Introduction
Good evening ladies and gentlemen. I am grateful to Trinity College Dublin for the invitation
to be here today at this important event, ten years on from the onset of the banking crisis in
Ireland.i
"Those who cannot remember the past are condemned to repeat it"ii is a well-known, albeit
ironically often forgotten, wisdom. There is a strong argument that the past was forgotten
leading up to the crisis, including with the misconception that the great moderation had led
to permanent reduction in business cycle fluctuations. Given the costs and human misery the
crisis has caused in Ireland, it would be inexcusable were this to happen again.
So today, in my brief remarks, I will spend a small amount of time on the causes of the crisis,
before discussing the crisis itself, what has changed as a result and conclude by looking to the
future.
The causes of the crisis
10 years ago, almost exactly to today, New York Federal Reserve economists' analysis of the
US economy (prepared for the setting of interest rates), noted that "Falling real estate prices
and rising defaults on home mortgages had caused stresses in financial markets and the
economy.... However, the analysis concluded that these problems would be contained."iii Just
five days later, Lehman Brothers filed for bankruptcy. The rest, as they say, is history. I cite
this analysis not to criticise the Fed, but as just one example of the international failures to
understand the strength of the gathering storm clouds, notwithstanding their proximity.
Problems had started to crystallise in 2007, and accelerated in 2008, particularly post
Lehmans, as market participants retreated towards safe assets. This tendency was intensified
by the complexity and lack of transparency in the financial system. In other words, due to the
complexity of the market, participants could not establish with confidence which risks would
end up with whom and how they might be exposed to the ultimate holder of certain types of
risks. Consequently, the market moved away from many higher risks. This included Irish banks
with their large property exposures. The move away from the higher risks due to concerns
about solvency took the form of a withdrawal of short-term liquidity, leading to the failure of
the Irish banks and many others.
It is obvious now that these storm clouds did not arise from a single cause. A recent Bank of
England Staff Working paperiv noted the following as contributing factors to the global
financial crisis:
 Inadequate or flawed regulation, supervision or both;

Underestimation of the riskiness of securities created with financial engineering;
 Bad incentives;
 Excessive funding of long term assets with short-term liabilities;

Ratings agencies failures;
 Flawed assumptions regarding house prices;

Elevated household debt;

A belief by bankers that their institutions were too big to fail;
 Global imbalances;

Financial assets accounting; and
 Too loose monetary policy.
It is a long list! Across the globe, "financial innovation....vastly outpaced regulation and
supervision.... Financial institutions went on a frenzy of reckless risk-taking.... [relying] more
on short-term funding, dramatically lowering lending standardsv."
Many of these failures are clearly relevant to the catastrophic impacts of the financial crisis in
Ireland too. They have been well covered in various reportsvi, including the Honohan Reportvii,
which presented five root causes specific to the collapse of the Irish banking system:
 Macroeconomic and budgetary policies that contributed to the economic overheating, and
which relied to an unsustainable extent on the construction sector and other transient
sources for Government revenue;
 Comprehensive failure of bank management to maintain safe and sound banking practices;

A regulatory approach which was too deferential and accommodating, insufficiently
challenging and not persistent enough;
 An under-resourced approach to bank supervision that, by relying on governance and risk-
management procedures, neglected quantitative assessment and the need to ensure there
was sufficient capital to absorb the growing property-related risks; and

