patrick honohan : the role of the central bank in the area of mortgage interest rates opening statement by mr patrick honohan, governor of the central bank of ireland, to the oireachtas ( national parliament ) joint committee on finance, public expenditure and reform, dublin, 26 november 2014. * * * accompanying slides can be found on the central bank of ireland ’ s website. there have been quite a few significant developments since i spoke last at this committee – too many to fully summarise in a short introductory statement. so i will be selective. the reduction of two further steps in the ecb ’ s main policy interest rate has had a complicated influence on financing conditions in ireland. on balance the positives for ireland clearly outweigh the negatives, not least to the extent that the ecb ’ s expansionary policy will help boost economic demand in the euro area as a whole in the course of bringing inflation back to its target. irish borrowers on tracker mortgages have seen this further interest rate reduction fully passed on to them, continuing and reinforcing an exceptionally lengthy period of ultra - low interest rates that has helped those borrowers. because of the impact on trackers, though, the lower ecb interest rates have not directly improved the banks ’ profitability, because the average and marginal cost of bank funds does not fall as much. the banks ’ drive to restore their profitability, combined with the lack of sufficient new competition, has meant that, far from lowering their standard variable rates over the past three years as ecb rates have fallen, they have ( as is well known ) actually increased the standard variable rates somewhat. the trends are shown in the attached figure which is based on a simple bank - by - bank average of the advertised standard variable rates for an 80 per cent loan - to - value mortgage. ( since this trend is not evident from the traditional interest rate series published by the central bank in line with international standards, we have been working on the assembly on a rigorous basis of additional statistical series on mortgage interest rates, and expect to publish these as from data for january 2015. ) these rates indicate that standard variable rate borrowers are still paying less than they were before the crisis, but not by much. a widening of mortgage interest rate spreads over policy rates also occurred in the uk and in many euro area countries after the crisis, but spreads have begun to narrow in the uk and elsewhere. until very recently bank competition has been too weak

estate asset prices, as these are among the most important drivers of the financial cycle. the announced revision of the crdiv / crr should provide an opportunity for the extension of the available instruments, as ltvs and dstis are not included in the current eu regulation. clearly, measures addressing the credit supply side by banks – such as increased capital requirements, counter - cyclical capital buffers or dynamic provisioning – can be easy to activate but have proven to be of modest effectiveness. furthermore, as non - banks play an increasingly important role in the provision of credit, measures targeting only the banks could just result in shadow - banks taking a considerable size of the mortgage business and fuelling a boom in house - prices. fourth, stress tests of the banking and financial system must have a macroprudential dimension. such comprehensive assessments need to be embedded in a macro - financial environment. they entail an assessment of the position of a specific economy in the financial cycle since, for example, the adequate level of capital requirements cannot be dissociated from a country ’ s position on the cycle. fifth, macroprudential policy is complementary to monetary policy and should share the same status as a policy area. central banks must have responsibilities in both policy areas even if they are not involved in microprudential supervision. several reasons justify this set - up. both areas need to work in close co - operation ; central banks are more sensitive to macro - financial stabilisation goals ; they possess more information about financial markets and the economy. finally, the alternative model of joining macroprudential policy with microprudential supervision faces the problem that their supervisory objectives are focused on avoiding individual banks ’ distress, for which they are accountable. in this perspective the uk institutional framework is, in my view, the most adequate. in the european monetary union, while monetary policy is designed for the euro area as a whole, macroprudential policy should be country - specific, even if co - ordinated, since financial cycles are not fully synchronised across countries. bis central bankers ’ speeches sixth, macroprudential policy should go beyond the banking sector and encompass market - based finance institutions and products. as this sector continues to expand and increase its role in lending to the real economy, as its interlinkages with the wider financial sector deepen, and as the footprint of large institutions grows, non - banks are clearly gaining in systemic importance. moreover, the more policy