Patrick Honohan: Central Bank of Ireland's Strategic Plan -
re-engineering how we do business
Opening statement by Mr Patrick Honohan, Governor of the Central Bank of Ireland, to the
Oireachtas (National Parliament) Joint Committee on Finance, Public Expenditure and
Reform, Dublin, 16 January 2013.
* * *
Thank you for inviting me to appear before the Committee today. Your letter of invitation
proposed a wide range for our discussion today, and I will not attempt to be comprehensive
in my brief opening statement.
Perhaps the best way of ordering my introductory comments is by reference to the Central
Bank's three year Strategic Plan which we published in November. Consistent with our
governing legislation, the Central Bank Commission has set as the key elements:
• Restore financial stability and support economic recovery in Ireland through the
successful exit from the EU-IMF Programme of Financial Support and restoring a
fully functioning banking system;
•
Reform the regulatory and supervisory framework to ensure risks to stability and
consumer protection are identified and effectively mitigated;
•
Protect consumers by challenging firms, improving firms' compliance and promoting
a better culture to help consumers have more confidence in financial services; and
•
Influence international policy making in monetary policy, financial stability and
regulatory standard setting.
Underpinning these activities will be a focus on improved efficiencies and cost effectiveness,
alongside the continuing development of our staff.
Delivering on this extensive mandate has, to say the least, been quite a challenge over the
past few years involving a lot of judgment calls, a huge increase in the volume of activity and
employment in the Central Bank and a re-engineering of how we do business. While the
condition of the economy and the banking system still leaves much to be desired, I believe
that things are moving in the right direction.
As far as the economy overall is concerned it is fair to say that, since the level of economic
activity collapsed in 2008-9, the elevated level of personal savings, the need to repair the
public finances and for balance sheet repair more generally has meant that domestic
demand has continued to shrink year-on-year. Overall employment and incomes would have
fallen even further were it not for the offsetting performance of exporting firms despite the
much weaker international environment even than was expected two years ago. A reversal of
some of the loss of competitiveness that was incurred in earlier years has contributed here,
though more is needed if the return to growth in private sector employment is to be
accelerated to the point where overall employment is growing again on a sustainable basis -
which our forecasters believe could happen during the course of this year. Against this
background, the Government's determination and achievement in making the agreed,
necessary overall reduction since 2008 in the gap between taxation and spending (painful
though it is for many) has been a vital element in restoring the confidence of official and
private international lenders which is a prerequisite for sustained recovery in employment
and economic prosperity. The Government has recovered access to the bond markets and,
while the cost of borrowing has come down a lot in the past half-year, I am sure that spreads
would have fallen even lower were it not for the wider uncertainties in sovereign debt
markets.
The reconstruction of a healthy banking system has been hampered by the scale of bank
losses, and the fact that such a large fraction of their borrowers, both households and firms,
are under stress. During 2009-2011, the capacity of the public authorities was stretched to
the limit in sourcing the liquidity and the capital needed for the basic functioning of the
system. While the rest of the public finances also needed urgent adjustment, it was this
additional pressure that tipped the country into the need for official assistance in the EU-IMF
Programme.
Apart from rebuilding their financial buffers, the banks have had to completely overhaul their
loan recovery operations, and to develop effective methods of loan underwriting in a new
environment. It is no secret that the Central Bank has been concerned at the pace of both
dimensions. Going well beyond what has been customary, the Central Bank has been
closely reviewing the steps being taken by banks to engage with stressed mortgage and
other borrowers under what we are calling the Mortgage Arrears Resolution Process.
Certainly the banks have ramped-up their activity here, but progress towards ensuring that
unsustainable debts are appropriately restructured, while also ensuring (in a manner
consistent with the Code of Conduct on Mortgage Arrears) that those currently in arrears
whose circumstances should enable them to service their debts get back on schedule is
clearly far from adequate so far. There are risks on both sides here. Too lenient an approach
to loan recovery will result in an intolerably heavy bill for the Exchequer and hence the
taxpayer and the user of public services. Too much reluctance to face up to reality about
unsustainable debts will also delay the economic recovery.
The personal insolvency bill provides a welcome new route whereby distressed mortgage
borrowers (especially those with multiple indebtedness) can find solutions, but it would be
better for all if the banks could still get ahead of the curve and resolve the bulk of the cases
without them having to go through what is still, of course, an untested process. The Central
Bank will continue its intensive step-by-step engagement with the banks on this matter until
we are satisfied that they have sufficient policies and procedures in place.
European banking union and Single Supervisory Mechanism
The introduction of the European banking union and Single Supervisory Mechanism (SSM)
has been agreed since I appeared last before the Committee. The design, development and
implementation of the framework for the SSM will be a key task at euro level throughout
2013.
The move towards a systematic approach to supervision, resolution and deposit protection is
part of what is needed to place the euro area institutional structure on a more robust basis,
building market and public confidence across the union. We in Ireland recognise, perhaps
better than others, the value of filling these institutional gaps. But it must be done well. To be
successful it is important that the new mechanism has a best practice supervisory toolkit,
effective and efficient decision making procedures, a top notch risk assessment framework
and a robust, jointly shared, supervisory culture. New resolution rules - and particularly
important in Ireland's case the potential use of ESM direct recapitalisation - need to come
into full operation and be ready for use by the SSM to ensure the success of the project. To
all of this, the Central Bank will continue to contribute, not least during this Presidency.
As far as supervision is concerned, greater distance between supervisors and the banks they
regulate can help improve the capacity for challenge and ensure a broader, more detached,
perspective on issues. At the same time, local knowledge is equally important. Balancing
these two dimensions will be a key part of the new regime.
While many details remain to be determined it is clear that much of the supervisory work will
still be delegated in practice to national supervisors, so that the work we have been doing to
strengthen our national supervisory system will remain equally relevant in the period ahead.
In addition of course, it should not be forgotten that the current proposals only refer to banks,
and by far the largest part of our national supervisory and regulatory regime relates to other
type of financial firm.
Promissory Notes
My last attendance at this Committee was in March 2012 and was focused on the issue of
that month's instalment payment on IBRC's Promissory Notes. As you will recall, an interim
solution was applied to that instalment, which was effectively settled with a long-term
Government bond rather than cash. While this was not altogether an ideal solution from
anyone's point of view, seeking a non-cash solution for that instalment was a sound tactic for
the Government, embarking as it was on the larger question of rearranging the duration and
terms of the overall central bank indebtedness arising out of the failure of Anglo Irish Bank
and INBS and the payment of their creditors.
Since then, there has been a very intensive process of discussion and negotiation on this
matter, which is one of the two main thrusts of the Government's policy to have a euro area
review of the indebtedness arising out of the banking crisis. There is considerable goodwill
from all interlocutors in this process. Nevertheless, it has not been easy to find a generally
acceptable solution. Taking into account both the statutory position and wider policy stance
of the ECB, an initiative of this type will be novel and as such challenging. Using our
knowledge of central banking law and practice, we have been working carefully to build
understanding and confidence around a set of proposed transactions designed to deliver for
Ireland, while not taking other decision makers too far out of their comfort zone. The ECB is
an organisation that seeks to proceed as far as possible by consensus, and it is not
surprising that this work has been taking quite a while. In fact, what we have designed is, I
believe, largely in the interests of the eurosystem as a whole.
I have nothing to add today to what has already been said by the Minister for Finance about
the prospects and timing of the conclusion to these discussions.
I am happy to take any questions you might have.