Gabriel Makhlouf: Key challenges - including mortgage arrears and
market-based finance - and the need to build resilience across the
economy
Introductory statement by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, before
the Joint Oireachtas (National Parliament) Committee on Finance, Public Expenditure and
Reform, and Taoiseach (Head of Parliament), Dublin, 5 December 2019.
* * *
Good morning.
Thank you for the invitation to appear before you today.
I am joined by my executive leadership team: Deputy Governor (Central Banking), Sharon
Donnery, Deputy Governor (Prudential Regulation), Ed Sibley and Director General (Financial
Conduct) Derville Rowland. The other member of our team, Chief Operations Officer Gerry
Quinn, could not make it this morning.
I am now three months into my term as Governor during which I have prioritised listening to
colleagues in the Bank and stakeholders outside of it to understand better the issues and
challenges as they see them. I've spent time outside of Dublin - in Waterford, Dundalk, and
Carlow (at the National Ploughing Championships) and also in Frankfurt and Washington DC -
and I've met members of the public, business owners and business representatives from a
range of sectors, Governors from other Central Banks and officials from the IMF and the
European Commission, among others. Last week I hosted a roundtable at the Central Bank for
14 organisations representing civil society.
Your invitation asked that I address the current principal issues being dealt with by the Central
Bank. Therefore, in addition to outlining some of my reflections so far, in my remarks this
morning I will outline some of the Bank's recent activities, as well as what I see as challenges on
the horizon. Of course, it will not cover all the issues that will be of interest to the Committee, so I
look forward to a wider discussion.
Reflections
The Central Bank's mandate is to serve the public interest by safeguarding monetary and
financial stability and by working to ensure that the financial system operates in the best interests
of consumers and the wider economy.
Having spent my entire career in public service, across the areas of macro and
microeconomics, public policy and service delivery, I recognise the importance of that mission.
To my mind, the 'wider economy' is represented by the community across Ireland.
Over the last number of years the Central Bank has grown as its mandate has increased,
reflecting both the response to the global financial crisis and the changing world around us.
Our responsibilities are heavily intertwined. The breadth of our mandate gives us both strength
and insight, enabling the Bank to harness its collective, wide-ranging and deep policy and
technical expertise to tackle complex issues. Most of the areas we are responsible for - whether
consumer protection; prudential regulation; payments, settlements and currency; or providing
economic analysis and statistics - have complex interactions with each other. I see our job,
along with other members of the Central Bank Commission, to ensure this is all brought
together.
I also have personal responsibility to the Eurosystem in terms of our primary mandate of price
stability, which - at its heart - is essential to intergenerational wellbeing, enabling governments,
business and citizens to plan, invest and make provision for the future. Aligned to that is the
Eurosystem's secondary mandate of supporting 'the general economic policies in the Union with
a view to contributing to the achievement of the objectives of the Union'.
The European and euro area post-crisis institutional architecture for economic policy and
financial regulation and supervision has changed and continues to change. The ongoing evolution
will continue to require us to be closely engaged and influential in EU and international fora.
I have been struck by how committed the staff in the Central Bank are to working in the public
interest. This resonates with my own values and I am confident that we have a strong basis on
which to deliver our mission. But as well as building on our strengths, we also need to maintain a
sense of humility and an openness to be challenged: the financial system is changing rapidly and
future challenges and crises will be different to what went before.
From a delivery perspective, we must ensure we are using our resources effectively and
efficiently. As the world around us changes, we need to evolve and strengthen as an
organisation, consistently seeking to be best-in-class. That means regularly assessing and
examining our policies, frameworks and approaches to ensure they are fit-for-purpose. Diversity
of thought is a critical component in this, in order to give us the capacity for deeper insights and
make us more resilient.
More generally, from my early engagements with various stakeholders, and in preparing for this
hearing, I recognise a desire in some quarters for the Central Bank to move faster on certain
issues. I understand that. I certainly want us to be on the front-foot in our delivery: proactive,
assertive and agile both in what we do and how we do it. But a rigorous evidence-based
approach must continue to underpin the delivery of our mission.
