Philip R Lane: The Central Bank of Ireland in 2016
Address by Mr Philip R Lane, Governor of the Central Bank of Ireland, to the Institute of
Directors, Dublin, 22 January 2016.
* * *
Good afternoon. It is a pleasure to speak at the Institute of Directors. The Central Bank of
Ireland and the Institute of Directors share a common agenda in promoting best practice in
corporate governance; the co-hosted Risk Appetite Forum in October 2015 provided an
excellent example of effective collaboration between the two institutions.
It is natural that the transition to a new Governor should prompt discussion and reflection about
the role of the Central Bank of Ireland in 2016 and over the next number of years. In recent
years, there have been considerable changes to the mandate and structure of the Central
Bank, in response to the many lessons from the domestic and international financial crises.
With the passing of the most intensive phase of crisis management, it is important to establish
new priorities for the Central Bank. Our recently-published Strategic Plan 2016-2018 provides
a detailed guide to our plans for the next three years. Our mission statement "safeguarding
stability, protecting consumers" encapsulates the dual priorities for the Central Bank: the
preservation of financial stability, while also working to ensure that the financial sector operates
in the best interests of its customers.
Today, I wish to provide a high-level overview of some of the key priorities for the Central Bank,
while also reporting on some new initiatives in how the Central Bank operates. I will also outline
our efforts to enhance transparency about the Central Bank, including our decision to publish
the minutes of meetings of the Central Bank Commission.
The Central Bank of Ireland is organised into the two policy pillars of central banking and
financial regulation, which are coordinated through a unified governance structure and
supported by shared corporate services1. At a global level, the experience of recent years has
vividly demonstrated that the stability of financial systems depends both on the effective
regulation of financial institutions and markets and the capacity of central banks to detect and
mitigate systemic financial risks through preventive macroprudential policies and pro-active
liquidity support during stressed periods. This requires that financial regulators and central
bankers work closely together. Accordingly, the preservation of financial stability is an
overriding strategic priority that unites both pillars of the Central Bank.
Furthermore, given the very high levels of financial integration in Europe, there are advantages
in adopting a common international approach to both central banking and financial regulation.
The Central Bank is part of the eurosystem (consisting of the ECB and the national central
banks) that designs and implements the common monetary policy for the euro area. In similar
fashion, financial regulation is highly coordinated at both euro area and EU levels2.
Accordingly, across the Central Bank, much of our work programme is directed at the
formulation and implementation of policies that are jointly determined at a European level.
In relation to the central banking pillar we play our part in the setting of monetary policy for the
euro area through a range of eurosystem committees and the Governing Council of the ECB.
The actual implementation of ECB monetary policy is largely decentralised to the national
central banks (in proportion to each country's share in the capital key of the eurosystem), so
that a core activity for the Central Bank is the provision of liquidity to banks against suitable
collateral. Such liquidity operations build on our fundamental role as part of the eurosystem in
operating the TARGET 2 payments system that links banks and central banks across the euro
4
area.3,
In common with similar initiatives by the other major central banks, the ECB has recently
adopted a number of unconventional measures in pursuit of its inflation target. These
measures include the expanded asset purchase programme (EAPP) that will run until at least
March 2017. In implementing the EAPP, the Central Bank of Ireland has been actively engaged
in asset purchases. To illustrate the scale of the eurosystem's intervention in asset markets,
total cumulative purchases of euro area public debt securities amounted to close to €500 billion
by the end of 2015. This aggregate includes purchases of €7.6 billion of Irish sovereign debt.
The ECB's accommodative monetary policy has contributed to Ireland's excellent recent
economic performance. For instance, the low interest rate environment has been a boon to
many indebted households, while the government has been able to issue debt at low yields.
More generally, as indicated in the introductory statement to the press conference after
yesterday's monetary policy meeting, the assessment of the Governing Council is that the
monetary policy measures that have been adopted since mid-2014 are working; noting the
increase in downside risks in recent weeks, the Governing Council will review and possibly
reconsider the monetary policy stance in early March.
