Remarks by Stefan Gerlach at Central Bank workshop on banking, credit and macro-prudential policy 16 November 2015 Speech I am delighted to open this Central Bank of Ireland workshop on “Banking, credit and macro-prudential policy: what can we learn from micro-data?” It is yet another element of the large work agenda the Bank is undertaking on macro-prudential policy. Before the financial crisis, policy makers saw two main lines of defence against a financial crisis emerging. The first of these was financial institutions’ own risk management procedures and their obvious interest in avoiding bankruptcy. The second line of defence was micro-prudential policy, that is, financial regulation and supervision focussing on individual financial firms. We know now that financial firms’ ability to manage risk was much overrated. We also know that the regulatory and supervisory regime at the time was not sufficiently robust and that regulators lacked the resources necessary to achieve their objectives. In addition to worrying about the safety and soundness of individual institutions and markets, the crisis showed that policy makers must also worry about the health of the overall financial system. Macro-prudential instruments, aimed at building system-wide resilience, are needed and are becoming an essential part of policy makers’ toolkits alongside micro-prudential tools. The Central Bank of Ireland has a financial stability mandate and introduced macro-prudential policy measures in January of this year to enhance the resilience of the financial system and to reduce the risk of bank credit and house price spirals from developing. The very limited evidence we so far have indicates that the measures are functioning as intended. The public discussion of the measures has highlighted a number of problems which exist in the Irish housing market, in particular in relation to supply constraints. Macro-prudential policy cannot solve these problems and they certainly cannot be resolved by risky lending: they can only be resolved by housing policy. There has been a steady increase in the volume of research which deals with measuring and testing the impact of macro-prudential policies. Early work in this area was mostly limited to aggregate empirical studies. There has been much less research using micro-data to learn lessons for the implementation and effectiveness of macro-prudential policies. Gaining insight from micro-data is important in policy formation as many aspects of macro-prudential regulation may require a calibration that is tailored to specific groups or sectors of the economy. Undertaking research on macro-prudential policy is an essential part of the work underpinning our recently introduced policy measures. Episodes of financial instability are very difficult to predict. Macro-prudential tools therefore need to be permanent features of the financial landscape and will need to be assessed from time to time. Research is important and indeed necessary to allow us to conduct a careful assessment of the broader effects the rules have on the economy. As yet, it is still too early to do so since we do not expect to have sufficient data until mid-2016.