ed sibley : non - performing loans – the irish perspective on a european problem speech by mr ed sibley, deputy governor of the central bank of ireland, at the second annual conference of the esrb, frankfurt am main, 22 september 2017. * * * introduction good morning. it is a pleasure to be invited to speak at the second annual esrb conference. 1 as the chair and previous panellists have noted, non - performing loans ( npls ) have many dimensions. they affect the credit supply channel, impact on banks ’ financing costs, bring uncertainty to banks ’ capital position, and block - up capital that could otherwise be used for more economically and socially useful activities. they also cause considerable distress for borrowers. in short, they can cause serious dysfunction for the banking system and hence its ability to serve the economy and its customers. for me, as a member of the single supervisory mechanism ( ssm ) supervisory board, npls clearly remain one of the central challenges facing the european banking sector today. npls go to the heart of banking – both its simplicity and its complexity. because credit, like banking more generally, ultimately requires trust. high levels of npls can erode that trust and confidence in the banking system. in my remarks today, i would first like to reflect on this issue of trust. i will then elaborate on the irish experience, pointing to some of the measures and solutions we took regarding npls. finally, i would like to draw on some of the key lessons from the irish experience, which are relevant to the broader trajectory for europe going forward. trust and npls both maturity transformation and credit intermediation ultimately rely on trust. at its simplest, depositors need to trust that when they put their money into a bank they have certainty of being able to withdraw that money in the future. similarly, banks need to trust that when they gather these deposits, and lend at longer maturities, they will either be repaid, or in extremis be able to enforce collateral. this requires trust in the legal, judicial or extra - judicial processes. however, we have all seen how trust can evaporate very quickly in times of crises. and, as francis fukuyama notes, “ widespread distrust in a society ….. imposes a kind of tax on all forms of economic activity ”. 2 while trust and confidence may be considered intangibles, the quantitative impacts are demonstrated through hard numbers. for example, investor mistrust

will be reflected in lower price to book ratios ; banks ’ mistrust will be reflected in elevated interest rates to compensate for higher risk ; potential new entrants and consolidators mistrust will be reflected in the reduced likelihood of entering markets with higher npls, and so on. authorities, including supervisors, therefore have a critical role in ensuring trust within the system. the ssm is close to three years in operation. it is still a relatively new institution. much has been 1 / 7 bis central bankers'speeches done to establish its reputation as an effective, intrusive, and independent supervisor. this trust is hard - earned and easily lost. by taking the necessary decisions, by doing the right things we will continue to earn the trust of the european public and market participants. and this includes taking firm action in relation to npls. but it is not easy. we must consider financial stability issues, and perhaps less obviously for some prudential supervisors – but crucially nonetheless – consumer protection matters. prudential supervision and consumer protection are inherently interlinked and mutually selfreinforcing. poor outcomes for consumers are poor outcomes for the banking system. although the ecb does not have an explicit mandate for consumer protection, many national competent authorities – such as the central bank of ireland – do. even were that not the case, it is important that intrusive prudential supervision should not come at the cost of the consumer. and this is particularly relevant for action on npls, which by its very nature relate to dealing with distressed borrowers – that may, for example, be at risk of losing their family home, or small enterprises that are providing local employment. indeed, ensuring that borrowers are protected remains at the heart of the central bank of ireland ’ s approach to npls. this is a fundamental aim in its own right, but it is also important in rebuilding trust in the irish financial system more broadly following the crisis. 3 i am cognisant that there is much more to be done in this regard, and the remaining high level of npls is a significant drag on rebuilding this trust across the system. the irish experience with npls this brings me to our own experience in ireland. the irish banking sector has been transformed since the start of the crisis. intensive supervisory focus and pressure coupled with improved economic circumstances continue to drive reductions in npls. nevertheless, npls levels remain elevated and their sustainable resolution remains a key supervisory priority. this