In relation to the longer-term agenda for the euro area, the financial crisis also made clear that
the original institutional design of the euro area suffered from a lack of risk-sharing and crisis
management mechanisms. While there has been significant progress in reforming the
institutional setup of the euro area, the recent Five Presidents' Report highlighted that further
reforms could help in improving the resilience of the monetary union. This reform agenda
should be a high priority for European policymakers.
Another favourable recent development has been the twenty per cent depreciation of the euro
against the dollar in the last eighteen months, which has been especially helpful for Ireland
through both trade and financial mechanisms. That said, the recent depreciations of many
emerging market currencies is a countervailing force in terms of the overall trade-weighted
exchange rate for the euro area.
It is important to recognise that Ireland's recent economic performance has been broadly
based, with domestic sectors now making a significant contribution to overall growth
performance. While we do not have final data yet, the likelihood is that GDP grew by
6.5-7.0 per cent in 2015. Looking ahead, the latest forecasts suggest that the economy will
continue to grow rapidly this year, with GDP growth expected to moderate slightly to around
5 per cent.
It is always necessary to point out that measured GDP is only a limited guide to economic
performance, especially in relation to highly-globalised economies such as Ireland. Financial
transactions within multinational firms or lumpy investments such as in new aircraft can have
a sizeable effect on measured Irish GDP. Still, faster growth in consumption and employment
confirm that the domestic economy is growing at a robust pace. This reflects the confluence of
several positive factors, including the employment-rich nature of the recovery, a less
constrained policy environment, the boost to purchasing power from lower energy prices, the
on-going easing of the balance sheet legacies of the crisis and broadly favourable conditions
in Ireland's main export markets. It is the positive alignment of all these factors that has helped
growth to strengthen and supports a continued favourable outlook.
However, while much has improved, vulnerabilities remain. The strong growth outlook provides
an opportunity to address the legacies stemming from still-high levels of public and private
sector indebtedness. Externally, the main current global risk factor relates to economic and
financial conditions in some emerging economies. Closer to home, the Central Bank is also
keeping a watchful eye on Brexit-related risks to the economy and the financial system5.
More generally, small, highly-globalised countries such as Ireland are inherently more volatile
than larger economies: we can grow strongly for extended periods but are also especially
vulnerable to negative shocks. For this reason, it is essential that the Central Bank is pro-active
in the deployment of macroprudential policies that can improve resilience and mitigate the
procyclical dynamics associated with excessive leverage. The new rules that impose
loan-tovalue and loan-to-income limits on most mortgages were introduced to protect borrowers and
contribute to a safer financial system, which in turn also contributes to a more stable economy
over the longer term.
In addition, the new EU system of financial regulation also allows for the imposition of a
counter-cyclical capital buffer (CCB), so that banks must build up extra capital during phases
in which credit conditions are assessed to be unusually strong6. Tools such as mortgage rules
and the CCB would have mitigated the costs of the boom-bust credit cycle in Ireland in the
mid-2000s. The Central Bank is firmly committed to deploying such tools on an ongoing basis,
with periodic reviews to ensure that the measures are appropriately calibrated. I expect the
first review of the mortgage rules to be published by November this year. This review will be
based on an analysis of the evidence provided by data on the first year of the operation of the
rules, while taking into account other factors that may have influenced the mortgage market
during this period. The rules-based framework is intended to promote the resilience of both
banks and households and, as such, should be viewed as a permanent feature of the system.
The Central Bank is open to tightening or loosening the calibration of these rules in response
to the evidence; still, the value of stability in a rules-based framework means that the evidence
threshold to justify adjustments to these rules is significant.
The monitoring and analysis of the domestic and international economies and the interactions
between the overall economy and the financial system are ongoing challenges for our team of
economists and statisticians7. This is especially important in Ireland in view of the wide
variations within traditional macroeconomic aggregates. For instance, the corporate sector
encompasses very large multinationals and the spectrum of small and medium enterprises.
