sharon donnery : lessons from the past, safeguarding stability for the future address by ms sharon donnery, deputy governor of the central bank of ireland, at the centre for economic policy research ( cepr ) economic history symposium, dublin, 9 june 2016. * * * i would like to thank mark cassidy, yvonne mccarthy, micheal o ’ keeffe and rebecca stuart for their contributions to this speech. introduction good morning. on behalf of the central bank of ireland, i am delighted to welcome you to the fourth centre for economic policy research economic history symposium. the conference has a fascinating and varied programme and the central bank of ireland welcomes the chance to be involved. unfortunately the governor is unable to be here and sends his best wishes. both economic history and the history of economic thought provide valuable lessons for policymakers today, not least central bankers in our quest to safeguard price and financial stability. and yet, despite the numerous experiences of financial crises over the past two centuries, recent events highlighted starkly the lack of both analytical frameworks to assess the risks associated with the build - up of financial imbalances, and the policy tools to mitigate them. for my introductory remarks, i would like to reflect briefly on the recent actions taken by the central bank to contribute to financial stability in ireland through the introduction of macroprudential policies. lessons from the past the term “ macroprudential ” only surfaced in public documents in the mid - 1980s. 1 however, throughout much of the twentieth century, and particularly during the post - war period, there were numerous examples of central bank interventions in the financial system that can, in retrospect, be considered “ macroprudential ”. during this time, many central banks in europe, and the us, used quantitative controls rather than interest rates to steer the economy and maintain bank stability. measures such as credit controls, reserve ratios and liquidity ratios were used in europe, and loan - to - value and repayment caps in the us. 2 such measures were largely implemented at a time when the boundaries between fiscal, monetary, industrial and prudential policies were less clearly defined. financial market deregulation and increasing central bank independence led to the clearer delineation of these policy functions. at the same time, the rise of inflation targeting meant central banks used these non - interest rate policies less and less. in ireland, credit, capital, and interest rate controls were progressively dismantled from the 1980s. 3 see galati

000 smes accruing over €3. 2bn of tax warehousing liabilities to revenue as of january this year, while 7 per cent of smes reported deferring payments to both trade creditors and to landlords during 2020. 2 in ireland, new bank debt did not feature heavily in the pandemic response, as the policy approach here was skewed heavily towards direct wage subsidy and grant support. 3 this more direct form of support meant the exchequer bore an additional burden in shouldering the pandemic shock, but now means debt overhang is less of a risk in aggregate to the irish business sector than it will be in many european economies. despite this, a huge amount of support was needed for those smes entering the pandemic with outstanding bank debt. the need for liquidity support among bank borrowers is evident in the payment - break take up rates in 2020 : 21 and 18 per cent among local smes and corporates, respectively. even now, with a stronger than expected recovery, 10 per cent of irish sme bank loans are non - performing, while another 29 per cent are classified by lenders as being at high risk of distress. what might an ideal insolvency regime look like in the face of such a build - up in liabilities, along with the existence of a complex combination of creditors? well, conceptually at least, we think it would look a lot like the small company administrative rescue process – or scarp – introduced by the government last year. 4 the key policy issues we see will therefore revolve around the operation and implementation, rather than design, of the scheme. scarp aims to provide a lower cost and more accessible mechanism to restructure the liabilities of distressed small enterprises. the mechanism is based on the irish examinership system. without such a coordination mechanism, creditors may benefit from “ free riding ” by allowing other creditors to move first in offering haircuts to the borrower. aware of this possibility, each creditor may individually refuse to engage. alternatively, a creditor may adopt a particularly hard line in isolation without taking into account the wider implications of its actions. in each case, there is a risk of inefficient outcomes where unnecessary liquidations emerge. research from the united states shows that small businesses are often liquidated inefficiently due to the high costs and difficulty in accessing bankruptcy courts. 5 this research also highlights the role that key creditors