have a more significant economic impact in the longer run. issues for the domestic financial system last year ’ s financial stability report identified three major domestic vulnerabilities : the upward momentum in house prices, strong credit growth and rising indebtedness, and the adverse impact of increasing repayment burdens on the health of the household sector. since then, there have been a number of welcome improvements around these issues. firstly, the upward momentum in residential property prices has eased, reducing the vulnerability posed by the previous substantial increase in house prices. while house prices increased nationally by almost 12 per cent on average in 2006, they slowed significantly in the second half of the year. the slowdown continued this year and prices are now about 3½ per cent lower on a year - to - date basis. these developments should be assessed against the gains in house prices in recent years, where prices have risen by over 50 per cent between 2002 and 2006. house prices are now on average at mid - 2006 levels. concerns at that time that house prices would move further out of line with fundamentals, and that housing affordability would worsen, have lessened since last year ’ s report. regarding future house price developments, factors such as investors ’ participation in the property market, the sustainability of current rates of immigration, the cost of borrowing and the performance of the labour market are all important. the underlying fundamentals of the residential market continue to be reasonably strong. second, a welcome easing has taken place during 2007 in the rate of increase in privatesector borrowing, and the rate of accumulation of private - sector indebtedness has eased accordingly. ireland ’ s level of private - sector indebtedness, however, continues to be high by international standards. although a high level of indebtedness increases the vulnerability of the private sector to income and interest - rate developments, there are also important mitigating factors such as the sector ’ s high net worth and the positive outlook for the economy. when assessed alongside the slowdown in borrowing, these factors reduce this vulnerability somewhat. also, mortgage repayment burdens have generally increased in recent years – driven initially by the high rate of houses price inflation and, since late - 2005, driven by interest - rate increases. robust income growth as well as changes introduced in the last budget and the moderation in house price developments have worked to reduce repayment burdens since our last report. as well as these developments in the vulnerabilities highlighted in

. after what has happened, we have not merely needed to ensure sufficient resources, but to put it beyond doubt that we have done so. no danger now, i think, that ireland ’ s regulatory authority would be seen as insufficiently resourced, and this is essential to bolster confidence in the financial system generally – not just the banks. i am conscious that this has been and continues to be a costly exercise. the government has not yet decided to pass through the full cost of the regulatory apparatus to the regulated firms – the percentage passed - through is still only 50 per cent – nevertheless, the market certainly complains about growing out - of - pocket regulatory costs. let me speak a little more on the second aspect – regulatory approach or regulatory philosophy. where does that now stand? what is the current regulatory philosophy? there are a number of dimensions : obtrusive and intrusive as opposed to light - touch. the previous tendency – not confined to ireland – to regard business leaders in financial services with awe and deference has had to be abandoned. of course there is no call for being disrespectful. but supervisors need to be prepared to be assertive with firms if, after a period of dialogue, they remain unconvinced that a risk has been properly mitigated. regulators may not be able to see everything, but the crisis has put beyond doubt the idea that bank ceos can either. it follows from this that a culture of challenge has to be inculcated within organisations too, both the regulator and the regulated. this dimension also relates to a more challenging fitness and probity regime – recently extended to cover not only new entrants, but existing directors, senior management and relevant staff. when the whole system has failed, it should not be a surprise to find that, one way or another, very few of those who were the very top decision makers in irish banks before the crisis are still acting as bank directors today. includes examination of the downside risk of portfolios and positions, not just governance arrangements and broad business plans. to be sure, supervisors cannot constantly monitor rapidly changing market portfolios, nor can they hope to track every transaction and exposure even in slower moving parts of the business. indeed, it needs to be recalled that the increased emphasis that has rightly been bis central bankers ’ speeches placed worldwide ( since the 1980s ) on governance and systems was originally a rational response to the declining ability of direct supervision of each institution