Transcript of Governor Philip R. Lane interview with Dearbhail McDonald, Group Business Editor, Independent News and Media

17 December 2016 Interview

Transcript of Governor Philip R. Lane interview with Dearbhail McDonald, Group Business Editor, Independent News and Media

Dearbhail McDonald: Regarding the recent changes to mortgage rules, could the Central Bank have gone any further at this time in terms of lowering the income test caps to bring it closer in line to the UK?

Governor Lane: So, the goal of this revision was to have them in a position where we would be happy for these rules to remain as they are under normal conditions. So the redesign we announced essentially is to deliver that, because under the previous system with the €220,000 ceiling we were going to have to probably change that every year because €220,000 in 2013 is different to €220,000 now and €220,000 in the future.

Whereas with this system, if you look at it now under normal conditions these rules we think should remain in place. In particular, we’re very comfortable with the three and a half times being an appropriate number for the loan to income ratio and we’re very comfortable that that is lower than in the UK. The UK did have a big recession, you know, during the financial crisis but nowhere near as big as here. My guess is basically every speech I give, and I’m sure it’s going to be recurring, is pointing out that Ireland is small, it’s a very open, very volatile economy so the macro risk facing Ireland is significantly higher than the macro risk facing a large economy such as the UK or the US or Germany so having a more conservative regime here such as the three and a half times loan to income makes sense. So that I think is rock solid. If someone believes four and a half times is the appropriate number in the UK a significantly lower number like three and a half is going to be the correct number here.

Many first time buyers will have significant amounts put aside already, are you concerned that the lowering of the deposit from 20pc to 10pc could in fact lead to an increase in house prices particularly in the Dublin area where more first time buyers are competing for homes?

So the first thing I would say there is our rules put minimums for deposits so the 10pc minimum is intended to be a minimum not a target.

So if someone is in the position that they have saved more than the minimum and it would be very wise to put a larger deposit on the minimum towards the house. Now I think it’s also fair to say that with the greater capacity of people in that category to borrow more than that has to be put in the context of what we just talked about, the loan to income ratio. So we see in the data that most people who buy a house above €220,000, in fact in the data for 2015, 2016 73% of people in that category were putting down a larger deposit because one reason is the loan to income ratio means you can only borrow so much. So if your target house is x, the loan to income gets you to y, the gap between x and y you have to fill with the deposit which may well be more than the 10% so that’s, you know, a background factor, that’s going to limit the ability of people to borrow significantly more than they do now. Having said that, we do not take a view on the level of house prices. Where we do take a view is if we see house prices growing more quickly than income levels and we see that’s a persistent pattern we can take action in the future so I think the bigger message is, the real concern is what happens if it begins to spiral, house price increases, pressure on people to take on more debt which in turn fuels house price increases. That spiral, which we saw in the mid 2000s, we will take preventative action if we see that taking place. That is not currently what’s happening in the market. And let me add two more points to that. You see in that kind of spiral you have people taking on larger loans, you have people owning existing homes who feel richer, you know, using the equity on existing homes to take on a new loan and buy a bigger house or to get into the buy to let business, you know, they’ve got equity which they can…And we are quite restrictive on second buyers and we’re even more restrictive on buy to let so there’s a lot of dimensions to the system which basically will limit the ability of that kind of credit house price spiral to take off. If it did take off we could tighten the rules.

What about that category of people who are in that second home or second buying category but they’re in negative equity or there just isn’t enough and they’re typically young families? Is there any solace in the mortgage rules for them?

So, let me point out two features, one is if you’re in negative equity you’re exempt from the rules.

So, the banks will look at each of those cases on its own merits. Now what we see is people in negative equity there are a number who do, who are able to take out a new mortgage and in the data so far the mortgages are typically around 91% and under value so the banks are being realistic in that way. Now it’s not easy. Definitely the people in negative equity, you know, were extremely unlucky. They were landed at, in terms of being at a wrong place at the wrong time; I’m full of sympathy for that group. Then the second point is some people who were in negative equity with the rise in house prices are now in positive equity and that’s one reason why our rules do have this set of allowances. So 20% of second time buyers, 20% of lending to second time buyers can be above the loan to value ratio.

So, we think on a case by case basis banks can evaluate individual situations people in those categories are facing but in the end whether it’s sympathising with first time buyers paying high rents, sympathising with people caught by negative equity, any of the solutions for those categories has to be on the basis of maintaining a sound financial system. So, you know, you will see from the amount we disclosed last week in terms of all the publications that a tonne of work has gone into assessing these rules, trying to work out what are reasonable values for the rules that we have and, you know, on the basis of our analysis what, we think what we’ve got is prudent, it’s reasonable and very importantly it’s not rigid. We do have these allowances to try and cater to these special cases.

Drilling down in the data, is there anything even at this stage that worries you or, as you review the rules that would give you a cause for concern?

