patrick honohan : additional capital requirements for four irish banks remarks by mr patrick honohan, governor of the central bank of ireland, at the publication of capital and liquidity results for the banking sector, dublin, 31 march 2011. * * * today the central bank announces additional capital requirements for four banks covered by government guarantee, namely bank of ireland, allied irish banks, irish life and permanent and ebs building society. this is part of what has been envisaged, since last year ’ s initial effort, as an annual capital adequacy exercise for the banks to get to grips with the scale of losses and the challenge of rebuilding the irish banking system. but the present exercise is on an exceptionally intensive and elaborate basis, and is designed to respond to market scepticism about the banks. this scepticism means that the banks have to hold more capital than would otherwise be needed, in order to convince international lenders of their solidity under all circumstances. this is being done as part of the eu - imf programme designed to restore market confidence to ireland, and in particular to its government finances and to its banks. the capital requirements being announced form part of what we are calling the financial measures programme, which represents the banking part of this two - pronged strategy. as you will hear, it involves not just a capital increase, but also a schedule of deleveraging and asset sales and some structural reorganization ( on which the central bank has been closely involved in advising, and which will be announced by the minister for finance ). all of these elements are interrelated. the overall increase in capital required is sizable. the main underlying reason for such a large increase is the need to restore market confidence. it is a prerequisite to the banks returning to normal functioning that they should have ample capital to meet even the market ’ s gloomy prognostications. the european commission, ecb and imf have endorsed the rigorous approach used. this year ’ s exercise has involved a detailed drilling down to the loan - by - loan level, including an intensive data integrity exercise and asset quality review. the central bank engaged blackrock solutions, an international firm with a strong reputation in the market for its capabilities in assessing losses in credit portfolios to conduct as comprehensive a review of the loan portfolios as was possible in 3 months, with an emphasis on determining the potential scale of loan losses in an adverse and unlikely macroeconomic scenario. reality is therefore not

you is that there are occasions when euro area core inflation rises, rather than falls, following an exchange rate appreciation – which is entirely at odds with our traditional thinking on the pass - through. perhaps unsurprisingly, this is typically the case when the exchange rate appreciates in response to a favourable demand shock. the logic is as follows : as the economy operates above capacity, inflationary pressures emerge that are sufficient to fully offset the disinflationary effects coming from the exchange rate channel. the chart also shows that changes in the relative monetary policy stance have, on average, the expected impact on consumer prices : if euro area policy tightens, the exchange rate appreciates and inflation falls. in other words, there is no empirical evidence that the exchange rate channel of monetary policy is inactive. but its strength will critically depend on the overall state of the economy, and not on the type of policy measure, standard or non - standard. this is my answer to the second question and can best be seen by looking at two concrete examples. 4 / 14 bis central bankers'speeches the first one relates to the sharp depreciation of the euro in the run - up to the announcement of the app. as you can see on slide 4, a simple model - based analysis suggests that a large fraction of the decline in the euro ’ s external value reflected the worsening economic outlook, to which we ultimately reacted. it is likely that exporters to the euro area, faced with falling euro area demand, absorbed part of the exchange rate movement in their mark - ups to protect their market shares, thereby mitigating the upward pressure on prices stemming from a weaker currency. the second example relates to the current situation. slide 4 shows that there are three forces, of roughly equal strength, that help to explain the euro ’ s marked appreciation in recent months : improved euro area growth prospects, an exogenous component and a tightening in the relative monetary policy stance vis - a - vis the united states. 5 / 14 bis central bankers'speeches slide 5 illustrates the implications of this shock decomposition for the assessment of the exchange rate pass - through. the black line, which is the net effect, suggests relatively mild downward pressure on core inflation, much below what the rule of thumb would tend to suggest, despite the sizeable appreciation. the reason is simple. the current solid economic expansion in the euro area allows firms that export to the euro area to increase prices in their currency without losing market share,