Patrick Honohan: Recent economic developments in Ireland and the
outlook for the economy
Opening statement by Mr Patrick Honohan, Governor of the Central Bank & Financial
Services Authority of Ireland, at the presentation of the Annual Report 2009, Dublin,
16 July 2010.
* * *
We are today publishing the Central Bank's 2009 Annual Report. The new Central Bank
Reform Bill will formally create a new single unitary organisation. To reflect the reality of our
new structures, this is the first such report to incorporate the annual reports of both the
Central Bank and Financial Regulator in one publication. We are today also publishing our
Strategic Plan, which I expect will also form the basis for our operations going forward under
the new legislation, subject to the views of the new Commission.
I am joined by Jim Farrell, Chairman of the Financial Regulator Authority; and Mary Sheehy,
Assistant Director General and Secretary of the Bank. We will be happy to take your
questions after our brief opening words.
As we state in the annual report, the failures of the banking system here have rocked the
economy and the public finances, with severe impacts on all members of society. To address
this, the country is faced with three key policy issues:
 stabilisation and normalisation of the banking sector;

consolidation of the public finances; and

restoration of the economy's competitiveness position.
For our part in the Central Bank, the focus remains on restoring the health of the banking
system.
We have already taken action, in March of this year, to review and set new, higher capital
requirements for our main banks. These new levels are based not just on expected loan
losses but on potential losses in a stressed situation. We expect that the banks will meet the
capital requirements set out by us, which we believe are sufficient to withstand future stress
scenarios. A combination of capital raising and asset disposals, underpinned by government
support, should ensure they meet those targets by December. We are also carrying out
additional stress tests on AIB and Bank of Ireland, as part of the European wide methodology
set out by the Committee of European Banking Supervisors (CEBS). Of course, we have
already stress tested these banks in the earlier exercise I referred to. Indeed, the severity of
the tests we conducted earlier on loan losses exceeds that of the CEBS version, although
CEBS has extended the test to reflect events in the sovereign debt markets. We will be
providing details of this latest exercise on this day week.
The new requirements we are imposing, along with some other measures, including the
recent extension of the guarantee on banks' liabilities, place our banks in a stronger position
to start lending again and to support economic recovery.
As for the public finances, it remains critical that the government sticks firmly to the fiscal
adjustment programme that it has embarked on. This path, difficult as it may be, is the surest
route to supporting the recovery in confidence in the Irish economy both domestically and
internationally. The budgetary arithmetic is so far broadly on track and in this context I'd like
to emphasise how important it is to interpret correctly the overall government borrowing
figures as they are published. In addition to the normal government borrowing requirement,
these figures now include the additional net costs of financial restructuring of the banks. The
€4 billion injected in 2009 into Anglo Irish Bank already lifted the general government deficit
from 11.7% to 14.3% of GDP. This year again, the remaining sizeable net injections into
Anglo and Irish Nationwide Building Society add an even larger sum. So looking at the
general government deficit net of bank restructuring costs gives a clearer picture of whether
the underlying trend in the public finances is still on track, as it is so far.
The focus internationally on the sustainability of public finances has been at the centre of
renewed pressures in financial markets generally in Europe. Here too, it is important to
interpret data correctly. What might broadly be described as IFSC institutions represent a
large and growing part of the borrowing by Irish resident banks from the Eurosystem. For this
reason we are enhancing our statistical presentations to include a new table covering retail
banking institutions in Ireland and that table, to be published in our monthly statistics, will
give the best indication of Irish bank liquidity conditions.
The other key element is competitiveness. Again, this is improving but we need to maintain
the momentum in order to maximise the economy's growth prospects over the medium term.
We will be publishing our next economic commentary and forecasts in a couple of weeks
when we will address these issues in some more detail.
Today we also publish our Strategic Plan for the period 2010-2012. It sets out our medium
term objectives and the actions we will take to achieve them. This again reflects the reforms
we have already implemented in our own organisation. We have made a number of new
senior appointments and have reformed our internal structures to fully merge the functions of
the Central Bank and Financial Regulator. In doing so we have taken account of the lessons
that we have learnt to date about the financial crisis, including those I set out in my recent
report to the Minister for Finance.
The Strategy covers all our main functions, including our requirement to contribute to price
stability, to fulfil our responsibilities generally as a member of the Eurosystem, to ensure the
financial services infrastructure delivers the necessary efficiencies to the economy, to
provide authoritative economic advice and to help consumers through our consumer
protection mandate.
The major new measures and initiatives featured in the Plan include:

A refocused approach to strengthening the financial system including a new
approach to financial stability assessment;

The development of a new regulatory model with an enhanced supervisory capacity
for the detection and correction of problems with an active and challenging
approach;

Interacting with new EU supervisory bodies, such as the European Systemic Risk
Board and the European System of Financial Supervisors;
 Building on consumer protection including a review of the Consumer Protection
Code;
 Greater attention in our economic research on the functioning of the financial system
and fuller collaboration with the universities, ESRI and the wider public service;
 Moving towards a 100% charge back arrangement on the costs to industry to reduce
the cost to the taxpayer.
We are also today publishing a Payments Oversight Report which explains how we
discharge our various responsibilities in this area in order to ensure that the economy has
reliable and effective payments systems to allow for the smooth functioning and delivery of
everyday financial transactions.
Finally, the annual report details the Central Bank's accounts. The Bank's profits for 2009
amounted to €933.8 million. After transfers to reserves, surplus income of €745.5 million will
be paid to the Exchequer. The Bank's balance sheet assets at the end of 2009 amounted to
just under €125 billion reflecting the continuing high levels of liquidity support by the Bank
through the Eurosystem to banks located in Ireland.