matthew elderfield : central bank of ireland ’ s strategy for the next few years to come address by mr matthew elderfield, deputy governor of the central bank of ireland, to the institute of directors in ireland spring lunch, dublin, 22 february 2013. * * * introduction i ’ d like to start by thanking the institute of directors for giving me this opportunity to speak to today. i would like to express my support for the important work that the institute does in promoting high standards of corporate governance in ireland. ireland is lucky to have a number of strong organisations in place which support corporate governance and encourage professional development at the board level in the financial services industry. i was very pleased to receive a christmas present from maura at the end of last year in the form of a copy of the institute ’ s handbook for directors of regulated financial services companies. i thought this provided an accessible and helpful summary of the evolving irish corporate governance framework. i ’ m also grateful to the institute for its continuing training work for directors in the financial services sector, which helps complement the activities of the insurance institute of ireland and the institute of bankers ( with its new bank director programme ) for example. members of boards of directors of irish financial companies have a strong institutional support framework to assist them undertaking their roles. with the audience here, there are of course a wide range of possible topics to discuss. i thought it might be helpful to take this opportunity to provide an overview of the progress and future direction of some of the most important components of the central bank of ireland ’ s strategic plan. we have in fact just finished a three - year cycle in strategic planning which corresponded to patrick honohan ’ s and my tenure in post to date. we are now starting a new three - year cycle and set out an updated strategic plan at the end of last year. this covers a wide range of issues, such as the increasingly international regulatory policy agenda, our continuing work on consumer protection and some more prosaic but important internal organisational challenges around, for example, improved cost efficiency. but i think by any measure, our most pressing strategic priority is the continuing process of restoring the banking sector so that it can contribute to economic recovery. so, i ’ ll take a bit of time today to discuss progress and what lies ahead. no doubt this will be of some general interest, not just to those of you who are directors at banks. also high on our list of priorities is the again continuing process of reforming regulation and supervision in

##apitalised. our principal regulatory tool for this has been the use of stress testing, to project forward credit losses that are likely to arise in a stress scenario and require a capital injection to make up the shortfall against a predefined hurdle rate. in the central bank ’ s prudential capital assessment review of 2011, the stress test was calibrated to ensure a high degree of conservatism by using projected loan losses assessed by an independent third party, blackrock solutions, rather than the banks themselves and by having a higher threshold target, a longer assessment period and an additional capital buffer compared to similar international exercises. as a result of the capital injection that followed, current capital ratios of the leading domestic banks include a healthy buffer above minimum requirements. towards the end of 2013, the central bank is planning to conduct a further stress test on the domestic banks at the same time as a pan - european exercise by the european banking authority. this will provide an update on the financial resilience and capital adequacy of the domestic banks. there are a clearly a wide number of factors at play that will determine the outcome of this exercise. the methodology and severity of the stress has yet to be agreed at a european level, for example. on the positive side, the irish banks start with a stronger capital position, have suffered fewer losses than projected from the non - core asset disposals and perhaps will benefit from early signs of stability in the housing market. however, conversely, the macroeconomic picture still remains in stress, mortgage arrears levels continue to rise ( although so far within stress levels and more recently at a slower rate ) and the introduction of insolvency legislation adds to the picture of uncertainty. in addition, even without these factors, new international standards under basel 3 will require additional capital over time for the irish banks. these various factors will require close and detailed examination in a new stress test, where we will again be taking an independent view of projected loan losses in reaching our conclusions. a crucial input into the stress test exercise is the treatment of troubled loan portfolios, and this is the third key stream of the banking strategy. in the area of mortgage arrears we have been encouraging the banks to develop detailed strategies to improve their operational capacity for handling this portfolio. we ’ ve also pressed for a case - by - case re - underwriting of existing arrears cases involving, where possible, recovery and, when necessary, restructuring of troubled loans