As you know, the Central Bank's three-year Strategic Plan runs to 2021. Its key themes -
resilience, consumer protection, engaging and influencing, organisational capability and Brexit -
remain valid. However, like any strategic plan, it is sensible to undertake a mid-point review, and
we will do so next year.
Delivery
Let me now turn to a number of areas of recent activity.
Financial stability
Yesterday we published our Financial Stability Review.
It outlines what we see as the main risks to financial stability, the resilience of the financial
system to those risks and the Central Bank's policy actions in response.
Key risks on our horizon include the consequences of the current low interest rate environment
across the globe, the potential for pro-cyclical risk-taking domestically in the context of an
economy that is close to capacity, the impact on Ireland of changes to the international trading
and tax environment, the lingering issue of high levels of sovereign debt in the euro area, and a
disorderly Brexit.
I mention Brexit because it is important to be clear that it has not gone away. As I said in
Waterford recently, the Withdrawal Agreement - assuming it is ratified by the next UK Parliament
- represents merely the end of the beginning. Any form of Brexit will be damaging for Ireland, with
a 'no-deal' Brexit - whether that is a 'no Withdrawal Agreement no-deal' or a 'no Free Trade
Agreement no-deal' - especially so. We have focused on ensuring that the risks to the Irish
economy are understood and that risks to financial stability and consumer protection are
identified and mitigated to the greatest extent possible.
Looking at the picture beyond Brexit, we use evidence-based macroprudential policies to
promote financial stability in Ireland and to mitigate the impact of negative shocks on the real
economy. The mortgage measures are a central component of our macroprudential toolkit.
The annual review of the measures allows us to challenge ourselves to ensure they are set in a
way that maintains and build the resilience of both borrowers and banks and that we don't see an
unsustainable credit-fuelled housing boom emerging again.
The measures were first introduced in early 2015, at a time when house prices were still
recovering from the financial crisis. Since then, there have been several years where house
prices have grown faster than incomes due to supply constraints.
The evidence from the 2019 review shows the mortgage measures have been effective in
strengthening borrower and lender resilience and in limiting the potential for a pro-cyclical
credithouse price spiral to emerge.
If the measures had not been introduced in 2015, our models suggest both the level of house
prices and the proportion of highly indebted mortgage borrowers would likely have been
significantly higher in 2019 than we currently see, all else being equal.
While the objective of the mortgage measures is not to target house prices, our analysis
suggests that - in the absence of the mortgage measures - affordability pressures for mortgage
borrowers would be even more acute.
As I said yesterday, the mortgage measures are working, and because they are working, we see
no reason to change them.
We recognise that significant challenges remain for people and families looking to purchase
homes. Demand continues to outstrip supply. There are issues in the mortgage market, the
rental market, and the market for social housing. However, increasing household debt is not a
substitute for increasing the supply of housing.
The decision on the mortgage measures was not the only macroprudential decision published
yesterday. We also announced further progress on - and plans around - the development of a
number of buffers in the capital of banks, essentially cushions against different types of risk,
including an economic downturn.
Consumer protection
The mortgage measures are an important part of our consumer protection framework. My first
few months have shown me that protecting consumers is embedded in every area of the Central
Bank's work.
Our statutory codes of conduct, redress powers and enforcement actions are essential to
consumer and investor protection, but so too is our work to ensure firms are well-managed and
financially sound, and to guard against instability in the system as a whole.
I have seen at first-hand the scale of the work the Bank undertook on the Tracker Mortgage
Examination, resulting in hundreds of millions in redress and compensation to more than 40,000
consumers. I have been briefed on our ongoing enforcement investigations, and the fact that we
have had to remind certain lenders of the consequences of failing to cooperate.
Nonetheless, as set out in our Strategic Plan, we must also strengthen our approach to
consumer protection by enhancing our approach to conduct risk, developing our approach to
supervision and continuing to focus on the culture of firms, and the individual accountability of the
people who run them.
We need a financial system that fosters trust, where consumers and investors are protected,
deposits are safe and insurance reserves are adequate to meet liabilities. We work with the other
parts of the State's consumer protection framework - such as the Financial Services and
Pensions Ombudsman and the Competition and Consumer Protection Commission - to deliver
this.
But we also need a strong culture of compliance.