I think compared to a number of years ago what we’ve seen by now, late 2016, is the recovery in Ireland has been, you know, I think quite solid. We’ve seen a big increase in employment, we’re starting to see some increases in wage levels and as you know you can see there’s some recovery in consumer confidence so you have increasing house, car purchases, increasing consumption, some degree of recovery say in home improvements and so on so right now many of the indicators are positive so I think looking to the future it’s very important that in the same way one should be a little bit contrary and optimistic in a crisis, you should be contrary and pessimistic at this point in time. On top of that there’s clear triggers, there’s Brexit, there’s possibilities of changes in global corporate taxation and so on so I can think, and I said this at a press conference recently, I can think of plenty of reasons that there could be adverse developments in Ireland. So whether it’s a bank making a lending decision, whether it’s a household trying to assess how much debt to take on’ it’s very important that people are suitably risk averse, suitably insulating themselves from downside risk and that’s essentially what our rules are about. The real test of our rules will be in the next downturn, have we enabled households and banks to acquire enough insulation that they’d be better able to withstand a downturn so that is the goal, that is really the motivation here.

In terms of the rules, how often will they be reviewed and what are the type of future interventions that could take place in order to, avoid a house prices spiral?

So let me distinguish between two types of review. One is even if macro financial conditions are normal is the behaviour in the mortgage market changing so do we have to look at how, where, how much debt people are taking on, how banks are using the allowance and so on. Now having just made this revision now we think we need to see all the 2017 data to assess those issues so if you like the review of how the framework is operating we’ll do in 2018 but this time next year, November 2017, we will make a conscious decision about have the macro financial conditions changed in a significant enough way that we need to alter the rules. So I think it’s very important that we commit to making an actual decision every year because one of the classic global issues, and we saw this here in the mid 2000’s, is what’s called inaction buyers who tend to say well we won’t make a decision for fear of disrupting the market, we won’t make a decision to see if more data will help us but I think we need to commit to an annual review. I mean interest rates we look at every six weeks. Once a year looking at the rules from the point of view of macro financial conditions I think is important. Then on the second part where you ask what could we do, let me point out it doesn’t have high visibility probably in the general public but one of the major tools that we have for banks is what’s called a countercyclical capital buffer which by European law we have to look at every three months. So every three months we are making a decision are credit conditions getting overheated. If we see they are overheated we would raise the amount of capital that banks hold so that’s one lever. So if we think lending is getting to an extreme we can raise the capital change on banks. On top of that in terms of the rules you can see from the nature of the rules that we can use some mix of tightening the allowances so saying the amount of lending above the loan to income ratio, the amount of lending above the loan to value ratio can be narrowed or the loan to value ratio could be made tighter.

There appears to have been a bit of a cat and mouse game in terms of the housing market: the Central Bank rules came in, the government appeared to respond with the help to buy scheme, you have now come in with the revision of the new rules, is there a frustration or a tension between the roles of both the government and the Central Bank are being mindful of the independence that has been acknowledged?

No that’s not how I see it because the way to think about the help to buy scheme it’s helping first time buyers to meet our rules. So in other words it’s essentially the government recognising that it makes sense that a significant deposit is raised to buy a house, recognising under current conditions if you’re on a limited income the ability to raise that deposit and if you’re not lucky enough to have parents to help you and so on is a tough demand. So one way to square that circle of satisfying what is needed for deposits while recognising the tough situation those households are in is to provide a scheme like help to buy. So if you like I don’t feel it as in conflict with our rules, it’s a way to help, you know, politicians have to respond to the wishes of the electorate and, you know, in their assessment and the many demands on the public finances that if this is assessed to be something that they want to commit resources to it’s a natural response of government to this situation and it’s, you know, I think fairly common.

Would you view the help to buy scheme as complementary to the position that you have taken or you don’t think it perhaps maybe would undermine what you’re trying to do because despite a lot of criticism at the beginning the public seem to come around to some extent in favour of the fact that these tough mortgage rules had been put in place?

Let me take it at two levels. One is, as I just said, I think it lines up with the rules in the sense it’s not trying to get around the rules, it’s trying to get households, to help households to fulfil the obligations under the rules. So that level it’s a kind of natural response, governmental response. At the second level what is true is it raises the fraction of households who are currently, who will be now able to enter the housing market. So as I said to you there’s not a mechanical issue here because in many cases households will be I think sufficiently aware of the risks they face to essentially take the subsidy from the government to achieve a higher than minimum deposit, you know, that would be welcome, in some of the cases it will allow some others just about to meet the minimum. So there will be raised demand for new builds but what’s important is the help to buy is ring fenced for the new builds and that I think is superior to having a general subsidy no matter what kind of property you’re acquiring. But of course, this raises the importance of the supply of new builds going up.

Which you don’t have control over?

