makers responsible for the overall health of the financial system – the macro prudential authority – must have a clear mandate and be independent. following the crisis, there has been much work on the development of macro - prudential tools that reduce the likelihood of property - driven financial crises, and that reduce or limit their consequences if they do occur. as the central bank is the macro - prudential authority in ireland, 21 the bank is following this debate closely. what are macro - prudential tools? the imf ( 2011c ) proposes two criteria. first, they explicitly and specifically target the build - up of risk across the financial system – systemic risk – as the bubble grows. second, they are controlled by the macro - prudential authority. 22 however, few macro - prudential tools have been used systematically and there is little practical experience for policy makers to rely on. 23 nonetheless, several tools that target real estate lending have costly property bubbles could potentially be identified by early warning systems. for a discussion, see barrell et al. ( 2010 ). this mandate is provided in article 6a ( 2 ( a ) ) of the central bank reform act 2010. available here : http : / / www. irishstatutebook. ie / 2010 / en / act / pub / 0023 / index. html. many public policies ( such as micro prudential, monetary or tax policy ) impact on the property market but do not constitute macro prudential policy. for instance, crowe et al. ( 2011b ) note that of a sample of 36 countries, as at september 2010 only 3 reported “ actively ” implementing loan - to - value, or loan - to - income, limits to address property market developments. bis central bankers ’ speeches been adopted in a small number of economies. 24 they can be grouped in three broad categories. 25 the first category relates to capital requirements on property lending. for instance, capital requirements for mortgages for buy - to - let properties could be increased relative to those for primary dwellings. this would tend to reduce this type of lending, which appears to be associated with greater credit risk, and ensure that banks ’ resilience is bolstered by the additional capital buffer. 26 second, dynamic provisioning requires banks to hold provisions against expected losses due to credit risks. this tool has been implemented in spain, where banks are required to build up buffers against performing loans in an upturn, which can then be drawn

and its related rules. at question here is the impact of the market consistent economic valuation principle on the life industry business model, particularly with respect to the provision of long term guarantees. industry has expressed concern that by prescribing a fixed common discount rate while at the same time requiring mark - to - market changes in asset values, then long term guarantee products in particular could be exposed to spikes in solvency requirements in times of short term market volatility. similar but related concerns exist regarding the impact of mark - to - market requirements on assets more generally and in light of recent experiences on sovereign debt in particular. again : short - term the concern is that volatility that drives mark - to - market changes in the fixed income portfolios of insurance companies could lead to volatility in solvency buffers. this has caused concern among some observers on a number of fronts. first there is the worry that this framework will discourage the provision of long term guarantee products, which provide a useful source of savings and investment for retail consumers. second there is a worry that the framework may be inherently pro - cyclical by exacerbating pressure to dispose of assets in times of increased market volatility. these are real and reasonable concerns and are being tackled in the final negotiations on the directive. discussions are underway to adapt the framework by allowing adjustments to applicable discount rates for certain matched assets and liabilities. also, a so called counter cyclical premium is being developed – again to allow an adjustment to discount rates to offset excess short - term volatility in certain aspects of the fixed income portfolio. there are a number of different technical approaches to achieve this end and as ever the devil is in the detail, but the desired outcome is a framework that seeks to square the circle of providing a more risk sensitive solvency framework, while at the same time permitting the continued provision of guaranteed products and avoiding dangerous pro - cyclical effects. while this is a highly technical debate about the detail of discounting and valuation requirements on particular portfolios of assets backing certain insurance products, i think it is important to highlight it as one of the key outstanding issues because of the significant impact it will have on the development of long - term savings products and its relevance to the current turbulence in the euro sovereign debt markets. the second subject i would like to mention briefly is that of internal models. solvency ii permits insurance companies to propose the use of their own internal model as an alternate to the directive ’ s standard