Professor Philip Lane, Governor of the Central Bank, has warned that Ireland will be especially vulnerable to a downturn in global financial confidence as the make-up of the new relationship between the UK and EU becomes clearer over the coming months.

Speaking to the Institute for International and European Affairs in Dublin, Lane said that while the Brexit vote hadn't caused a decline in confidence as yet, if it seems that a "harder" form of Brexit is the likely outcome, it could cause problems.

While he sees the leading Irish banks as "adequately capitalised", Ireland would be most at risk in the event of a "Brexit-related reversal" in sentiment.

However, the risks within the banking sector are "manageable at a system-wide level".

His words followed the news that AIB and Bank of Ireland had fared the worst out of 51 European lenders in the latest round of European Banking Authority financial stress tests.

Lane attributed this to the Irish banking system's higher loan loss rates since 2008 when compared to other EU member states and the fact that projected credit losses are based on past experience.

Lane said:

"Capital depletion in the adverse scenario is inevitably more pronounced for Irish institutions."

Welcoming a recent positive International Monetary Fund (IMF) report which showed highlighted the progress being made on both economic recovery and regulatory supervision in Ireland, he also revealed that work had started on a number of IMF recommendations to improve transparency and increase the financial sector's resilience.