matthew elderfield : the future of irish banking address by mr matthew elderfield, deputy governor of the central bank of ireland, to the 31st annual macgill summer school, glenties, 25 july 2011. * * * good afternoon ladies and gentlemen and thank you for inviting me here today to address this prestigious gathering. your invitation has encouraged me to spend a very healthy weekend sampling donegal ’ s excellent hill walking and has allowed me to see a little more of ireland, now that i have been in post for some 18 months. the top priority during that time has been the irish banking system. so, this afternoon i would like to set out for you in some detail the work that is underway at the central bank to ensure we remain on track to meet the targets for the banking system under our regulatory strategy and under the financial measures programme of the international monetary fund, the ecb and the european commission. in particular, i want to make reference to the update on our banking supervision strategy, published at the end of june, which set out some new thinking in a few areas in particular, such as provisioning policy and credit standards. to best explain our work in this short presentation, i will set it out under five main themes : the capital story, or, what is being done to strengthen the banks ; the deleveraging story, or, how the banks are being restructured ; our new rules for corporate governance and fitness and probity aimed at refreshing boards and senior management ; some recent thoughts on new standards to improve the management of credit risk ; and, finally, the work underway to improve supervisory practices at the central bank through the implementation of a new risk - based assessment framework. that is a big agenda and a lot of ground to cover in twenty minutes – so i will have to be brief, but i want to try to give you a flavour of the interconnected nature of the work programme. i think we are making good progress on all these fronts, but each area has its own timeline for completion and seeing results. capital adequacy – strengthening the banks the immediate challenge of rebuilding the banking system involves a number of interconnected exercises under the financial measures programme aimed at strengthening the capital position of the banks. these exercises include the independent loan loss forecasting and stress testing exercises carried out earlier this year to help establish the capital needs of the banks under the prudential capital assessment review ( pcar ). our pcar took place against the very difficult background of a severe crisis

they perceive, and the spreads are a consequence of this. but the spreads themselves feed back onto the condition of the issuers. borrowing countries whose debt is trading at unaffordable spreads, because of perceived risk and market uncertainty, struggle to correct imbalances and hence can face a negative spiral of worsening creditworthiness. it is for this reason that economic and financial policy in countries like ireland is heavily focused at present on reducing the uncertainty facing the prospects for the economy and for the public finances. while the irish problems were largely home - grown, ireland is still among the world ’ s most globalised economies, and the solutions are therefore being worked out in a global environment with assistance not only from the rest of the euro area and the european union, but on a global scale from the international monetary fund. it is in the interests of all that the perception of risk that currently swirls around irish assets is dissipated with better information, unquestioned adequacy of bank capital and a fiscal correction along as solid a national economic growth trajectory as can be achieved. here too the heavy lifting will have to be done largely at home, but optimal engagement of partners remains a crucial element. * * * bis central bankers ’ speeches in this context, it is worth looking back a little at ireland ’ s experience with globalisation. until quite recently, most observers would have seen this experience as significantly positive ; how is it today? ireland ’ s increasing globalisation in the 1980s and 1990s both helped lift the economy from decades of under - performance and demonstrated its new ability to generate full employment and compete effectively at the production frontier. the intimate engagement with the european union since membership in 1973 had helped enrich administrative and political capacity as well as resulting in a vital flow of development funding through the structural funds especially from the late - 1980s to the end of the millennium. by then the wider forces of globalisation had begun to act as a kind of turbo - charger for the economy, amplifying the competitive, export - led growth period and the subsequent residential construction and property price boom. this process helped achieve rapid convergence in living standards through the attainment of full employment, but it also fuelled an overshoot which could not be managed down given the debt vulnerabilities which had accumulated and which proved unsustainable through the global crisis. international convergence of economic and regulatory policies towards liberalisation and light - touch, unfortunately embraced also by ireland, and ridiculously easy availability of credit