##sap bank stress test. the fsap adverse scenario was not predictive but designed to assess the capacity of irish banks to withstand a severe but plausible scenario of a simultaneous downturn in the irish and uk economies, characterised by a fall in property prices and a widening of sovereign spreads that triggers increased funding costs for banks. the exercise confirmed that the risks within the bis central bankers ’ speeches banking sector are manageable at a system - wide level. unsurprisingly, it also highlighted that some vulnerabilities still exist as a consequence of the recent crisis. the eba stress test serves as a useful barometer to assess the health of the european banking sector and focuses on the largest banks operating in the european union. relative to other member countries, the irish banking system has experienced higher loan loss rates since 2008. since projected credit losses in the adverse scenario are calculated based on past experience, the capital depletion in the adverse scenario is inevitably more pronounced for irish institutions. stronger starting capital positions coupled with ongoing balance sheet repair has enabled european banks, including the irish banks, to withstand a more severe scenario than in the 2014 stress test exercise. as with the fsap stress test results, the primary message from the exercise is that the irish banks included in the eba sample ( aib and bank of ireland ) are adequately capitalised but remain vulnerable to a downturn, especially in relation to the continued workout of problem loans and the sustainability under stress of current profitability levels. the fsap, eba and ssm stress test results, together with additional supervisory stress testing work, are being combined with the full risk assessment for all in - scope banks to feed into the annual supervisory review and evaluation process ( srep ), which is used to determine capital requirements and capital guidance for banks. in addition, the stress tests and srep inform the risk mitigation programmes, which are focused on driving the banks to continue to reduce their risk profiles. as the ecb is now the competent authority for the supervision of irish banks, the focus of our joint work includes ensuring that banks make further progress in the workout of problem loans, have credible business strategies and risk management plans to increase resilience to deterioration in their operating environment, including any adverse consequences of brexit. brexit the short - and medium - term macroeconomic effects on ireland of brexit depend on several factors. most directly, a slowdown in uk output growth and a depreciation

the financial crisis have been remedied. important changes include mandatory clearing of standardized over - the - counter derivatives through central counterparties, or ccps ; more intensive supervision of systemically important ccps ; and reforms of the tri - party repo system and the money market mutual fund industry. but, even as we reduce or eliminate old vulnerabilities, we must not rest on our laurels, for new vulnerabilities will inevitably take their place. these accomplishments notwithstanding, i have no doubt that the current regulatory framework could be improved. indeed, the official sector should assess the efficiency and effectiveness of regulations on an ongoing basis. i agree with vice chairman quarles ’ observation that there is more we can do to make the regulatory regime more efficient, transparent, and simple — including relief for small banks, greater tailoring based on a firm ’ s level of systemic importance, and simplifying the volcker rule. 5 some of these changes have already been adopted or are in process. greater focus on incentives is needed but, i also think we must take a broader view of what characterizes a resilient and robust financial system. to that end, we need to carefully monitor the incentives that influence the behavior of financial firms and their employees. indeed, the record from the crisis and more recent years shows just how powerful incentives can be in driving firms and individuals to do things that are imprudent and / or unethical. bad incentives can lead to conduct that not only generates large risk exposures and market excess, but also erodes trust and confidence in the financial system. for example, the pre - crisis housing boom would not have gone so far, for so long, without the widespread breakdown in mortgage underwriting practices that was driven by poor incentives. 6 some examples of bad incentives that contributed to the financial boom and bust included : compensation practices at financial firms that rewarded volume and short - term performance over longer - term, sustainable returns ; the willingness of the credit rating agencies to designate tranches of subprime mortgages triple - a in exchange for fees paid by a small number of issuers of mortgage - backed 2 / 8 bis central bankers'speeches securities ; the willingness of fannie mae and freddie mac to use their implicit government support to take on large amounts of mortgage risk with very little capital backing ; the willingness of aig to use its triple - a rating to provide credit protection to banks and securities firms against complex mortgage obligations with little direct capital support