patrick honohan : international credit and financial market integration – after the storm? opening remarks by mr patrick honohan, governor of the central bank & financial services authority of ireland, at the 8th infiniti conference on international finance, trinity college, dublin, 14 june 2010. * * * it is a pleasure to open the 2010 infiniti conference, an acronym i understand to mean “ international financial integration studies at trinity ”. research on international financial policy issues has never been more important in ireland and abroad than it is now. the great financial crisis has thrown up many key questions for research. our own experience in ireland has many international financial ramifications. for, even if i have been emphasising recently how much of ireland ’ s banking difficulties were home grown, they have certainly occurred in an international context. ireland is one of the most globalised economies in the world – one indication : the ratio of exports to gdp approaching one ( which, by the way, you will realise is not a theoretical upper bound ). and its property price and construction bubble was financed to an important extent from abroad. over a four year period 2003 – 2008 net indebtedness of the banks to the rest of the world jumped from 10 per cent of gdp to over 60 per cent. interestingly, this foreign borrowing was not only used to finance the domestic property bubble but also to finance property development abroad – mirroring a common phenomenon of high income countries incurring foreign debt to acquire foreign equity – in this case equity in the property market some of which did not perform too well. and there was another international development that was important in igniting the property boom. in line with shiller ’ s theory of how bubbles get going, a myth that a new economic era was unfolding drove expectations. thus there was not only an unrealistic expectation that the irish economy would grow beyond the sustainable level of output – close to the production frontier and at full employment – which it had achieved in the celtic tiger period based on sustainable improvements in competitiveness and efficiency. in addition, the sharp fall in nominal and real interest rates on euro entry led many investors to exaggerate the degree to which a higher capitalization rate would apply to long - lived assets such as property. what new areas come to the fore now as topics for study? i would like to emphasise a number of issues which relate to the interaction of fiscal and banking policy. the direction of the interaction is two - way. banks

on the deficit reflecting the unsustainability and transient nature of a large part of the tax system, for me there is a lesson here from banking regulation. just as banks are required not only to make provision for expected loan losses in their accounts, but also have to hold capital reserves to meet unexpected losses, the sgp targets should make allowance for the risk that unexpected fall - offs in revenue may occur. finally, a word on the taxation of financial intermediaries, which is back on the policy agenda. i see that financial transactions taxes are being discussed again, though i suspect that the conclusion will be that they do little for improving the efficiency or safety of the financial system ( they would have done nothing to discourage derivatives related to sub - prime lending, for example ), and also would not generate as much revenue as some suppose. nevertheless, it does seem possible to use some form of pigouvian corrective taxation as a kind of graduated type of regulation, potentially better than outright banning of products, and a useful complement to the regulation - by - ratio that has become the norm over the past quarter century. with such a long list of researchable topics, i look forward to seeing a large international attendance again at infiniti, and i declare the 2010 conference open.