Which I don’t but I mean equally people in that category need to do an assessment, they know the supply is limited now, they know the help to buy scheme is coming on track and always people who are looking to buy a house it’s a kind of a significant decision and balancing the desire to buy now versus saving more, waiting more, I think for that everyone needs to make a decision there. It’s not a one way bet, it’s not a one way bet that you should immediately look to buy a house because they’re, you know, the paradox of supply, as more supply comes onto the market in itself that’s going to, in a cyclical way, soften prices. So right now there may be congestion in that first time buyer market but if you’re in that category the answer is not to max out in terms of buying now, for many people each household will be different in terms of the balance of buy now versus buying later.

Just to go back to the rules, is, you know, consumers markets. People need certainty around the decisions that they’re going to make, so will this be an annual review because sometimes people’s consumer behaviour changes, they may hold back or fire ahead on the basis of that?

Yes. So in the same way as interest rates, people take out a mortgage and they know the interest rate today and if you’ve taken out a, whether it’s a verbal rate where you’re immediately exposed to fluctuations or even a short term fix if you have a 30 year mortgage and you might have a three year fix you still have a lot of uncertainty. The reassurance I think is that these rules are not random so if we tighten the rules in the future it will be in response to overheating pressures, you know, so the rules are meant to stabilise the market. So I think the message is that kind of extreme boom bust cycles are not good for financial stability, they’re not good for consumers and under these rules they’re kind of natural kind of temperature cooling mechanisms but through these limits the goal is to avoid or to limit the scale of boom bust cycles. And in terms, to me that reduces the risks facing households compared to free for all type dynamics. So going back to what I just said I think it does mean that, you know, as a common psychology during the boom just buy now for fear of prices continuing to go up, under these rules one way bets are much less likely, you know, that if prices rise too quickly we can intervene and prices will come back down. And then there’s other factors. In a small volatile economy there’s various international reasons which might push prices down here and then as I say the nature of supply is right now there’s a shortage, a supply comes on track, in itself that’s going to have downward pressure on prices. So people should buy when it makes sense from a family point of view to buy, they should not be overthinking the kind of financial speculation element of it.

A lot of people say we haven’t learned from the last housing boom bust cycle. What are we not doing, as opposed to what we are doing what are we not doing in Ireland relative to other markets?

I think everyone would agree that the goal, I think to have a satisfactory housing market it needs three pillars. One is a functioning buyer market so people can buy when they need to, they can move up, trade up, trade down, if they need to move jobs they can sell and buy in a smooth way so you do need a kind of a stable market for home buyers.  You need a stable rental sector because for many people at different points in life renting is, at least temporarily, a sensible option. And then you need, in any rich society you need sufficient, affordable housing so whether that’s provided by local authorities or through public private partnerships or other ways to subsidise housing, you know, it’s not rocket science to say those are the three elements, you know. The government has its housing strategy, you know, which in the end boils down to a lot of individual actions so like in most areas of life there’s no silver bullets. It’s kind of the hard grind of improving all three sectors in a balanced way. But let me come back to this basic point is it’s intrinsically more difficult in Ireland because of the high openness of the economy. It’s very hard to forecast how many people are going to be here, you know, we’ve seen the significant migration during the worst of the crisis, we’ve seen unexpectedly strong employment growth, a lot of people arriving in Ireland to work and so on so that makes it very hard to plan. Income levels here are volatile so in terms of working out what kind of level of housing that is affordable and so on that’s very difficult so, you know, it’s intrinsically more difficult in a small open economy. But this again reinforces the importance of providing a financial stability framework and more generally for the government committing to long term planning.

Where do you see the property market or property lending even going in the next five to 10 years, mindful of the actions that you’re taking now?

So I think what we hope to see is essentially more or less proportional to the increase in the size of the economy. Now there’s some catch up so for a while we may see home building and lending go more quickly in the overall economy because clearly there’s a generation now of underinvestment that needs to be cleared up. So there may well be a period of time where we see above typical rates of lending and rates of home building but then in the long term we should just settle down and should be, if you like, a kind of typical part of the economy growing more or less at the same speed as the overall economy.

So if there was some initial rapid growth in the next, I don’t know, three to five years it’s not something in the long term that you would be worried about in terms of bank lending?

Well rapid, I mean the devil is going to be in the details of what is reasonable so that’s going to be the hard work that we face and the banks face, and so on, of balancing the tension between normal recovery and catch up dynamics versus any extrapolative or speculative element. So that is going to be converting the general principle into kind of year by year supervision and prudential supervision we will make.

What about the concerns about potential overheating of the commercial property market particularly in Dublin, I know you’ve been looking at issues such as yields but what are you doing to prevent that market overheating and would you be concerned about any exposure of the Irish banks or funds that are exposed to that because that is something that has been, where there’s been huge demand?

So this sector is, of course we know it’s generally riskier than the residential market and we know this is where the most severe losses were in the crisis, there’s no doubt about that. But there’s also a distinction in the sense of with the mortgage rules, you know, we essentially can operate on both sides of the market. We can regulate the banks but also restrict the ability to borrow. That is different, we don’t regulate developers. We don’t regulate non-financial corporations in the sense of their ability to take on risk. But it is fundamentally different in the sense of if these individuals lose lots of money so long as they’ve enough equity there, so long as it’s not all debt financed the risk, lands with those who take the risk.  So the key, as you indicated, is to make sure there’s not excessive leverage in those transactions especially leverage which is generated here. So by and large a lot of what we’ve seen so far is mostly externally financed and essentially if the world’s investment community decides they want to allocate some resource of risk capital to office blocks or hotels in Dublin that lands on them. So the key is to make sure banks here do not over lend to that sector.

