Philip R Lane: Selective overview of the Central Bank of Ireland's current
work programme
Introductory statement by Mr Philip R Lane, Governor of the Central Bank of Ireland, at the
Oireachtas (National Parliament) Committee on Finance, Public Expenditure & Reform, Dublin,
26 January 2016.
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Thank you for inviting me to the Committee to present a selective overview of the Central Bank
of Ireland's current work programme. I will especially focus on our domestic activities; as part
of the eurosystem and the EU system of financial regulation, the Central Bank is also heavily
engaged in a wide range of European policy committees.
In recent years, there have been considerable changes to the mandate and structure of the
Central Bank, in response to the many lessons from the domestic and international financial
crises. With the passing of the most intensive phase of crisis management, it is important to
establish new priorities for the Central Bank. Our recently-published Strategic Plan 2016-2018
provides a detailed guide to our plans for the next three years. Our mission statement
"safeguarding stability, protecting consumers" encapsulates the dual priorities for the Central
Bank in the period ahead: the preservation of financial stability, while also working to ensure
that the financial sector operates in the best interests of its customers.
Much of the Central Bank's policy work takes the form of contributions to a wide range of EU
regulatory committees and the eurosystem's committees that support the formulation and
execution of the European Central Bank's monetary policy. In common with similar initiatives
by the other major central banks, the ECB has recently adopted a number of unconventional
measures in pursuit of its inflation target. These measures include the expanded asset
purchase programme (EAPP) that will run until at least March 2017. In implementing the EAPP,
the Central Bank of Ireland has been actively engaged in asset purchases. To illustrate the
scale of the eurosystem's intervention in asset markets, total cumulative purchases of euro
area public debt securities amounted to close to €500 billion by the end of 2015. This aggregate
includes purchases of €7.6 billion of Irish sovereign debt.
The ECB's accommodative monetary policy has contributed to Ireland's excellent recent
economic performance. For instance, the low interest rate environment has been a boon to
many indebted households, while the government has been able to issue debt at low yields.
More generally, as indicated in the introductory statement to the press conference after last
week's monetary policy meeting, the assessment of the Governing Council is that the monetary
policy measures that have been adopted since mid-2014 are working; noting the increase in
downside risks in recent weeks, the Governing Council will review and possibly reconsider the
monetary policy stance in early March.
In relation to the longer-term agenda for the euro area, the financial crisis also made clear that
the original institutional design of the euro area suffered from a lack of risk-sharing and crisis
management mechanisms. While there has been significant progress in reforming the
institutional setup of the euro area, the recent Five Presidents' Report highlighted that further
reforms could help in improving the resilience of the monetary union. This reform agenda
should be a high priority for European policymakers.
Our latest Quarterly Bulletin was published this morning. It projects that that the economy will
continue to grow strongly this year, with GDP growth expected to moderate only slightly to 4.8
per cent. This reflects the confluence of several positive factors, including the employment-rich
nature of the recovery, a less constrained policy environment, the boost to purchasing power
from lower energy prices, the on-going easing of the balance sheet legacies of the crisis and
broadly favourable conditions in Ireland's main export markets. It is the positive alignment of
all these factors that has helped growth to strengthen and supports a continued favourable
outlook.
However, while much has improved, vulnerabilities remain. The strong growth outlook provides
an opportunity to address the legacies stemming from still-high levels of public and private
sector indebtedness. Externally, the main current global risk factor relates to economic and
financial conditions in some emerging economies. Closer to home, the Central Bank is also
keeping a watchful eye on Brexit-related risks to the economy and the financial system.
More generally, small, highly-globalised countries such as Ireland are inherently more volatile
than larger economies: we can grow strongly for extended periods but are also especially
vulnerable to negative shocks. For this reason, it is essential that the Central Bank is pro-active
in the deployment of macroprudential policies that can improve resilience and mitigate the
procyclical dynamics associated with excessive leverage.