An unwillingness to take on board sufficiently the real risk of a looming problem and act with
sufficient decisiveness and force to head it off in time.
In other words, a myriad of decisions both large and small, including decisions not to act
(inaction bias), all underpinned by implicit and explicit assumptions, led to the global financial
crisis and how catastrophic its effects were in Ireland.
There is also a strong argument that Ireland, as a small and open economy, was and is more
susceptible to the economic cycle and is likely to experience more froth in the good times and
is at greater risk of severe downturns than larger, less open economies.
Results of the crisis
As is well documented, Ireland experienced a credit-fuelled property bubble, which inflated
both residential and commercial prices, driving individual indebtedness, reducing overall
competitiveness and encouraging an over reliance on property based taxes in the years from
2003 to 2008viii. Asset bubbles are at least 380 years old. This time, in Ireland (and elsewhere)
it happened to be property related and not tulips, trade in the 'South Seas' or dot.com
companies.
When confidence evaporated, there was no soft landing. The effects of plummeting property
prices quickly spilled over to the rest of the economy, caused distress and difficulties for
borrowers, hurt savers (including through the loss of value of supposedly 'safe' bank shares),
and severely weakened the country's fiscal position.
In response, a process of fiscal adjustment and banking sector support began in 2008. This
included a guarantee of liabilities in the banking sector; a series of pro-cyclical, contractionary
budgets; and capital injections into the domestic banks. By late 2010, Ireland's fiscal position
was unsustainable. The government agreed to enter an EU IMF support programme, with a
total size of €85bn. The resulting adjustment programme brought additional contractionary
budgets (albeit they would have had to be even more austere if Ireland had had to raise
market-based funding, compared to cheaper, three-year official funding), public sector pay
cuts, further banking stress tests, and more capital injections.
The associated human cost of this was immense. The effects are still being felt today by too
many - such as those still directly affected by high levels of personal debt and indirectly by,
for example, the dysfunction that still exists in the housing market. The emergency brake
applied to housing construction in 2008, is still being felt acutely today. Post the onset of the
crisis, the housing stock in Ireland flat-lined at just over two million homesix. That is an
increase of just 8,800 between 2011 and 2016, compared to an increase of more than half a
million in the first decade of the 2000s, and c.74,000 in 2007 alonex. The consequences of this
particular effect of the lack of resilience in the system took a while to work through; non-
performing loans emerged much more quickly.
10 years on from the onset of the crisis, and five years since their peak, non-performing loans
(NPLs) in Ireland are still a cause of considerable distress to borrowers and vulnerabilities in
the banking system. But that is not to say that there has not been considerable progress.
NPLs in the Irish retail banking system declined from €85bn in 2013 to c.€25bn by the end of
2017xi. Importantly, loan "cure" (the return of previously defaulted balances to performing
loan status) has been the key driver of NPL reduction in the residential mortgage segment,
particularly for owner occupier mortgages, where loan restructuring has played such a pivotal
role.xii In contrast, liquidations, write-offs, and sales account for a large majority of the NPL
reduction in the commercial real estate segment.
This is illustrated by approximately one in six (116,010)xiii of all owner-occupier loans currently
in existence having had some form of restructure. 87% of these loans were meeting the terms
of this restructure, and 79% of them are no longer in arrears. This has been achieved through
the hard work and sacrifices of those borrowers in distress that have engaged, the pressure
and the requirements of the Central Bank (including that repossession can only be pursued
as a last resort), and the actions of the banks, all underpinned by economic growth.
Unfortunately, significant problems remain. At the end of June 2018, c.46,000 accounts were
in arrears greater than 90 days. The outstanding balance on all lenders' owner occupier
mortgage accounts in arrears of more than 90 days was €9.5 billion, equivalent to c.10 per
cent of the total outstanding balance on all owner occupier mortgage accounts. Accounts
over 720 days past due constituted 42 per cent of all accounts in arrears, and at €2.5 billion,
represent 91 per cent of arrears balances outstanding.
This matters because behind each account in arrears there is distress and, in the case of PDH
loans, the vulnerability of borrowers at risk of losing their home. This is why there are a
significant number of protections and supports for consumers facing mortgage arrears.
Within the remit of the Central Bank's responsibilities, the approach to mortgage arrears
resolution is focused on ensuring the fair treatment of borrowers through a strong consumer
protection framework while ensuring banks are sufficiently capitalised, hold appropriately
conservative provisions, and have appropriate arrears resolution strategies and operations in
place.
This includes regulatory requirements such as the Consumer Protection Code and The Code
of Conduct on Mortgage Arrears (CCMA), which govern how lenders interact with retail
borrowers that are in distress. Firms must also follow the Mortgage Arrears Resolution
Process (MARP) when dealing with borrowers facing arrears. The MARP process also requires
alternative options if a restructure cannot be agreed or was not appropriate.
There is a range of advice and support for those in arrears, including the Money Advice and
Budgeting Service (MABS), the national mortgage Arrears Resolution Service (Abhaile) and a
Court Mentor service to assist debtors faced with court proceedings. The Government also
introduced the Personal Insolvency Act 2012, which introduced three debt resolution
processes: A Debt Relief Notice, A Debt Settlement Arrangement and a Personal Insolvency
Arrangement. The Insolvency Service was established in March 2013 as an independent
statutory body. The Government also introduced a national mortgage-to-rent scheme. There
are also a number of other non-statutory organisations providing assistance to those in
mortgage arrears.
However, these protections, safety nets and restructuring options are not going to address
the underlying problems if distressed borrowers do not engage with their lenders or the
supports that are in place. In this context, it is noteworthy that:
 c.44% of PDH loans that are more than two years past due are more than five years past due;
 c.40% of borrowers of PDH loans that are more two years past due are not engaging with
their lenders;