When it comes to issues like culture, the responsibility rests first and foremost on the leadership
of firms. Organisations make their own cultures and it is the responsibility of boards to ensure
the development of consumer and compliance-focused cultures that the Irish public deserves.
If the sector wishes to regain trust, it must earn it by demonstrating trustworthiness. That is no
easy feat and the public will rightfully be the ultimate adjudicators. I welcome the creation of the
Irish Banking Culture Board as a positive sign of intent. The Individual Accountability Framework
that we have proposed should also help address some of the issues in the banking sector.
Mortgage arrears and market-based finance
I want to turn to one ongoing challenge and one emerging risk.
Mortgage arrears
The protection of borrowers in mortgage arrears continues to be a key priority for the Central
Bank. The regulatory framework provides a significant number of protections for borrowers in
arrears. This is important given the strain, stress, and vulnerability of people who are at risk of
losing their homes.
The Central Bank's approach to resolution has focused on ensuring the fair treatment of
borrowers and ensuring that lenders have appropriate arrears resolution strategies in place.
Significant progress has been made in terms of restructuring mortgage arrears, and critical to
this has been the implementation of alternative repayment arrangements (ARAs). But it's also
true to say that a sizeable arrears problem persists and engagement between lenders and
borrowers remains essential if this is to be addressed successfully. Arrangements should be
appropriate and sustainable for the borrower, regardless of whether a bank or non-bank holds the
loan. It is important that any arrangement addresses the underlying problem for borrowers.
As part of our supervisory work, we will continue to focus on ensuring the long term sustainability
of any alternative arrangements. We will continue to press all firms to engage and work to find
solutions for both firms and borrowers which address the underlying issues. But we must also all
recognise that there will be cases where this may not possible.
Market-based finance
The emerging risk I want to mention is the growing size of the market-based finance sector, both
here in Ireland but also across the world.
The relative size of the sector in Ireland to the domestic economy is among the largest globally
and it has a predominantly international focus. It is dominated by investment funds and money
market funds, which account for around two-thirds of total assets.
Market-based finance provides a valuable alternative to bank financing for many businesses and
households, supporting economic activity. But these activities may also give rise to financial
vulnerabilities, which need to be understood, monitored and addressed.
Because of this, yesterday I announced that we are going to build on recent work in this area and
conduct a deep dive on property funds to assess the resilience of this growing form of
marketbased finance. We will also consider whether there is a need for macroprudential policies to
strengthen the resilience of this growing form of finance to the domestic economy and we will
continue to work on these issues with our colleagues in Europe and in global fora.
Conclusion
I have sought to give you a whistle-stop tour of the principal issues being dealt with by the Central
Bank, together with some of my own reflections.
I'd like to conclude by saying something about the global economy, on the risks that it faces
currently and how I believe we here in Ireland should look to manage them.
In its latest forecasts, the IMF signalled a slowdown in global growth, driven by "rising trade and
geopolitical tensions that have increased uncertainty about the future of the global trading system
and international cooperation more generally, taking a toll on business confidence, investment
1
decisions, and global trade". This uncertainty comes at a time when economies have started to
enter significant transitions, driven by developments in technology, in demography, and in the
environment, to name three. A particular characteristic of these transitions is the pace of change.
We need to meet these challenges by building resilience across the economy, in the financial
services sector and most importantly in households across the country. We should continue to
focus on the fundamentals, managing the short term while planning for the medium term,
ensuring our frameworks are fit-for-purpose and learning the lessons of the past while preparing
for the future.
Successful economies need stable and sustainable macroeconomic frameworks and sound
monetary policy that delivers predictable prices. They also need stable and well-regulated
financial systems and well-functioning markets. The Central Bank will continue to focus on its
core mandate of price stability, a stable financial system and the protection of consumers. We
will also continue to challenge ourselves. As I said earlier, as the world around us changes, we
need to evolve and strengthen as an organisation, learning from experience and regularly
assessing our policies and approaches.
And, finally, our freedom to make independent decisions will not mean that we will be isolated.
We will be transparent in the exercise of our responsibilities, accountable for our activities, and
engaged and connected with those we serve.
I welcome the opportunity to appear before you today.
1
See IMF World Economic Outlook. Available here