Similarly, the financial system includes both externally-focused international financial firms and
investment funds and the domestically-orientated retail banks. This diversity means that the
analysis of macroeconomic performance and financial stability necessitate a deep
understanding of behaviourial patterns at the microeconomic level. To this end, the Central
Bank is committed to the analysis of a wide array of micro-level economic and financial data.
Our role in the collection of financial data will also be further expanded through the
establishment of the Central Credit Register (CCR). The credit reporting obligations will apply
to over 500 lenders, including banks, credit unions, asset finance houses, local authorities and
money lenders and will be fully operational from 2017.
Since the crisis, the provision of liquidity to Irish banks and various asset purchase
programmes have resulted in a sizeable increase in the balance sheet of the Central Bank
compared to the pre-crisis period. The restructuring of the banking sector in conjunction with
Ireland's strong economic recovery has allowed the banking system to substantially reduce its
dependence on central bank funding, such that the Central Bank's balance sheet has
contracted from its peak size of about €208 billion in early 2011 to €76 billion at the end of
2015.
An important component in the balance sheet is the special portfolio of assets the Central Bank
acquired as a result of the liquidation of IBRC in February 20138. The portfolio consisted of a
fixed-coupon Irish Government Bond, NAMA bonds and a portfolio of Floating Rate Notes9. At
the time of the liquidation, the Bank stated that it would dispose of the government bonds as
soon as possible, provided conditions of financial stability permitted, but also specified a
minimum schedule of disposals. The disposal schedule of these bonds has been faster than
the minimum schedule, due to improved financial conditions. The pace of future disposals will
continue to depend on conditions of financial stability.
Still, the normalisation of monetary conditions over time will lead to further reductions in the
size of the balance sheet. In parallel, once normalisation has been attained, this implies that
the surplus income generated by the Central Bank will make a smaller contribution to the
government's finances than has been the case in recent years.
Let me now say a few words about financial regulation and supervision and what you can
expect to see during 2016.
The banking sector is in the middle of a multi-year transition to higher capital requirements,
reduced leverage and increased balance sheet liquidity. The Single Supervisory Mechanism
(SSM) has been in place for just over a year, with the Central Bank having made a material
contribution to the design and implementation of unified supervision for the larger banks in the
euro area. It is beyond the scope of this speech to provide a detailed account of the
engagement of the Central Bank and SSM with the domestic banking sector. However, in
relation to distressed mortgage loans, the ongoing focus remains on delivering sustainable
solutions for distressed mortgage loans and the effective implementation of protections for
borrowers in the revised Code of Conduct for Mortgage Arrears (CCMA).
The SSM represents the first pillar of Banking Union. The second pillar consists of the Single
Resolution Mechanism (SRM), which came into effect on January 1st. By ensuring that
financial institutions can be resolved in an orderly manner, the SRM should significantly reduce
the adverse impact of an institution's failure on the wider financial system and the taxpayer.
In its capacity as the national resolution authority (NRA), the Central Bank cooperates closely
with the new Brussels-based Single Resolution Board (SRB), which acts as decision maker in
the resolution of significant institutions and cross-border banks10, 11. The Central Bank is
currently developing resolution plans for in-scope institutions, which document the actions to
be taken in the event of failure12.
This is also a landmark year for the insurance sector, with the Solvency II framework going
live. This represents a major change in the way that insurance firms are regulated. The "whole
balance sheet" approach to capital calculation combined with the strong emphasis on a firm's
risk management and supervisory review will result in a much transformed regulatory and
supervisory framework. This year, Central Bank supervisors and the supervised firms will be
putting this framework into operation for the first time.
During 2016, you can expect to hear plenty of discussion about the European Commission's
proposal for Capital Markets Union (CMU). The CMU Action Plan published in September 2015
contains 33 initiatives designed to enhance the performance of the financial sector in
supporting growth across European economies. These aim to improve the diversity of funding
sources for businesses and project, enhance investment opportunities for savings and reduce
barriers within the Single Market for cross-border investing. Work is already well-advanced on
proposals for more straightforward securitisation activities to receive a proportionate regulatory
treatment. The Prospectus Directive will be revised with a view to trying to improve access to
finance for small and mid-size companies. A harmonised European approach to the regulation
of lending by investment funds is also under consideration13.