more than half of loans that were more than four years past due at the end of 2016, were
more than five years past due at the end of 2017; and
&
 more than 70% of mortgages in arrears over five years are not engaging with their banksxiv
xv.
Recognising the individual distress these numbers represent, I would again urge anyone in
arrears to engage with their lenders and/ or the supports that are available. Nonetheless, if
we, economically and societally, want a functioning mortgage market, where secured lending
is priced in a different way to unsecured, then that security must mean somethingxvi and
banks, from both a commercial and a financial stability perspective must have a way of dealing
with NPLs.
Sales have proved to be controversial, particularly for owner occupier loans. They are a
legitimate and necessary approach for banks to address non-performing mortgage loans. To
date, there has been no material difference in the number of legal proceedings issued
between banks and non-banks, as a percentage of total number of accounts in arrearsxvii. It is
also important to emphasise that the Central Bank has, with the support of the Oireachtas,
ensured that the protections of our Codes of Conduct, including the CCMA, travel with the
loans - it is the activity that is regulated, not the ownership.
The regulatory response to the crisis
Domestically, much of the decade since 2008 was spent in crisis management mode, including
as part of the Troika programme. A veritable 'alphabet soup' of regulations, implementing
technical standards, accounting and supervisory policies have been implemented in recent
years. The list of acronyms is long and confusing - CRD/ CRR, BRRD, SSMR, MiFID II, EMIR,
IFRS9, GDPR, TRIM, PSD2, etc.xviii, but the extensive international regulatory response reflects
the international nature of the crisis.
The Central Bank has also undergone significant organisational change in terms of culture,
structure, and process. Following the onset of the crisis, including through the enactment of
Central Bank Reform Act of 2010, we introduced significant changes to the regulatory
framework and our supervisory culture and approach.
This has delivered a more assertive, risk based, outcomes-focused and analytical approach to
supervision. Enforcement is now an important tool to effect deterrence, achieve compliance
and promote the behaviours we expect. We are committed to the continued and necessary
evolution of our regulatory framework, our supervisory approach and our ability to resolve
firms as the industry and the risks it presents evolve.
From a prudential perspective, we are aiming for the Irish financial system to be resilient, to
be trustworthy and to sustainably serve the needs of the economy and its customers over the
long term - including through the economic cycle. This is delivered by driving regulated
financial services firms to:
1. Have sufficient financial resources, including under a plausible but severe stress;
2. Have sustainable business models over the long-term;
3. Be well governed, have appropriate cultures, with effective risk management and control
arrangements, and
4. Be able to recover if they get into difficulty, and if they cannot, be resolvable in an orderly
manner without significant externalities or taxpayer costs.
Where these objectives are not being met, we are taking action to remediate them. This
remediation continues to address legacy issue, drive improvements and build greater
resilience into the system.
The creation of the Single Supervisory Mechanism (SSM) in 2014 is also fundamentally
important. Its creation reflected the European nature of banking failures and has centralised
banking supervision across the Eurozone under the authority of the European Central Bank.
It has driven greater consistency and intensity of banking supervision and has started to
rebuild confidence in the European banking system - albeit there remains some fragility to it.
If we look back to the 'light touch' regulation of yesteryear, while there was an extensive
rulebook, there was a catastrophic over reliance on banks, their management and the market
as whole to act in a certain way that would avoid the build-up of undue risk. Now 10 years
since the onset of the crisis, rules are used to support a more assertive, intrusive, and
outcome focused approach to supervision. The construction of today's system has clearly
been driven by the lessons of these last 10 years.
Regulation has been successful in improving the safety and soundness of banks and other
financial services firms, governance and risk management arrangements, and reducing (but
not yet removing) contingent taxpayer liabilities connected with failure. To take one
important and tangible example of what this means in the case of the Irish banks, we have
demanded increases in the quantity, and quality of capital that banks hold to protect against
losses that could be triggered by a negative shock. Overall, the system has over 3.5 times the
level of equity to risk weighted assets compared with 2006xix. Regulation has also driven
greater transparency, disclosure and consistency in reporting, and product design and
literature.
Notwithstanding the progress, legacy issues remain. These include the remaining high level
of non-performing loans that I referred to earlier, remaining vulnerabilities in some banks'
business models, and capability issues in critical areas, including in IT risk management.
Furthermore, resolution plans are not yet fully implementable, meaning that there is further
work to be done to remove implicit taxpayer support for the larger banks. As we have recently
reported, banks also have work to do to improve their cultures and the levels of diversity at
senior levelsxx.
This is why we remain focused on both addressing these legacy issues, and building resilience
into the system during good times to mitigate the effects of the inevitable future downturns
and shocks. This is particularly important in the context of Ireland's vulnerability as a small,
open, economy, and the risks of which I referred to earlier.
We have also taken forward-looking macro prudential actions, which include:

