estimate of us $ 1. 2 trillion to reach a maximum of $ 4. 1 trillion before falling back to the latest estimate of $ 2. 3 trillion ( chart 5 ). clearly these estimates are not easy to pin down. this is not an exact science. chart 5 although it is not an exact science, estimating expected losses is an important ingredient in determining what additional capital banks require to be able to withstand any future unexpected losses. in times of crisis, incurred losses as reported in accounts tend to lag expected losses. indeed, this is a matter on which the accounting profession really needs to reflect. some of my colleagues feel that i should challenge the accounting profession for not having looked sufficiently far beyond the balance sheet date in providing their audit opinion ; arguably, in a rapidly deteriorating environment accountants should at least have been more concerned with post - balance sheet events concerns, and more fundamentally could have done better in seeing the need for expected loss forecasts and the amplitude of the potential property price movements in assessing the going concern assumption. whatever about that, if a bank is to retain the confidence of the market it needs to have enough accounting capital to absorb the additional expected losses and still remain well capitalized. this was the main goal of the exercise which the central bank embarked upon about a year ago and which has come to be known as the prudential capital adequacy review ( pcar ). much of the losses fall out of the nama haircuts ; the associated loan purchases by nama crystallize those losses and trigger a formal recapitalization requirement for the participating banks. accordingly, estimates of non - nama loan losses for the two listed banks in nama were prepared by the central bank following extensive discussions with the banks and the resulting required capital amounts to be sought by the banks from the market were announced to coincide with the first nama haircut announcement. at that stage nama valuations were available only for the largest 10 exposures. the average haircut on this first tranche at 50 % was much higher than had been expected earlier ( a 30 % indicative haircut had been mentioned in mid - september 2009 ), and these haircuts were read across to the rest of the nama portfolio in order to arrive at the minimum required capital. nevertheless – as was always possible – the second tranche haircuts, not fully announced until midaugust 2010, were even higher. at this point, it became clear that a long -

be on the medium - to long - term where increasing indebtedness increases the vulnerability of borrowers to income and employment shocks in future years. in discussing vulnerability, it is important to bear in mind the current low level of interest rates. there is a danger that this may be causing some participants in the housing market to associate the adoption of the euro with permanently low interest rates. since most new mortgages have periods in excess of twenty years, borrowers must take a long - term view of interest rates. variable mortgage interest rates ( which represent the bulk of outstanding mortgages ) reflect where the euro area economy is in the short - term, but are unlikely to reflect where the economy will be in the medium to long term. we are continuing to work closely with our colleagues in the regulatory authority, both in developing our joint work on stress testing, and in following - up on the results of the mortgage lending study undertaken last year. specifically, the authority requested a tightening up in relation to client income verification and the funding of mortgage loan balances in order to ensure that loans are properly secured and will be repaid in full. they are monitoring lending practices on an ongoing basis. in addition, the authority is, as part of a review of conduct of business rules, consulting with both industry and consumers on the benefit of a measure requiring each lending institution to obtain from the borrower, in writing, agreement of its assessment of the borrowers ’ ability to repay. stress - testing credit institutions a stress test of the banking system was completed during the last 12 months. this involved the banks simulating the impact on their financial positions of being hit by a severe recession. the outcome of the exercise was positive. the financial position of the banking system, and each of the twelve credit institution included in the test, proved very resilient to the simulated recession. however, these results have to be qualified because the stress - testing techniques used are still being developed and may be subject to a number of shortcomings. international dimension in any analysis of irish financial stability, an assessment of international developments is a critical factor. the extreme openness of the irish economy makes it exceptionally vulnerable to shocks emanating from abroad. systemically threatening shocks are more likely to originate abroad than within the irish economy. the interaction of such shocks with any vulnerabilities that might be present in the domestic financial system could result in systemic weakness. unemployment as well as interest rates, both crucial factors in an analysis of the