patrick honohan : publication of the central bank of ireland annual report 2010 opening statement by mr patrick honohan, governor of the central bank of ireland, at the publication of the central bank of ireland annual report 2010, dublin, 30 may 2011. * * * we are today publishing the central bank ’ s 2010 annual report ; and for the first time an annual performance statement on our financial regulatory work. the latter is a new requirement under the central bank reform act of 2010. i am joined today by my colleagues, tony grimes, deputy governor for central banking ; matthew elderfield, deputy governor for financial regulation ; and gerry quinn, chief operations officer. major challenges on several fronts engaged the central bank during 2010, and continue to do so. the main driving force remains the pressing need to restore stability to the irish banking system. the central bank continues to work with the ecb to ensure that the necessary liquidity is available to allow the irish banking sector continue to function. the central bank has set new, tougher capital requirements to ensure the banks are strong enough to withstand future losses. we have brought in new consumer protection measures, not least in relation to the treatment of mortgage arrears. we have introduced new standards of corporate governance to the financial services industry and we have embarked on a major programme of enhancing supervision and enforcement. over the past year, the central bank has continued to provide policy advice to government on national economic issues, and to make public our views on current economic conditions and broad policy options. with the government ’ s access to market funding severely curtailed, the central bank did not hesitate to recommend a prompt application for assistance to the eu and imf financial support facilities. it provides a window of time during which the government can demonstrate its adherence to a convergent fiscal strategy, thereby helping to rebuild market confidence. to date, the programme is firmly on track. turning to our own financial accounts, the central bank ’ s profit for the year to 31 december 2010 amounted to €840. 9 million. after retained earnings, surplus income of €671 million will be paid to the exchequer. as i said, are also publishing today an annual performance statement ( financial regulation ) for 2010 and 2011. this comprises two main sections – a review of performance in 2010 and a regulatory performance plan for 2011. our key priority remains the resolution of the banking crisis and helping to put the banking system on a sound footing. we are now at your disposal for questions. bis central

the financial system, the higher would be the demand for governance as regulation and supervision cannot cover all risk elements in their supervisory processes. 1. 3 the next critical pillar or imperative is risk management ; i. e. identification, assessment, continuous monitoring of risks ( real or hypothesized ) and risk mitigation, while maximizing returns. in financial business, risk can emanate from many areas. the wellknown risks are credit, liquidity, market, operational and human capital risks. there are several other risks, such as cross - border product risks, illiquidity risks etc. the new and complex products that are being offered by foreign financial markets or institutions can have cross - border risks as their distribution can bring in serious contagion risks across global markets. most financial institutions do not view equity as risk capital. in banking, risks must include situations of drying up of liquidity. a case in point is the northern rock episode in which the bank exposed itself to the illiquidity risk. the need to bring in new capital to cover illiquidity was not given adequate attention by northern rock. such risks should also be analysed by banks and financial institutions and include them in their risk management framework. ignoring this risk or not taking action to mitigate can be construed as the “ moral hazard ” we often speak about. moral hazard leads banks and financial institutions to expect the public to rescue their institutions and continue to run on an illiquid basis, until they hit serious drying up of liquidity. if managed properly, risks can be confined to the institution concerned. if not, any one of these risks or a combination can affect a group of financial institutions or the entire financial services industry thereby creating a systemic risk. as martin wolf, a well known financial times journalist said “ the financial services industry is famous for privatizing its gains and socializing its losses in that it expects the society at large to rescue them through public funds ”. 1. 4 the third component is compliance, which relates to laws and regulations, internal policies and procedures. literally, compliance means obedience or dutifulness, but it has broad scope and various interpretations. compliance generally covers matters such as observance, application of standards of market conduct and managing conflicts of interests. more recently, compliance has expanded its scope to cover specific areas such as operations of money laundering and terrorist financing and even tax laws that are relevant to financial services. in brief,