The activation of the counter-cyclical capital buffer, which is designed to build resilience
during times of growth, and so that it can be released during a downturn, avoiding the pro-
cyclical withdrawal of credit supply;
 The introduction of borrower-based measures that limit loan-to-value and loan-to-income
ratios, which increase the resilience in the system and reduce the risk credit-fuelled property
bubbles from over-borrowing and over-lending; and

Advice to government regarding the need for running budget surpluses as a precondition for
the running of stabilising, counter-cyclical deficits in a future downturn. If surpluses are not
built up we increase the risk of requiring pro-cyclical fiscal austerity policies.xxi
My colleague, Sharon Donnery, Deputy Governor, Central Banking, will speak more on these
macro prudential measures in her remarks at the Dublin Economics Workshop on 14
September, so I will not discuss in detail here today.
We are also seeking to ensure that the financial services industry pays the direct costs of these
necessary enhancements to regulation and supervision. Over the coming years we are aiming
to increase the levy paid by regulated entities to 100% of our regulatory costs.
Looking Ahead
The Irish financial system, and the banking system specifically, is undoubtedly stronger and
more resilient that it was 10 years ago. After many years of contraction, it is also growing
again, becoming increasingly complex in nature and increasingly internationally focused, in
part due to Brexit.
So, there are grounds for optimism. However, as I have touched on, weaknesses remain, and
as I have also referenced, it is likely that we are closer to the next downturn than we are to
the start of the last one. Even as the sun is shining today, there are clouds on the horizon. One
can hope that future storms are not as severe as the last one, but storms there undoubtedly
will be.
In this context, it is noteworthy that both globally and domestically the levels of debt that
characterised the build up to the crisis has not disappeared. In fact, global debt levels are
higher now than they were in 2009, reaching the record peak of $164 trillion in 2016 -
equivalent to 225 per cent of global GDP. Debt in advanced economies is at levels not seen
since the Second World Warxxii. Closer to home, Ireland's household and public debt levels,
which are key indicators of the economy's resilience to shocks remain very elevated (Irish
households are the fourth most indebted in the European Unionxxiii). This level of debt clearly
increases the vulnerabilities to shocks (including interest rate risk) and limits authorities'
policy options for dealing with them in a counter cyclical way.
These macro risks are significant for Ireland, given the openness of the economy. These could
obviously affect the domestic retail banking system, notwithstanding its increased resilience.
Risks also arise at a micro level. One such risk arises from the increasing dependency on and
interconnectedness of information technology, and the need to enhance resilience and
mitigate cyber security risks in this area. I have not discussed in detail today, but it is an area
of concern that I will cover in more detail in a speech next month.
Conclusion
Building resilience now, for individuals, governments and banks will serve us well for future
downturns, whatever the cause may be. It will also help with the pressing need to restore
trust in the system, a foundation of which is that financial institutions are trustworthy.
All of the actions taken during the crisis, and the changes made in its aftermath are to support
the vital, public interest mission of the Central Bank. That is to safeguard the stability of the
financial services system and protect consumers.
My energies are focused on ensuring that the Central Bank has a robust, fit for purpose
regulatory framework, and is delivering an effective, intrusive, analytical and outcomes-
focused approach to supervision, which remembers the lessons of the past, anticipates future
risks, and continuously improves.
My hope is that in 10 years' time, we will still remember the banking crisis and the lessons
from it. But that between now and then we will have navigated the many challenges ahead
and more successfully weathered the inevitable shocks that will occur, than we did 10 years
ago. This will require continued diligence, building resilience, a willingness to listen to
different voices and challenge the assumptions we are relying on - it is inevitable that not all
of them will hold.
With that said, I look forward to hearing the perspectives of my distinguished fellow speakers,
answering your questions and hearing your views.
References
i
With thanks to Michael McInerney and Martin Maloney for their assistance in drafting these remarks.ii George
Santayana (1863-1952), Reason in Common Sense, The Life of Reason, Vol.1
iii
