increases and tightening conditions in the labour market, which also carry the potential for overheating of the economy and higher inflation. these are a source of concern because they could ultimately damage the economy. one feature of the strong performance of the economy is the growth in private sector credit. the cumulative growth in the past three years was over 50 per cent and it is now increasing at an annual rate above 20 per cent. as we started from a level of indebtedness relatively low by international standards, growth on this scale may not be a cause of immediate alarm. on all previous experience, however, it would be unsustainable in the longer term without inflationary consequences. the ready availability of credit at relatively low interest rate levels has been a contributory factor to the excessive rises last year in house prices which are now at historically high levels in real terms and by reference to average earnings. house prices have risen by 40 - 50 per cent since 1994. there are predictions that a further substantial rise in prices this year is likely. we may not be far from a situation where home ownership will be beyond the reach of persons on average incomes. there seems to be a perception that the central bank can exercise some legal authority in restricting credit. it has no such authority. any restriction would be inconsistent with european union practice. besides, it would be unworkable as demand would probably be met by overseas lenders. the introduction of the single currency will facilitate access by overseas lenders. the bank continues to monitor the conditions applied by the credit institutions in lending for house purchase. it has warned these institutions repeatedly of the dangers inherent in high rates of credit growth and any relaxation of lending standards. insofar as the bank can establish, 100 per cent mortgages have been issued only in exceptional cases where properties were being purchased for investment. the bank would not encourage this practice and the credit institutions have been so advised. economic and monetary union preparation for emu is a dominant feature of the work of the central bank at the moment. our duty is to ensure, as best we can, that ireland continues to fulfil the entry requirements, in particular the requirement on inflation, and that the banking and financial system in general is well prepared for the single currency. it now seems virtually assured that emu will start on schedule on 1st january 1999 and that a substantial majority of european union countries will participate from the outset. control of monetary policy will pass immediately to the governing council of the european central bank and

in the euro sovereign debt markets, a weak irish economy, a formal eu - imf programme for ireland, and, a lack of market confidence in the irish banking system, reflected in the stressed wholesale funding position of the banks, and concerns about future loan losses. against this background we took a conservative approach, making conservative hard - nosed assessments of loan losses and adding an additional capital buffer, and, we built in transparency and strong external validation into the exercises. in terms of validation, the stress tests were informed not only by views of the banks, but also by the fully independent assessment of portfolio loan losses conducted by consultants blackrock solutions. the data inputs for this exercise were themselves subject to an bis central bankers ’ speeches external assurance process to make sure that the information was reliable and we used boston consulting to provide quality assurance over the capital calculation and loan loss methodology. and, our detailed findings were subject to close scrutiny by large teams from the imf, ecb and european commission. by any measure, this has been a very thorough process with very extensive external validation. in terms of transparency, our detailed 80 page financial measures programme report is published on our website. the goal of this transparency is straightforward : we wanted to address market scepticism of the banks ’ financial position by being completely open about the results of this process so that market participants can make an independent judgement about the conclusions of our exercise. an important issue we exposed in our recently published banking supervision update, and which is closely related to capital, concerns the banks ’ provisioning for loan losses. our pcar exercise was focused on ensuring adequate regulatory capital is in place to provide for anticipated loan losses. it does not directly relate to the banks ’ accounting for such loan losses, which should normally occur under their provisions in line with ifrs international accounting standards. we feel it is important that further measures are put in place to ensure that bank balance sheets reflect more accurately their current underlying risks. we have therefore decided to require banks to make a number of new disclosures designed to align the provisions they make with the underlying realities of their portfolios. we will require banks to ensure that any potential impairment from future disposals is recognised as fully and as early as possible. in determining the banks ’ capital needs we assessed their residential mortgage portfolios and i would now like to take a brief opportunity to refer to the difficult issue of mortgage arrears. i recognise the stress and anxiety that mortgage arrears, or even the imminent threat of