Ireland is an important location for non-bank financial entities, with the vast bulk engaged in
externally-oriented financial trade. Amongst other entities, this sector includes investment
funds, money market funds and financial vehicle corporations. While many of the entities and
financial activities are subject to regulation and oversight, our understanding of this broad
sector is considerably less developed relative to traditional banking activities. In line with
growing international interest in the financial stability implications of banking-type activities
carried out by non-banks (that is, "shadow banking"), the Bank for the first time was a
contributor to the 2015 Global Shadow Banking Monitoring Report published by the Financial
Stability Board. We are set to continue to monitor and deepen our understanding of any risks
that may arise to the financial system from these activities - either in Ireland or more widely.
In December, we released new regulations on SME lending. The regulations aim to strengthen
protections for SMEs, while also facilitating access to credit. The regulations provide for greater
transparency around the application process and the reasons for refusing credit applications,
greater protections for guarantors and an expansion of the grounds for an internal appeal14.
There is growing international recognition that financial regulators should be more pro-active
in protecting consumers, in view of the complexity, risks and costs of financial products. Our
work on consumer protection is primarily focused on increasing transparency to enable people
make informed decisions with full clarity about the risks, costs and long-term impact of financial
10
On 1 January 2016, the Single Resolution Board (SRB) assumed full responsibility for both resolution planning
and resolution actions in respect of the c.150 largest banks within the Banking Union, including the Irish
Significant Institutions (AIB, Bank of Ireland, Permanent tsb and Ulster Bank).
11
This mandate is in addition to our responsibilities under the domestic resolution regime, which primarily applies
to credit unions.
12
The new framework also provides for the establishment of a national resolution fund and a European Single
Resolution Fund, to help finance the cost of future failure. In 2015, both banks and investment firms were
required to contribute to the national fund. This changes from 2016 onwards, when banks will instead pay into
the Single Resolution Fund, contributions to which will be mutualised over an eight year period.
13
The Central Bank has been a leader at the European level in already providing a regulatory treatment for loan
origination by investment funds.
14
The regulations will apply to regulated entities from 1 July 2016. Credit unions will come under this legislation
from 1 January 2017.
products. This year, we will further enhance our engagement with boards of the larger retail
firms to push for a more consumer-focused culture within firms, and will carry out on-site
consumer risk assessments across a number of retail firms.
We also plan to continue our product-focused supervisory work, including the tracker mortgage
examination, and reviews of structured products and health insurance. We will also increase
our firm-specific engagement with low-impact firms, including intermediaries and debt
management firms. Further work will be done to strengthen consumer protection code
requirements, including for variable rate mortgage holders, as well as carrying out an
examination of the impact on consumer outcomes of commission payments to insurance
intermediaries.
Over recent years, the approach of the Central Bank to financial supervision has completely
changed not only in the area of banking where supervision is now carried out by the ECB
through the SSM but across the organisation. Using our risk-based supervisory framework -
or PRISM as it is commonly known - we have developed an approach to supervision which is
assertive, rigorous, demanding, but also proportionate and fair. In terms of the supervision of
firms, the Central Bank does not operate a "no failures" regime. Rather, we expect that, as with
any other sector of the economy, some firms may fail. Where this occurs, our aim is to ensure
that the failure is orderly and that disruption to consumers is minimised.
Our supervisory approach continues to evolve and develop. During 2016, we will be carrying
out a review of the PRISM framework. As part of this we will be taking a look at our risk appetite
to see that it is clearly stated and well understood. We will be introducing changes suggested
by peer reviews (for example in our approach to lower impact firms), and we will be further
integrating emerging risks, including cyber risk.
