John Hurley: Managing financial stability in Ireland
Comments by Mr John Hurley, Governor of the Central Bank and Financial Services
Authority of Ireland, at the Central Bank of Luxembourg on the occasion of the publication of
its Financial Stability Review, Luxembourg, 28 April 2008.
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It is a great pleasure to be here today at the launch of the Financial Stability Review and on
the occasion of the 10th Anniversary this year of the creation of the Banque Centrale du
Luxembourg. I would like to thank Governor Mersch for the invitation to speak about
arrangements for managing financial stability in Ireland.
As you may be aware, for the last five years, the Central Bank and an autonomous Financial
Regulator have operated together in Ireland within the one organisation - the Central Bank
and Financial Services Authority of Ireland. There were various reasons behind this choice of
structure. A key consideration was the sharing of responsibility for financial stability, realising
the synergies that existed between the central banking and financial regulation functions.
Other advantages included optimising the use of technical skills, benefiting from economies
of scale in the provision of shared services and promoting communication between both
areas.
A key consideration was the sharing of responsibility between the Central Bank and the
Financial Regulator for financial stability.
The new organisation was notable for two reasons. First, it established a single financial
services regulator. The second notable aspect of the new organisation was the location of
the Financial Regulator within the broader Central Bank and Financial Services Authority of
Ireland. This reflected the fact that, prior to the re-organisation, the Central Bank had been
the main locus of expertise in these supervision activities in Ireland.
The end result is an organisation that consists of two constituent parts, each with their own
responsibilities. Both sides are bound together, however, by integrated membership of the
Central Banks' board of directors and the Financial Regulator's corresponding Regulatory
Authority.
Although both parties have their own responsibilities, there is a shared high-level objective of
contributing to financial stability. The Central Bank has an explicit legal mandate, in both
domestic legislation and under the Maastricht Treaty, to contribute to financial stability both in
Ireland and across the euro area. The Financial Regulator contributes to the work of the
Central Bank in discharging its responsibility in relation to the maintenance of overall
financial stability.
It makes this contribution in two broad ways. First, it maintains confidence in the solvency
and safety of individual institutions. Second, it protects and informs consumers. Although the
Central Bank's and Financial Regulator's roles in contributing to financial stability are
different, they are complementary and combine to deliver a comprehensive approach to
stability issues.
There are various joint initiatives between the Central Bank and Financial Regulator, where
our technical expertise is pooled. Examples of this co-operation include our regular
macroeconomic stress-testing exercises and publication of the Financial Stability Report; a regular
programme of joint meetings of Central Bank and Financial Regulator management with the
senior executives of our major banks; and, finally, the parties cooperate fully in their
participation in international fora on financial stability issues. There is also a memorandum of
understanding between the Central Bank and Financial Regulator on financial stability
issues. Under this agreement, the Central Bank contributes to stability through the
formulation of monetary policy, oversight of the financial system infrastructure, surveillance of
the financial system, and undertaking any official financial operations that might be required
in exceptional circumstances. For its part, the Financial Regulator makes its contribution
through its prudential and consumer roles.
In addition, a separate joint management committee was established to deal solely with the
stability issues. The Financial Stability Committee is the main forum where senior
management from both the Central Bank and Financial Regulator meet formally to consider
financial stability issues. However, in practice, staff at all levels of the organisation come
together regularly in an informal way to discuss these matters and to undertake joint work.
Publication of the Financial Stability Report is one of the ways in which our organisation
contributes to financial stability on an on-going basis. A key element of the Report is that it
represents the joint views of both the Regulator and the Bank. It is our hope that the
wideranging analyses in these Reports encourages dialogue among the wider public on financial
stability issues and conveys the importance of a stable financial system. In addition, the
Central Bank and the Financial Regulator jointly hold round-table meetings with senior
executives of the main domestic credit institutions as early as possible after publication. The
aim of these meetings is to focus attention on the key risks outlined in the Report.
A key area where co-operation between the Central Bank and Financial Regulator has
proved most useful is in respect to financial crisis management. The organisation is
constantly developing its procedures to deal with potentially disruptive events and this is very
much a joint effort between both parties. The Central Bank and Financial Regulator have
held joint crisis simulation exercises and, more recently, these have involved the participation
of officials from the Irish treasury. This is in addition to the normal Domestic Standing Group
arrangements.
This co-operation between both the Central Bank, Financial Regulator and Treasury
Department leaves us well placed to meet the objectives set out in the international
memoranda on crisis management issues - where the sharing of information and expertise
at national level would be important to the handling of any cross-border financial crisis.
In summary, financial stability considerations were key in the design of the organisation. This
choice of organisational structure reflected the shared high-level objective of contributing to
financial stability for both the Central Bank and Financial Regulator. The end result is an
organisation with a cohesive and comprehensive approach to financial stability issues.
Many thanks for your attention today.