actions and industry communications on sectoral findings. For further information on the Central Bank's sanctioning of a payment institution for safeguarding failures please see here
Culture, governance and risk management risks are driven by growth outpacing operational, governance, compliance and risk management capabilities and inadequate authority and independence at a local level in group companies. The Central Bank plans to focus on board and executive accountability that ensures that firms (1) have a well-thought-out strategy and business plan, (2) demonstrate appropriate governance, risk management and internal controls, and (3) have a continued focus on operational resilience.
Financial risks and resilience. Macroeconomic conditions, including reducing interest rates, affecting revenue generation and cost base, and a tighter external funding market, impact viability and funding availability.
Financial crime risk in this sector is largely affected by a lack of the necessary experience, expertise or focus and ineffective risk-based financial crime frameworks. The Central Bank may intervene and use its supervisory powers where elevated risks or breaches of regulatory requirements are identified, including in cases of financial crime risk. Firms can also expect continued engagement from the Central Bank to assess the adequacy and effectiveness of their firms' AML/CFT risk management frameworks, through supervisory engagements and supervisory intervention where elevated risks or breaches of regulatory requirements are identified.
Operational risks and resilience are influenced by growth outpacing operational infrastructure and controls and significant reliance on third-party providers, including intragroup, with weak controls and oversight arrangements. The Central Bank views operational resilience as crucial for the sector to ensure service reliability, availability, security, and recoverability. The Central Bank highlights that the sector has experienced an all-time high number of major incidents and service outages, many of which result from outsourced service provider failure. In this regard, firms can expect the Central Bank to focus on the implementation and development of incoming regulations and initiatives focused on improving operational resilience, customer functionality, and safety in the payments space. These include DORA, the third proposed Payment Services Directive (PSD3), the Payment Services Regulation (PSR), and the Instant Payments Regulation. For further information on PSD3/PSR, please see here.
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