economic reports published by the central bank, such as our quarterly bulletins. we are not forecasting that all or any of these shocks will occur, and we are not limiting our analysis to those shocks that are most likely to occur, but we are looking at a broad range of possible shocks and forming a view on the robustness of the system to withstand these shocks. key issues highlighted in the report in this short address i will confine my remarks mostly to four areas, namely property prices, credit growth, stress - testing and the dimension of global risks. frank browne will provide further comments in his presentation that will follow. property prices from our examination of financial stability issues, the risk of an unanticipated and sudden fall in residential property prices, accompanied by an increase in the default rate among mortgage holders, is the risk that poses the greatest threat to the health of the banking system. however, the shock absorption capacity of the banking system is currently adequate. regarding the question of whether or not house prices are overvalued, the analyses in the report give quite mixed results. some measures suggest that there is a significant overvaluation while others do not provide evidence of overvaluation. however, what is more certain is that if house prices were to continue to increase in double digit figures, the risk of a sharp correction would be more pronounced. in this context, the present tentative indications of a gradual slowdown in house price inflation are to be welcomed. this development is consistent with the large increase in supply and the decline in rental income that has been evident for some time. of course, it should be noted that, even if there is no significant overvaluation in house prices, any sizeable deterioration in the fundamental determinants of the market could still mean that house prices could fall significantly and this also would have adverse implications for financial stability. credit growth to the household sector as i said to you in july, credit growth continues to be a concern - especially credit for property - related purposes. the continuation of current rates of credit growth to the household sector, well in excess of the corresponding rates in other countries, will inevitably lead to a more highly indebted household sector in this country. this underlines the need for both lenders and borrowers to stress - test every borrower ’ s ability to repay these debts, not just in the economically favourable circumstances that exist today, but also in more challenging circumstances. in the context of credit growth, our focus has to

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