tested the banking sector. these exercises involve measuring the financial health of the sector in difficult economic circumstances, and the results indicate that the sector has the capacity to weather a significant slowdown. notwithstanding the robust health of the sector, the issues which i have outlined earlier pose challenges for the sector. international banks have been negatively affected by recent events, both directly through losses on their us subprime assets and through a variety of other indirect channels. however, irish banks have not had to absorb similar losses because the domestic banks have no significant direct exposures to us subprime mortgages and very limited exposures through investments and credit lines extended to other financial companies or special purpose vehicles. the banks ’ provisional year - end results confirm that losses arising from the us subprime issue are relatively small. in light of the scale of the disruption in international financial markets, it was inevitable that the domestic banking sector would find it more challenging to raise funds on a term basis. however, irish banks ’ liquidity arrangements are good and the sector is comfortably satisfying the more robust prudential liquidity requirements put in place by the financial regulator prior to recent events. in addition, irish banks are well positioned to access central bank funding, both because of the broad range of collateral acceptable in the eurosystem for obtaining these funds and the significant volume of this high - quality collateral available to them. lessons – the way forward before concluding, i should say that the financial authorities and governments in many countries are assessing how to turn the corner on the recent period both from a short - term and medium - term perspective. at an eu level, ecofin has set out a roadmap for dealing with such episodes of turbulence, while the financial stability forum, which brings together national authorities, international financial institutions, financial regulators and central bankers, has reviewed the lessons from a global perspective and presented them at the g7 last weekend. in the short term, all international commentators agree on the fundamental importance of restoring confidence in the creditworthiness and financial health of banks. the prompt disclosure by relevant banks of their exposures and associated losses would seem to be crucial in this respect. in the medium term, the financial stability forum ( fsf ) has identified a number of broad policy areas where further action is required to increase the resilience of the global financial system. these relate to enhanced transparency about banks ’ exposures to structured products and off - balance sheet vehicles, improving the valuation of assets when markets are illiquid,

the experience of their international peers in that margins on traditional business had fallen over the longer term. however, because of the high level of demand in ireland, profitability was maintained without recourse to investing in structured products or conduits as described earlier. the re - pricing of risk in international financial markets and the associated turmoil was triggered in mid - 2007 when international investors became nervous about the underlying value of their investments in assets that consisted of pools of us subprime mortgages. these assets had been created under the “ originate and distribute ” model whereby mortgages were issued to borrowers by an originator ( i. e., a bank or broker ) but were subsequently packaged together and sold on to investors. an increasing number of these mortgages have become non - performing since mid - 2005. these losses became an international problem, as many of the investors including banks that had bought these assets were located outside the us. uncertainty about the size and the identity of those investors holding the losses gave rise to increased risk aversion in the marketplace and marking down of the value of these types of assets. the uncertainty rippled through a variety of financial markets and caused disruption. arising out of concerns about banks ’ exposures to risky assets, counterparty risk heightened and problems began to spill over to the interbank market – where banks borrow from and lend to each other. as a result, there was increased uncertainty in key markets where banks traditionally raised funds. disruption to funding markets is particularly problematic for all banks since they regularly need to renew portions of their funding. the bout of turbulence in international financial markets has persisted for longer than many commentators would have predicted. since mid - 2007, there remain ongoing tensions in international financial markets amid a steady flow of negative news. through late - 2007 and into 2008, central banks – including the ecb – have continued to provide funds to promote a smoother functioning of the interbank money market. however, the cost of term borrowing for banks in this market has remained high. in addition, other longer - term bank funding markets remain relatively closed, as banks continue to be reluctant to lend to one another other than for short maturities, while many asset - backed securities, leveraged loan and structured credit markets are virtually inactive. term premia are expected to remain elevated for some time because of wider problems in the financial system such as uncertainties regarding the valuation of complex products, counterparty mistrust and continuing uncertainty about the ultimate location of mounting losses on assets