Lawrence M Ball, The Fed and Lehman Brothers
iv
David Aikman, Jonathan Bridges, Anil Kashyap and Caspar Siegert, Bank of England Staff Working Paper
No. 747, "Would macroprudential regulation have prevented the last crisis?"
v
Christine Lagarde, "Ten Years After Lehman - Lessons Learned and Challenges Ahead."
vi
See also Nyberg Report and Banking Inquiry Report
vii
Patrick Honohan, The Irish Banking Crisis, Regulatory and Financial Stability Policy, 2003 - 2008
viii
Mark Cassidy, Ireland's Experience after an Adjustment Programme
See also
ix
See Central Statistics Office - Census of Population 2016 - Profile 1 Housing in Ireland
x
Department of Housing, Planning and Local Government: Housing stock 1991 to date
xi
See Sharon Donnery, Trevor Fitzpatrick, Darren Greaney, Fergal McCann, and Mícheál O'Keeffe "Resolving
Non-Performing Loans in Ireland: 2010-2018"in Quarterly Bulletin 2018 Q2.
xii
See "Cures and Exits: An investigation of the drivers of NPL resolution in Ireland since 2012", Fergal
McCann and Niall McGeever
xiii
See Central Bank Mortgage Arrears Statistics
xiv
See Enda Keenan and Martin O'Brien (2018) "New Mortgage Lending Activity in a Comparative Context",
Central Bank of Ireland Economic Letter, Vol 2018 No 5.
xv
Measured as whether a borrower has submitted a Standard Financial Statement in accordance with the
Mortgage Arrears Resolution Process.
xvi
-
See Ed Sibley, The Irish Mortgage Market 2018 and beyond for a more detailed discussion on this
xvii
Figures derived from analysis of legal proceeding issued for loans in arrears as at 31 December 2017 by
statistics division of the Central Bank
xviii
The Capital Requirements Regulation (EU) No. 575/2013 (CRR) and Directive 2013/36/EU (CRD IV) came
into effect on 1 January 2014. The CRR is directly applicable to all Member States while CRD IV has been
transposed into Irish national law via Statutory Instruments 158/2014 [European Union (Capital Requirements)
Regulations 2014] & 159/2014 [European Union (Capital Requirements) (No.2) Regulations 2014]. Further
information available here.
The Bank Recovery and Resolution Directive (BRRD) provides national resolution authorities with
comprehensive and effective powers for dealing with failing banks. This framework and related legislation
enhances both the resilience and the resolvability of EU institutions and in-scope investment firms, which will
be better prepared to deal with, and recover from, a crisis situation. Moreover, in the event that an institution
does fail, the impact associated with that failure should be minimised. See here.
MiFID II contains new EU-wide rules governing investment firms, credit institutions, trading venues and market
structures, as well as third-country firms providing investment services or activities in the EU. It significantly
broadens the scope of MiFID by bringing new activities and firms into scope, removing or narrowing
exemptions and covering new financial instruments and products. See here.
Regulation 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories ("EMIR") implements
increased transparency in respect of derivatives by imposing requirements concerning reporting of all derivative
contracts (including exchange traded derivatives) to Trade Repositories (TRs); clearing those OTC derivatives
subject to the mandatory clearing obligation; risk mitigation techniques for non-centrally cleared derivatives,
and setting out requirements for both Central Counterparties (CCPs) and TRs. See here.
IFRS 9 is a new accounting standard that will be effective from 1 January 2018. It introduces an expected credit
losses model (ECL) which may lead to higher impairment provisions and more volatile impairment charges with
a consequent impact on capital ratios.
The SSM has committed to undertake a targeted review of internal models (TRIM) for banking groups. See
here.
The General Data Protection Regulation (GDPR) is the first major reform of European data protection
legislation in 20 years, comes into force on 25 May 2018. All companies who collect and process personal data
in the EU will need to work out what data they hold on their customers, where they hold it, if they have
extract it in an easily "portable " form or
permission to do so, whether it is stored safely, and how they can
delete it if requested.
The Payments Services Directive 2 (PSD2) will come into force in the EU in January 2018. Banks will be
obligated to share their customer information with third parties; such as payments firms. See here.
xix
Source: SNL Financial Statement Data for AIB, BOI PTSB and UBID
xx
See Central Bank of Ireland report on Behaviour and Culture of the Irish Retail Banks
xxi
See also: Remarks by Governor Philip R. Lane at Central Bank Economics Roundtable
xxii
Eurofi regulatory update, September 2018
xxiii
Quarterly Financial Accounts, Q1, 2018
http://www.centralbank.ie/polstats/stats/qfaccounts/Pages/releases.aspx