Because that’s something you’re actively monitoring.

So, let me say this, there’s several points to that. One is internally in the banks of course they will be aware of the losses they made before so the risk appetite is going to be different than before. Number two is commercial real estate, we would attach a higher risk weight to commercial real estate in evaluating the lending that banks do so as part of the normal supervision regulation of banks there is definitely enhanced attention paid on commercial real estate. So it’s, if you like, it was, you know, a big problem during the crisis. Many lessons I think have been learned from that and it is important to say there is a difference this time around in the sense of the amount of local debt finance going into those buildings is a lot different than before but we’ll continue to monitor it, because there’s a legacy. So there’s lots of existing commercial property loans and the value of those we have to keep an eye on. So the ideal is that excessive volatility from that sector is to be avoided but it’s fundamentally different to the mortgage market, you know.

I want to move onto consumer protection and sanctions because it’s been a very, very busy year for the Central Bank in terms of the fines it has imposed including the recent imposition of the fine on Springboard, a subsidiary of Permanent TSB. Are you happy with that strategy and the message you’re sending out? It’s a broad strategy ranging from very punitive and very public sanctions to, you know, the full administrative range, are you happy with that element of the banks work at present?

So I think it’s an essential element especially say for consumer protection. So in itself to signal that violations of our expected standards of behaviour will be sanctioned, I think that’s important to say. In some ways there’s a financial penalty but for many the reputational penalty, if you’re individually sanctioned, is an important part of the overall system of financial regulation. But the goal is essentially to alter mind sets, alter behaviour so now that we have this regime here now we see concrete examples of firms or individuals being sanctioned, the goal is that that will improve behaviour in the financial sector.  So if you like of course in the aftermath of the crisis, you know, when the tide goes out certain things come to light and it’s important to be ready to take enforcement actions. If you like it’s a second line of defence. The first line of defence is more preventative, the kind of day by day dogged work of consumer protection is essentially guiding firms as to what is required of them Entry level, making sure that fitness and probity, that the key people in firms are deemed to be fit, meet the fitness and probity standards, minimum standards so making sure that if you’re going to offer financial advice you’re qualified to do so. So if you like there’s a gatekeeper function, to do as much as we can to make sure those involved in providing financial services are consumer orientated, there’s the enforcement at the other end and in between it’s just the day to day nudging of firms, inspection of firms, review and so on which is basically holding firms to account.  So there’s a tonne of work there at all levels but they work hand in hand so in relation to enforcement. I think it’s very welcome that we’ve seen this successful string of cases, you know, coming to settlement and completions.

The Central Bank has been quite open about issues such as recruitment and capacity and even just retaining and especially in an environment where there were are caps on that. Are you happy that you have the sufficient regulatory capacity now both in terms of the knowledge and the numbers to meet the, you know, that side of the business, the banks business?

So there’s been a gear shift in recent years, in part a change of the philosophy, which is European wide, which is essentially more intrusive supervision. So rather than taking on trust the kind of reporting from the banks or other firms it is much more intrusive, more inspections, more challenge and so on. And second, the Irish financial sector has grown quite a bit, not so much the domestic retail sector but the global business conducted out of Ireland. So for both of those reasons we are expanding the staff in status so there’s been a significant increase in 2015, again this year in 2016 and we’re looking for a 10% increase next year in 2017 so each year I think we’re building the numbers. Then the second part of the question is experience levels. Of course we do hire internationally, you know, if there are particular vital gaps in the kind of senior line up we will fill those in, in part, with international recruitment. But the core of it is going to be each year we have a significant internal training programme so each year the expertise level in the organisation will continue to improve. I would say that the, you know, we have a cadre of senior leaders in the bank whose mission it is to make sure that the growth in the organisation is successful, that people are given sufficient training and the expertise level accumulates over time. Retention numbers are at different levels within the organisation and there’s a degree of turnover. I would point out that in the financial sector in general there’s more mobility maybe than in some other sectors. So we tolerate, you know, a kind of exit rate which is higher than maybe the civil service might see. We recognise that’s part of life but of course, just as in some other specialised parts of the public sector, it’s clear that the gap between what we offer and what the private sector offer is significant. In part again I think we accept that, you know, for our people here the primary motivation is public service. The primary motivation is making a difference and there’s a lot of very frustrating jobs in the bank but, you know, people at different points in life, people with different family circumstances and so on in the end may feel too constrained and leave. So our pay model in the end has to be broadly aligned. We are, you know, a public service organisation and our pay system, pay rates and so on, are in line for the wider public service.

