gabriel makhlouf : trends and transitions - an irish perspective on global and european regulation remarks by mr gabriel makhlouf, governor of the central bank of ireland, to the european financial forum, virtual, 17 february 2022. * * * thank you for inviting me to address you today and welcome to everyone tuning in from around the world as well as those at home here in ireland. my main theme today is resilience. we have seen the benefits of resilience over the last two years and we will continue to focus on it. mark twain is reputed to have said that “ history doesn ’ t repeat itself, but it rhymes ” and i agree with that. we certainly cannot lose focus on the risks that have brought down financial systems in the past : misaligned incentives and excessive credit growth, leverage, and liquidity transformation. these risks are always there. and to paraphrase carmen reinhart and ken rogoff, these times are rarely different. 1 on the other hand, transformational change is in the air. our roles are changing as we adapt to significant economic transitions and at a pace that is only going to accelerate further. economic resilience through transitions in my first speech as governor in 2019 i spoke about ‘ economic resilience ’ and what i considered some of the major transitions of our time. 2 economic resilience is in essence the ability of an economy to manage change, whether it is to withstand or recover from shocks or the more gradual evolution to a different state. of course back in 2019 i wasn ’ t talking about a global pandemic but about four particular economic transitions : climate change, technological change, change in the financial system, and the uk ’ s withdrawal from the eu. in many respects most of those transitions remain as important today as they did in 2019. they are also driving some of the key global and european trends in financial regulation. the economics of regulation economic theory tells us regulation is about protecting the essential needs of the public, whether constraining monopoly power, preventing distortions to competition, ensuring market integrity or simply correcting for market failure. 3 in short, regulation is about supporting positive outcomes. but all policy interventions have costs as well as benefits. and we need to balance these carefully as we develop regulation and policy more broadly. put simply, we want to ensure the financial system supports the effective and sustainable functioning of the economy. and, like the economy, regulation happens in cycles. financial crises are

the different categories ( for example the stress - loss rate on irish commercial development property non - nama for bank of ireland was 60 % ; for irish retail mortgages it was 5. 6 % ), and to a lesser extent across the banks. these were all well above the banks ’ own published estimates and far in excess of provisions taken. the limitations of stress - testing as an exercise across the globe are pretty well appreciated. both the choice of stress scenarios in terms of macroeconomic and other external factors, and the mapping from those factors to default probabilities and to loss - given - default are always subject to uncertainty. variances are high. this is all the more so when the economy moves outside of the previously experienced range. given the steepness of the decline in economic activity ( between the peak quarter in late 2007 and the trough in late 2009, real gdp fell by 11. 5 % ; gnp by 13. 9 % ) and employment and the steady decline in house prices both actual and forecast, there was very little in historical experience – either in ireland or in other advanced economies with large financial sectors – to guide those attempting to estimate the range of plausible outcomes for a bank lending portfolio which had clearly been inadequately underwritten. loan losses were certain to be beyond almost all previous experience not just in ireland, but in advanced economies : just how far beyond was clouded in uncertainty. 3 from loss rates to capital requirements the central bank ’ s march 2010 projection for non - nama loss rates, combined with the first tranche haircut grossed up to apply to all nama loans, were employed with projections of capital and income generation from the rest of the banks ’ activities over a three - year horizon, and a small buffer, to arrive at a needed capital amount by end - 2012 that would ensure that the bank would satisfy the central bank ’ s chosen core capital adequacy thresholds. these thresholds were higher than current international standards, reflecting evolving international discussions. they were set at 8 per cent core tier 1 on basel 2 basis in a base case for roi and uk separately : retail mortgages, retail other, investment property, development property, nonproperty commercial. for “ capital markets ” lending : investment property, commercial property, non - property. projecting macroeconomic variables following such a deep decline was already a challenge, but even if they could be known, attempting to map macro forecasts into loan - losses brought any existing models ( the banks had some