risk in the banks. in normal times, a well - run bank with good loan appraisal procedures will be able to forecast its likely loan losses fairly accurately, especially if the likely macroeconomic prospects can be pinned - down. but when it becomes clear that banks have made substantial underwriting errors across a wide range of their portfolio to the extent that began to become evident in late 2008 and early 2009, the range of uncertainty balloons out. standard valuation practices that work for properly underwritten loans in normal times are ineffective in such an environment in predicting the enormous systemic losses that can occur. thus over the past couple of years, a point estimate – a single number – has been more misleading than helpful in terms of understanding the range of loss possibilities. ( that is why we at the central bank have been determining bank capital requirements on the basis of two scenarios, a base case and a stress case. but of course there are more than two possible cases. ) called in from trinity college by an oireachtas committee in june 2009, i expressed the opinion that the plausible range was as wide as €50 billion. information that could narrow this range was not readily available, but the central bank began to assemble the necessary information through the pcar process and from nama. gradually the range of uncertainty bis central bankers ’ speeches narrowed, especially with the last of the haircuts on the lumpy nama purchases. the important point is not just that the best estimate of the losses increased, but that the range of uncertainty increased at first and has narrowed, but has more narrowing to do. ( let me quickly show a sequence of slides – annex 2 – which illustrate schematically how the level of uncertainty regarding future loan losses evolved over the past few years. ) to oversimplify, ireland faces two main problems in its current financial balance sheet. first, it has too much debt, public and private. second, there is a market perception of significant tail risk to the debt, especially related to the banks. it is these two problems, which are obviously interlinked, and which have both been growing in the course of the past year, that have led to the market ’ s reluctance to provide continuing funding at reasonable rates of interest. by making an alternative line of funding available, the provision of financial support from eu partners and the imf under the programme buys time for ireland to reduce these two problems. it does not itself reduce them. in particular, the financing provided is not structured to

##vyn king ’ s characterisation of a good central banker : “ boring is best ”. bis central bankers ’ speeches but in times of crisis, central banks move into the focus of attention. over the past few years, however, expectations as to what central banks can do and should do have reached excessive levels. no wonder central bankers are today considered to be the new or the real “ masters of the universe ”. as you can probably imagine, i refuse to accept this label. the higher the expectations placed on central banks ’ abilities, the greater the risk of overburdening them. this problem is particularly relevant in the euro area, where the ecb is considered by some to be the only workable institution. however, i agree with my french colleague christian noyer who recently said : “ it ’ s not good to be seen as ‘ the only game in town ’ ( … ). we cannot substitute governments just because their response is believed to be too slow. ” 3. current monetary policy in the euro area the main firewall against overburdening is the central bank ’ s mandate : which is why central banks should stick to it. in the case of the eurosystem, the mandate enshrined in the eu treaties is to maintain price stability in the euro area. the governing council aims to maintain inflation rates “ below, but close to, 2 % over the medium term ”. at the current end, inflation rates in the euro area are significantly below 2 % ; in fact, the most recent inflation figures were negative. without doubt, this puts the governing council in quite an uncomfortable situation. it is clear that an excessively prolonged period of low inflation – or “ lowflation ”, to use the imf ’ s expression – is not harmless : it could put a strain on the sustainability of private and public debt in some countries and make the economic adjustment process in countries with losses in competitiveness more difficult. however, it is worth underscoring that this is an admissible argument in monetary policy discussions only insofar as it impacts on price development over the policy - relevant horizon. and i am quite sure that for most of you, it was quite clear that the governing council had to react – and that the governing council decision three weeks ago to launch a sovereign bond purchase programme, or qe, was the only logical response. the question you have presumably been asking yourselves is this : why the ongoing discussion in the council about a monetary policy instrument