You mentioned the growth kind of the non-retail or non-domestic sector. It’s a very broad term, the shadow banking sector, but when you look at areas such as securitisation or the regulated funds industry which has grown significantly do you have any concerns about that? You don’t have responsibility for Section 110’s, but you do regulate QIAIF’s and I think is it, or ICAV’s which maybe hold around €10billlion worth of commercial properly.  Does the Central Bank have any concerns about the extent of the growth of that and regulating that, that industry?

I think there’s several levels to that.  One is in terms of understanding what’s going on in the financial system whether we regulate the funds or not for the overall understanding of the system we need to know what’s going on. So one thing that’s happened in the last couple of years is even firms that we don’t regulate many of these special purpose vehicles and financial field corporations now have to report a lot more information. So we’ve, in terms of our analytics we have a much improved understanding now, and if you’ve read some of our recent quarterly bulletins and so on, we’re putting out a lot of, I think, very interesting studies of what’s going on in these funds and by and large a lot of that is what you’d expect to see. By and large a lot of it is global assets, help out global investors where essentially the kind of intermediation, the kind of fund structure is here but there’s not too much interconnection with the Irish economy. As you say there are counterexamples where significant property assets in Ireland are now held through these fund vehicles and we can come back to that in a minute. So we think we have a big responsibility to the global financial system to inform and educate the global entity like the Financial Stability Board, our colleagues at the ECB, the IMF about what’s going on here. The separate question of regulation so the funds that we regulate, you know, we have a kind of a specialised expertise in the, you know, in the supervision and regulation of funds but that’s essentially if you like in terms of making sure that the investment protection is there, making sure that the prospectuses are in order and so on. The deeper questions about the role of these funds in the domestic commercial property sector that’s a wider discussion than the kind of narrow issue of complying with the regulation of funds. Let me again point out there are different types of funds depending whether they are retail where we have to be concerned about individuals putting their hard won savings into a fund.

Versus professional type funds where the non-retail investors and where proportionately it can be expected that the investors in those funds have enough analytics and enough capacity to understand what’s going on. So in terms of investor protection, in terms of consumer protection that sector I think is run in an orderly fashion. What happened globally in 2008 was essentially the interconnection, and this is the phrase kind of in banking, the interconnection between banks and funds so banks thinking that they’d offloaded risk into a fund or special purpose vehicle in turn in a crisis came back onto the bank and we know plenty of examples in Europe and in the US where that happened.

Part of the funds were here in Dublin. That is essentially more broadly about the regulation of banks and insurance companies and so on and so that is also on hand globally but of course that’s much less popular than it used to be because now the risks are more clear. So globally asset management more generally is seen as a big risk factor because essentially if I’m buying a fund and I assume I can see my mutual fund shares tomorrow if I get nervous collectively we can’t all sell our mutual fund shares and some property fund because the underlying asset is liquid.

So there is a global concern that maybe in the next crisis it won’t be concerns about banks, it’ll be a panic among investors in funds. So everyone in the world recognises this and we actually, the Central Bank I think would be recognised as leaders in developing better policies in terms of the liquidity of funds, that amount of leverage in a fund and so on and also a crisis management of funds. So we are, you know, doing a lot in that area but again from the, some of the points you raised in the question of course probably of greater local interest is the role of funds in the domestic property sector.

The so called vulture funds and obviously loan origination and securitisation has been looked at from a revenue perspective and obviously the move to close down those tax neutral loopholes, is it something that you think - specifically those local funds or the vulture funds that have acquired so much property arguably to the detriment of borrowers - do you think that they require closer scrutiny from a Central Bank perspective as distinct just from a tax one?

So I think where we’ve arrived at now in terms of investment funds holding mortgages is the fact of under the Credit Servicing Act, 2015 these firms now have to appoint a credit servicer which has to comply with our Code of Conduct on Mortgage Arrears. That I think provides a lot of reassurance. If you have a mortgage which is now owned by one of these firms the code of conduct applies. There’s a lot of consumer protection there. The deeper question probably…I think that’s in itself significant and worth stating is that the code, you know, has now been extended so there is protection for those who owe mortgages to these firms. I think in terms of the strategies adopted by these firms compared to the strategies of banks, you know, I think we have to monitor that because they have different business models, they have different incentives. Some elements of that…

They’re not here for the long term.

They’re not here for the long term but part of that can be to the benefit of the consumer to the extent they’re more willing to make debt write offs, you know. I would agree that there is a risk that they also may seek to recover more from consumers so that I think is an open question about, and it may well differ across these fronts, they’re not all the same type of fund. It has to be recalled that of course they typically buy portfolios of distressed debt so often they have the most troublesome loans. So in other words, people who might have a past due mortgage which is owed to a bank and a bank sells that portfolio to a fund it may change the end game. Let me repeat, the advocacy to anyone who’s in deep mortgage distress I think all the indications are if you engage with the lender the solutions are much more likely to be found. If there’s no engagement it’s going to end up in court and eventually in an outcome like that.

