##ity assistance has been a classic and impeccable exercise of long - standing central banking doctrine, but it has been on a scale for which there are few precedents in history. to an extent, the need for such liquidity is the mirror image of the scale on which the international market was previously tapped. indeed, it has often been remarked that membership of the euro area facilitated bank access to foreign funds. but over - borrowing by european banking systems was not limited to the euro area. and euro membership has provided the safety net on the way down. the european central bank has risen to this challenge and the eurosystem has extended credit to irish banks on an unprecedented scale. governed by a detailed legal framework, the lending has been carried out either through normal eurosystem operations ( to the extent that the banks concerned had collateral satisfying the specific requirements, both as to assured and rated quality, and as to marketability, defined by the ecb ) or directly from the central bank of ireland. the direct lending by the central bank of ireland is of course carried out with the prior knowledge and approval of the ecb : the suggestion sometimes heard, that the ecb might be about to cut - off the irish banks, is very wide of the mark. they hope, as we all do, for faster progress towards restoring the confidence of the market in ireland and its banks ; but that is a very different matter. all central bank lending to banks is collateralised, whether by other financial assets of the banks ( with appropriate haircuts ), or by government guarantees. but inasmuch as almost all of the central bank lending has gone to repay bank liabilities that were already guaranteed, this process has not increased overall government obligations. ( it ’ s important not to doublecount here ). indeed, the quantum of irish government guaranteed bank liabilities has diminished substantially over the past year. * * * the process of rolling back the excesses that have marred the great advances made by the irish economy over the past two decades has heightened uncertainty. in order to underpin a vigorous economic recovery, risk must be reduced, not least by ensuring the conventional elements of fiscal discipline and cost competitiveness, but also through an intensified process of clarifying and crystallising the position of the banks and reducing their exposure. the eu - imf programme funding provides a window of time in which to help restore the fundamentals and reduce the risks. bis central bankers ’ speeches

only over a period of time, but in our case, within months of publication, one of the underlying assumptions of the 2010 stress tests was unluckily undermined. we had to go public on them part - way through the big programme of loan purchases by the state property company nama. these loan purchases crystallised those embedded bank losses immediately, but the prices at which the purchases would be made were calculated in a very elaborate and time - consuming way mandated by competition law. the stress - test ’ s seemingly aggressive assumption that the seemingly severe haircuts in the first tranche of loan purchases would read through to the lower tranches also proved to be wrong. with hindsight it would have been great to have built in more insulation by providing for even tougher haircuts ; but at the time it would have seemed an arbitrary and hard to justify exercise of regulatory powers. this year, we are determined to present a stress test that will not only be more convincing to the market, by providing much more granular detail, but also be better insulated against surprises by using aggressive stress assumptions and modelling. the emphasis is clearly on determining appropriate capital levels to meet stresses. the higher capital required will be driven by this rather than from any increase in expected losses : to be sure the somewhat weaker economic growth projections now available would imply some increase in expected losses, but it is the stress scenario that is the focus of the present exercise. we will seek to largely free the tests of any excessive expectations from irish exceptionalism in loan - loss recoveries ( over the years very few irish residential mortgages have been foreclosed in downturns by comparison with the experience in the uk and us, for example : with the help of external consultants we are referencing experience in those countries – though not slavishly so – in the analysis that will lead us to choose new tougher capital levels for the banks sufficient to convince the markets. and less reliance will be made on extrapolation from recent experience. * * * the downsizing of the banks is already under way. not only did they enter the crisis with sizable businesses outside ireland, including a long - standing presence in the uk, as well as more recent ventures in poland and the united states, among others, but their large property - backed portfolios of lending to irish borrowers was heavily financed by wholesale international borrowing most of which has now been repaid, and replaced, for the time being by central bank funding. by