The new rules that impose loan-to-value and loan-to-income limits on most mortgages were
introduced to protect borrowers and contribute to a safer financial system, which in turn also
contributes to a more stable economy over the longer term. As I have already stated, The
Central Bank is firmly committed to deploying such tools on an ongoing basis, with periodic
reviews to ensure that the measures are appropriately calibrated. I expect the first review of
the mortgage rules to be published by November this year. This review will be based on an
analysis of the evidence provided by data on the first year of the operation of the rules, while
taking into account other factors that may have influenced the mortgage market during this
period. The rules-based framework is intended to promote the resilience of both banks and
households and, as such, should be viewed as a permanent feature of the system. The Central
Bank is open to tightening or loosening the calibration of these rules in response to the
evidence; still, the value of stability in a rules-based framework means that the evidence
threshold to justify adjustments to these rules is significant. Tools such as mortgage rules and
the recently-introduced system of counter-cyclical capital buffers would have mitigated the
costs of the boom-bust credit cycle in Ireland in the mid-2000s. The Irish economy remains
vulnerable to adverse shocks, with limits to household leverage offering protection to
households and banks.
In relation to financial regulation and supervision, the banking sector is in the middle of a
multiyear transition to higher capital requirements, reduced leverage and increased balance sheet
liquidity. The Single Supervisory Mechanism (SSM) has been in place in the euro area for just
over a year: the SSM represents the first pillar of Banking Union by implementing a common
area-wide approach to banking supervision, with centralised responsibility for the supervision
of the circa 130 largest banking groups (including the main Irish retail banks). The second pillar
consists of the Single Resolution Mechanism (SRM), which came into effect on January 1st.
By ensuring that financial institutions can be resolved in an orderly manner, the SRM should
significantly reduce the adverse impact of an institution's failure on the wider financial system
and the taxpayer. The third pillar is the European Deposit Insurance Scheme (EDIS): this is
still under negotiation at a European level.
In relation to mortgage arrears, the number of accounts in arrears over 90 days was just below
66 thousand at the end of September 2015. There is some progress to report however. Overall
arrears levels started to decrease over two years ago and the number of households in
longterm arrears (over 720 days) started to decrease in the third quarter of 2015. While the
economic recovery has gained pace, the number of legal proceedings against mortgage
holders have also been increasing. The Central Bank's continued role in this area is to ensure
that the banks adhere to the Code of Conduct of Mortgage Arrears, meet the criteria for
sustainable solutions and continue to engage with their customers to find non- repossession
solutions whenever possible. The Consumer Protection (Regulation of Credit Servicing Firms)
Act 2015 seeks to ensure that borrowers whose loans are sold to unregulated transferees
maintain the regulatory protections they had prior to the sale.
It is imperative that lenders continue to work with over-indebted consumers to try to resolve
any arrears situation and to achieve sustainable solutions with co-operating borrowers. Clearly
for many, there is no quick remedy or solution to long term arrears and careful, empathetic but
realistic approaches need to be taken. I welcome the new coordinated programme of
assistance for those in long-term arrears, with MABS acting as a "one stop shop" for borrowers
in need of advice and support.
For credit unions, the Central Bank's new regulations came into effect on 1 January this year.
These will enhance soundness and provide for enhanced confidence in the sector, supporting
its role in providing important financial services to the community. We will continue to work with
credit unions to support appropriate restructuring measures, the embedding of the
strengthened regulatory framework, and to facilitate prudent and appropriate development.
This is also a landmark year for the insurance sector, with the Solvency II framework going
live. The "whole balance sheet" approach to capital calculation combined with the strong
emphasis on a firm's risk management and supervisory review will result in a
muchtransformed regulatory and supervisory framework. This year, Central Bank supervisors and
the supervised firms will be putting this framework into operation for the first time.
In December, we released new regulations on SME lending. The regulations aim to strengthen
protections for SMEs, while also facilitating access to credit. The regulations provide for greater
transparency around the application process and the reasons for refusing credit applications,
greater protections for guarantors and an expansion of the grounds for an internal appeal.