What about that cohort maybe of distressed debtors? You’re now seeing vulture funds revising upwards the value of the loans because they can see that they can get money back and a lot of those distressed debtors who maybe were in a position perhaps to engage, maybe not to offset it, but they didn’t get the opportunity to buy their mortgages at a discount, do you have any sympathy for those people that maybe there wasn’t protection for them at that point or is that just the consequence of the way the loans were allowed to be sold?

For mortgages primarily from the bank, I mean there’s two issues here, one is selling off mortgages and then there’s other types of commercial loans that NAMA might have sold to funds over the years. From a very basic mandate I mean the banks have to try and recover commercial returns for their owners and of course AIB is virtually entirely owned by the Irish State and a lot of PTSB and parts of Bank of Ireland the commercial return to the banks in turn is in the interest of the State itself. It’s very hard to see a situation where a bank can stand over selling a loan to the individual household in an arm’s length way which everyone could say that was fair. It may suit, you know, it may suit the individual debtor but for transparency purposes auctioning or selling in some way a portfolio of loans to some secondary buyer across Europe I think the Irish example is seen as relatively successful. There’s a lot of problems across Europe in selling, non-performing loans and removing them from the banks. But as you say I’m sure it’s very frustrating if you’re in a situation where your individual mortgage was sold and you believe the outcome for you is going to be worse.

Ultimately it’s who pays for the crisis and the balance between, we know as a State a lot of money was put into the banks which has raised the public debt and it caused austerity, it caused, you know, tax increases, it caused depression in public services. So here the balance between what the State has taken on, what the bank shareholders have taken on, bank bondholders, of course that remains open to a lot of dispute, and there’s no question that those who bought at the wrong time have suffered a lot during this crisis.

And do you have any views on who should pay for it? Did we get the balance right and in respect of those funds? Tax policy is not your area but more for your personal view, was it right or fair that the vulture funds and non-bank lenders were able to acquire Irish property assets on a tax free basis, on a moral level as much as anything else?

So I think there’s a series of issues there. One is, let me be emphatic, that the fact that Ireland has been able to attract global investment has reduced the cost to crisis for people in Ireland. The collective cost of the crisis to Ireland has been mitigated by the ability…In Ireland of course the crisis here was huge relative to our resources. For global investors being able to take a risk by investing in Ireland that’s kind of a beneficial part of the global financial system that we were able to access these funds. The issue about taxation is interesting because I think the funds might argue, the fact that they were tax free vehicles meant they were able to offer a higher price so they paid upfront.

On the other hand, you could argue that these funds should have worked out, could have worked out, that essentially zero tax was non sustainable and what we see now where those loopholes are tightening is if you like a predictable and natural part of the Irish recovery that what was on offer, you know, at the depth of the crisis, not what’s on offer now.

And many of these funds were involved before in previous crises in Asia and so on, and this dynamic - it’s not the first time this dynamic has played out.

Have vulture funds played an important role in Ireland’s recovery notwithstanding the controversies?

If you look at what happened, you know, I think the inflow of funds into the Irish sovereign debt market was vital so the fact that famously we had Franklin Templeton making a big bet on Ireland was vital. The fact that Wilbur Ross and others had put their own resources into Bank of Ireland was a vital signal to the world that it wasn’t just the opinion of the Irish State, it was the opinion of risk taking investors putting their own money on the line was vital in the recovery. So if you think about the net flows of funding and so on the fact that there’s been a significant net flow of funding from the global investor pool into Ireland has reduced the cost of the crisis collectively in Ireland. Now that collective benefit may be of small comfort to any individual who perceives that he or she is going to pay out more.

Yeah, as a result.

And that’s essentially the balance here. The macro narrative I think is solid but of course individuals in the end care mostly about the outcome for themselves.

The Credit Union sector might perceive itself to be too over regulated at the moment and yet we recently had the example of Rush Credit Union.

Was the intervention there too late?

So liquidations should be viewed as a last resort, there’s a high hurdle to liquidate so, . If you like there was a kind of a State intervention where the level of intervention in Rush happened over a number of years. I think in proportion to the identified problems. And if you like there were many options explored. I think one can always argue about, how quickly they move to liquidation but the most important thing to point out here is this is in the protection of the deposit guarantee system. So the people who had deposits with Rush up to €100,000 our system is those are guaranteed and throughout the whole society whether it’s with credit unions or banks we have a system now where it’s really important that we cannot expect small depositors to worry too much about is my credit union safe, is this bank safe. I think it’s natural and reasonable that small depositors up to €100,000 can be reassured that a guarantee is in place and, the pay-out for that guarantee was part of the function of the Central Bank and that went well. So liquidation when you know the small depositors are protected, you know, if you like it’s a very different context there.

Will we see more consolidation in that market?

