Philip R Lane: The European monetary and financial system - the
role of the Central Bank of Ireland
Speech by Mr Philip R Lane, Governor of the Central Bank of Ireland, to the Irish Embassy,
Tokyo, 8 May 2017.
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Good afternoon. It is a pleasure to address this distinguished audience.
Today, I wish to discuss the role of national central banks in the European monetary and financial
system, with specific reference to the Central Bank of Ireland.
In relation to the monetary system, Ireland was one of the founding members of the euro area in
1999. Monetary policy is formulated and implemented by the eurosystem, which consists of the
European Central Bank (ECB) in Frankfurt and the national central banks of the member
countries. The staff of the Central Bank of Ireland actively participate in the eurosystem
committees that provide advice to the Governing Council of the ECB.
The governors of the national central banks (each in an individual capacity) sit on the Governing
Council, together with the six members of the ECB's executive board. Accordingly, the ECB's
monetary policy decisions are a shared responsibility of the members of the Governing Council,
supported by the collective work of the eurosystem's committees that include participants from
the ECB and the national central banks. In turn, the implementation of monetary policy is
primarily decentralised to the national central banks and the financial operations department of
the Bank conducts liquidity operations and asset purchases as required.
A general lesson from the global financial cycle that generated expansionary conditions in the
financial systems of many advanced economies during 2003-2007 which was followed by costly
reversals is that macroprudential policies are required in order to ensure that the financial system
is resilient in the face of such volatility.
This lesson was deeply absorbed in Europe, with a new post-crisis approach to financial
regulation, that includes new frameworks to assess pan-European systemic risks and the
development of institutional frameworks for macroprudential policy in each country. The Central
Bank of Ireland actively participates in the work of the European Systemic Risk Board (ESRB)
and I am a member of the General Board of the ESRB.
In addition, we are now the designated macroprudential authority for Ireland. This new mandate
includes the setting of systemic capital buffers for banks, including bank-specific buffers that are
proportional to the systemic importance of each institution and a common counter-cyclical
capital buffer (CCyB) which can be adjusted at different stages of the credit cycle. In addition, the
Bank sets borrower-based measures (BBMs), which places ceilings on the level of debt that can
be incurred by individual households. Our current BBMs place ceilings on the loan-to-income
(LTI) and loan-to-value (LTV) ratios in relation to mortgages, which are intended to improve the
resilience of households and banks to withstand future reversals in housing market conditions.
In relation to the prudential regulation of banks, there has been considerable progress in
developing a banking union in Europe. In particular, the Single Supervisory Mechanism (SSM) of
the ECB is now responsible for supervision in the euro area and is the direct supervisor for the
largest banks, including the main Irish-resident banks. In practice, the SSM operates through joint
supervisory teams (JSTs), which are led by ECB staff but also include staff from the national
supervisor - in Ireland, we are the national competent authority for supervision of not only banks
but also insurance firms, investment firms and a broad range of other financial intermediaries.
The supervision of non-bank financial firms remains a national responsibility but there is
significant coordination through the work of the various European supervisory authorities (ESAs):
the European Banking Authority (EBA); the European Insurance and Occupational Pensions
Authority (EIOPA); and the European Securities and Markets Authority (ESMA). The staff and
leadership of the Central Bank of Ireland contribute to the policy discussions of the ESAs,
through committee work and membership of their governing boards.
A second element of banking union is a common EU-wide approach to the recovery and
resolution of banks, which is laid down in the Banking Recovery and Resolution Directive
(BRRD). Each country now has a national resolution authority, with a lead role played by the
panEuropean Single Resolution Board (SRB). In Ireland, we also have taken on the mandate to act
as the national resolution authority which involves the development and, if required, the execution
of recovery and resolution plans for banks and investment firms.
A third element of banking union is the establishment of a common deposit insurance system.
This is a multi-stage process which remains under discussion. For now, the common EU rule is
that deposits are guaranteed up to a limit of €100,000 but the funding and management of
deposit guarantee schemes are a national responsibility: we operate the Irish deposit guarantee
scheme.
Finally, the regulation of the conduct of financial firms and the operation of financial markets is a
vital part of the overall regulatory architecture in order to protect consumers and investors. Within
the general European-level regulatory policy framework, conduct regulation is primarily carried
out at the national level and our mission statement of "maintaining stability, protecting
consumers" conveys the priority attached to consumer protection in the regulatory work of the
Central Bank of Ireland.
I hope that this brief overview gives you a basic understanding of the post-crisis European
monetary-financial landscape and the important role played by the Central Bank of Ireland, both
at the national level and through our contributions at the European level.