An independent assessment of recent external peer reviews of the Central Bank's regulatory
functions is published today and available on our website and recognises the success of the
Central Bank's actions in the last several years.
On the subject of cyber risk, we are seeing a material increase in the frequency, sophistication
and severity of cyber-attacks on financial sector firms. This will be an important area of focus
for us over the coming period. As highlighted by Deputy Governor Cyril Roux in a speech in
September, we expect financial firms to be addressing this risk clearly and effectively. In
particular, cyber risk is a matter for the board and senior management, not only for the IT
division. You can expect to hear more from us on this topic during 2016.
Finally, on the topic of regulation, I will mention that you will have seen a good deal of
enforcement activity reported in the press in recent months. This reflects our approach
whereby high-quality supervision must be underpinned by a rigorous approach to enforcement.
You can expect to see this approach continued.
The expansion in the scope of monetary policy, the adoption of a more intrusive approach to
financial regulation, the introduction of new EU regulatory mandates, the ongoing growth of
the investment funds sector in Ireland and the professionalisation of corporate services in the
Central Bank have resulted in a significant expansion in staff numbers. As our mandate
expands, we expect continued growth in our staff numbers; we anticipate recruitment of an
additional 150 staff this year, bringing our staff numbers to about 1650.
As we expand, we will begin the move to our new headquarters on North Wall Quay at the end
of 2016. The layout of the new building has been designed to promote a collaborative working
environment, which will facilitate the teamwork that is so critical to the delivery of the CBI's
multi-faceted mandate.
In parallel, the Bank is also reviewing its organisational and management structures. We
expect to complete the design of new organisational and reward models in the next few
months. The implementation of the identified reforms will need to be achieved in consultation
with our staff representative bodies and within the boundaries of the FEMPI legislation.
We are also responding to the growth in the activities of the Central Bank by implementing a
new data strategy, in order to capture, manage and analyse the extensive amount of data we
process in support of our regulatory and central banking functions. We will also invest in
enhanced cyber-security measures to combat the increasing risks in this area.
As I said at the outset, I am conscious that more needs to be done to build the level of trust
among the public that the Central Bank will take the correct actions to safeguard financial
stability and protect consumers. At a basic level, we believe that people will be more confident
that we act independently and in the public interest if they have greater insights and
understanding about into what is going on inside the Bank. As a progressive, independent
central bank, our ultimate vision is to be trusted by the public, respected by our peers and
provide a fulfilling workplace for our people.
In this spirit, I am pleased today to announce some measures that are intended to increase
transparency. First, the Central Bank Commission has decided to publish the minutes of its
meetings. While information on the supervision of regulated firms and market-sensitive
financial operations activities cannot be disclosed, the publication of these minutes should
contribute to greater understanding of our corporate governance, internal debates and the
initiatives we take to deliver on our mission. The minutes will be published about six weeks
after each meeting, with the minutes of the first meeting I chaired as Governor in
midDecember scheduled to be released by early February.
Second, we have also committed to publishing data on our salary structures and pay scales
on an annual basis and publish these for the first time today. Furthermore, by providing greater
details on our human resources policies, we aim to enhance understanding about the Central
Bank as a public organisation and prospective employer. We will continue to add to the
transparency measures announced today, as we seek to present an open view of the Bank
through our media and public engagements. This will be supported by a new website that is
currently under development, which will go live at the end of this year.
In summary, during my tenure as Governor, my aim is to build on the progress that has been
achieved in recent years in recasting the Central Bank as an efficient and effective central bank
and financial regulator. The staff of the Central Bank can be proud of these achievements,
which were recently recognised by our international peers through the Central Bank of the
Year award from centralbanking.com and the Central Banking journal.
In particular, I am firmly committed to ensuring that the Central Bank fulfills its critical social
responsibility towards consumers of financial services and the general public. To this end, the
Central Bank will be vigilant and pro-active in its independent macroprudential and financial
regulatory policies in order to avoid a repetition of the costly boom-bust cycle that Ireland
endured in the last decade.