The numbers of credit unions have been declining, there’s been various initiatives, partly here, partly through the ReBo and so on and partly through the actions of the credit union movement itself in terms of transfers and mergers, I think there’s a natural issue here. And the balance I think is always going to be of course scale economics can help especially in the world of new technology and so on. Of course larger credit unions can do more, but of course the spirit of the credit union movement which is community based, location based, also has to be respected. So I would, I think there’s probably a major lesson from Rush in that those involved in the governance of credit unions have a responsibility to make sure that those managing the credit unions are running it correctly, that the correct natural risk management of credit unions is in order so all of those involved in running the credit union movement if you like it’s a reminder of the importance of good corporate governance.

Just in terms of the Oireachtas Committee Report on insurance, that recent report, it pulled no punches in terms of targeting the insurance industry. Does the Central Bank have a function in terms of forcing insurance companies to be much, much more transparent, like would you support, for example, much broader exchange of claims records as a means of consumer protection?

So I think both the Oireachtas Report and then the indicative findings from Minister Murphy’s working group - I think the diagnosis is reasonably shared, and I think we would share it as well, that there’s many factors involved in what’s happened in insurance and there are many reforms that can help. It’s important on this issue about information sharing that there’s all sorts of different types of information involved here so it’s not a single issue so I think we can all agree that easier detection of vehicles in terms of motor insurance, knowing which vehicles are insured and which are not seems like a technological fix that, you know, everyone can agree on. Within the industry, subject to fulfilling data protection and other requirements, greater access to a common view of the accident records and so on of individuals makes sense so those I think have a lot of merit. In terms of the financials of insurance companies let me point out that, you know, we already published quite a bit about the financial condition of insurance firms and from mid 2017 onwards as part of the new Solvency II regulation a lot more will be disclosed. The point here is that to allow investors to work out which insurance companies are in good shape and so on more disclosure is a good idea. So more disclosure generally speaking is I think, it makes sense for all sorts of reasons so I do think that that is part of it. There are, you know, in a situation, and I think the Oireachtas Report identified this, in a situation where a certain amount of information is revealed because claims go to court but a certain amount of claims are settled, you know, outside of court.

90pc, the vast majority.

Yeah, outside of court and then you have also the personal injuries assessment board. I mean going to court is expensive and no matter what kind of reform in the legal system you might think of going to court is expensive.

So settlement of claims in a predictable way so whether that’s because everyone knows what is in the book of quantum, and the book of quantum is set a reasonable level, everyone knows what the guidelines are, you know. So to allow settlements of claims, any friction should be avoided. We want claims to settle.

And should we have more transparency on the settlement of claims?

Well this is the paradox is I think this, I have an open mind about what is the, the best regime to encourage rapid and fair settlements of claims so I do think this is an identified issue because of course people will be tempted to go into court if they think the awards will be higher and so on. So behind all of that is converging on a situation where it’s, and let me point out by the way, my predecessor, Patrick Honohan, had also pointed out that maybe no fault insurance can reduce the costs as well. So I think there is…

Is that something you would support?

You know, I think there’s a lot of merit to that. So I think that can maybe be part of the menu of what people are looking at because of course by taking out the contesting of who bears the liability, that that can maybe save some of the…

And what would be at the top of your menu if there were one or two reforms that you think would really assist?

No I think, you know, again that would go far beyond my role as governor to try and override, you know, the work going on either by the Oireachtas Committee or by the government working group as we are supporting the governmental working group.

So what can you do as a Central Bank to protect consumers?

So this goes back, so I think this is, our role is, I think there’s kind of two elements to consumer protection in insurance, the kind of the macro view and the micro view. The micro view if you like is making sure that the kind of, for example the claims process of insurance companies is fair and reasonable and we do that. We make sure that the financial conditions of the firm are in good shape so they have enough reserves to pay out on claims, they hold enough capital. So, essentially that is the routine work of consumer protection. Let me also point out that that is complimented by the work, we used to have, a part, a significant part of the consumer protection function is now taken over by the CCPC and, for example, on their website I would advocate everyone who is trying to work out what insurance companies to go with to go to their website, for example, it includes a comparison across different firms for various typical insurance patterns and so on. So there is an information and education role that the CCPC takes on. But let me come back to the macro view because in the end what people are going to care about mostly is the price of insurance and this is where I think it’s important that, to recognise that, you know, I do think we need to recognise in terms of how we evaluate the kind of risk models that firms are using to recognise what’s happened here in terms of the volatility and so on. But it’s also important to recognise that insurance in Europe is a large cross border business. Many firms, many brokers will be sourcing their underwriting from insurance companies elsewhere in the EU and a fundamental fact of the single European market is that the pricing dynamics in the insurance sector is not under our regulation. So even if the firms here if you like had reasonable and prudent pricing strategies the risk of new entrants undercutting, taking risks and then later on down the road turning out to have inadequate provisions is something I think the European system needs to work harder on. So there is a, in other words part of what we’re doing is working at a European level to try and improve how the insurance market in Europe works because it’s not a standalone market here in Ireland.

When you look at, just on that note, when you look at the losses potentially in relation to Setanta or the hit that the sector and by extension consumers will have to take were we kind of failed at a European level by not having sufficient cross border protections in place and, you know, what are the risks?