There is growing international recognition that financial regulators should be more pro-active
in protecting consumers, in view of the complexity, risks and costs of financial products. It is
not our role to run the firms we regulate nor is it to determine their business models or
strategies (including in relation to the setting of prices and rates charged). Rather, our work on
consumer protection is primarily focused on increasing transparency to enable people make
informed decisions with full clarity about the risks, costs and long-term impact of financial
products. This year, we will further enhance our engagement with boards of the larger retail
firms to push for a more consumer-focused culture within firms, and will carry out on-site
consumer risk assessments across a number of retail firms.
Firms must be able to demonstrate that their products are fit for purpose - this means that
firms must ensure that products are fully understood by customers and are suitable for their
individual needs. We therefore expect firms to conduct consumer-testing on their products
(including their product literature) and to simplify them where necessary; to use plain language;
and to go beyond disclosure and caveat emptor to ensuring consumers' general understanding
of products before launch and individual consumer's understanding of the product during the
sales process. They must also continuously satisfy themselves that products remain suitable
for the target market and provide the best solution for existing as well as new customers.
We also plan to continue our product-focused supervisory work, including the tracker mortgage
examination, and reviews of structured products and health insurance. We will also increase
our firm-specific engagement with low-impact firms, including intermediaries and debt
management firms. Further work will be done to strengthen consumer protection code
requirements, including for variable rate mortgage holders, as well as carrying out an
examination of the impact on consumer outcomes of commission payments to insurance
intermediaries.
You will have seen a good deal of enforcement activity reported in the press in recent months.
This reflects our approach whereby high-quality supervision must be underpinned by a
rigorous approach to enforcement.
Our role in the collection of financial data will also be further expanded through the
establishment of the Central Credit Register (CCR). The credit reporting obligations will apply
to over 500 lenders, including banks, credit unions, asset finance houses, local authorities and
money lenders and will be fully operational from 2017.
The expansion in the scope of monetary policy, the adoption of a more intrusive approach to
financial regulation, the introduction of new EU regulatory mandates, the ongoing growth of
the investment funds sector in Ireland and the professionalisation of corporate services in the
Central Bank have resulted in a significant expansion in staff numbers. As our mandate
expands, we expect continued growth in our staff numbers; we anticipate recruitment of an
additional 150 staff this year, bringing our staff numbers to about 1650.
As we expand, we will begin the move to our new headquarters on North Wall Quay at the end
of 2016. The layout of the new building has been designed to promote a collaborative working
environment, which will facilitate the teamwork that is so critical to the delivery of the Bank's
multi-faceted mandate. In parallel, we expect to complete the design of new organisational and
reward models in the next few months.
A greater level of openness about how the Bank conducts its activities can help improve the
level of public trust in our organisation: we believe that people will be more confident that we
act independently and in the public interest if they have greater insights and understanding
about what is going on inside the Bank. To this end, we have recently announced plans to
publish the minutes of the meetings of the Central Bank Commission. While information on the
supervision of regulated firms and market-sensitive financial operations activities cannot be
disclosed, the publication of these minutes should contribute to greater understanding of our
corporate governance, internal debates and the initiatives we take to deliver on our mission.
Second, we have also released data on our salary structures and pay scales, which will be
updated on an annual basis. Furthermore, by providing greater details on our human resources
policies, we aim to enhance understanding about the Central Bank as a public organisation
and prospective employer.
In summary, during my tenure as Governor, my aim is to build on the progress that has been
achieved in recent years in recasting the Central Bank as an efficient and effective central bank
and financial regulator. The staff of the Central Bank can be proud of these achievements,
which were recently recognised by our international peers through the Central Bank of the
Year award from centralbanking.com and the Central Banking journal. Peer reviews provide
another important benchmark for our performance: an independent assessment of five recent
external peer reviews of the Central Bank's regulatory functions is available on our website
and recognises the Central Bank's consistent adherence to the highest international standards
over the last several years.