Yes, this is definitely recognised so in banking we’ve now got as I said a single supervising mechanism. By and large insurance is much more fragmented and there is a European agency, EIOPA, but it doesn’t have that supervisor role so I do, I think, you know, we as a bank, as a regulator, would identify as a high priority that the way insurance in Europe is regulated should be much more coordinated.

What about public sector pay, maybe your views on that especially just in light of a poll this weekend which indicated public support [for pay rises]? What are your thoughts on, you know, the increased demands for public sector pay after a very, very long period of, you know, that being depressed and does it pose a systemic risk do you think?

So I think there’s two elements to that. By and large the ideal is that public sector pay is in line with private sector developments. Now of course public sector workers have different arrangements in terms of job security and in terms of the nature of public sector pensions. Now I would emphasise there’s been a big reform so new entrants to the public sector have a very different pension treatment to existing workers. So, you know, Ireland needs to have a system where the pay of public sector workers can move along in line with private sector developments while recognising those fundamental differences. The second element of it is essentially affordability. At any point in time, you know, if we look at the government public finances, you know, in my letter to Minister Noonan from the summer in advance of the budget this goes back to recognising that Ireland is a volatile economy so looking at this year’s tax revenue is not the way to think about public sector pay because public sector pay should be predictable, you know. It’s very difficult for people in the public sector to receive significant pay cuts either through the pension deduction or actual pay cuts so predictability is important. And so if you think about the revenues of the government there’s an element there that is not predicable and, more importantly, there’s a clear downside risk. So number one, some of the factors I listed, number one is currently interest rates are low so the cost of servicing the high public debt is limited. That will not last forever if we’re successful in generating some recovery in Europe. Number two is the ongoing management of the special portfolio of the bonds the Central Bank received upon liquidation of IBRC leads to higher revenues to government through our annual transfer of surplus income. And it’s important to remember that this is essentially, it’s an important recovery for the State of saving some of the legacy from IBRC but it’s not going to last forever.

No.

And then number three is we know there’s been a surge in corporate tax revenue, I agree with the analysis that there’s no particular reason to believe that we’re going to reverse immediately but there has to be a risk factor with corporate tax given the nature of kind of restructuring of firms. If it can come in so easily it can leave also and so even though overall revenues whether tax or non-tax are currently high, the risk of reversal there is such that any bargaining of our public sector pay should be based on what is sustainable. So it’s either sustainable on the basis of current tax rates or the government and the political system more generally given the minority government has to make the assessment of the balance between tax, other forms of revenue, public sector pay, public investment and provision of public services and, you know, that is a big challenge which is for the political system to resolve.

So mindful of those factors from a Central Bank perspective would you say that we can’t afford them at this time?

I think it’s important that that is a decision for the political system because the affordability issue is the matching of sustainable expenditure and sustainable revenue. So I think the Central Bank can be silent about the level of public spending. From a financial stability point of view our core message would be, you know, if you look around the world there are successful examples of governments with large, of countries with large public sectors but those that are sustainable are those which also have the tax revenues to match. So, you know, the reconciliation of public sector pay, tax and the other components that’s a big political decision.  All I’m saying here is that should be based on a realistic view which includes a realistic view of downside risk.

What are the systemic risks to the Irish economy at present in your view?

I think there are clearly four. As you say the crystallised ones you might think about is the playing out of Brexit. That’s clearly a I think unknown. Number two is the ongoing, and to correlate with Brexit, the ongoing debate about the future of Europe.

So that, you know, a lot has been done. The first thing I want to say in terms of monetary union is that a lot has been done. We’ve had the banking union, we’ve had the ESM, we’ve had the fiscal treaty but it’s not complete. There remains a reform programme to make the European Monetary Union more stable and anything that threatens that stability will be disruptive here and across Europe. Number three, you know, with the new administration in the US clearly the fact that now congress and the presidency are united so that, so regardless whether it’s a Democrat controlled government or a Republican controlled government the fact you’ve a unified system for now maybe means more policies can be executed. There can be good news for that in the sense of if it leads to more infrastructure spending which is sensible. There’s a downside to the extent, you know, if policies which are globally adverse such as protectionism takes hold so let’s see and connected to that is the corporate tax regime, so to the extent there is some new formula for corporate tax in the US it’s clearly not the only factor why US firms are here but it clearly is, the extent of that, especially if it correlates with protectionism, the extent of that in terms of the engagement with US firms overseas we definitely have to monitor that.

And obviously with Brexit, with both the new incoming US administration and the UK government both signalling quite strongly that they would reduce corporation tax rate is that something that would pose a risk to Ireland in terms of the fact it’s a small, open economy and that has been traditionally one of our biggest levers is that something that is a concern?

Clearly that has to be a major challenge, you know. Again it’s important to say here of course every government makes its own tax systems so it’s something we have to recognise. I don’t think we can influence US tax policy or UK tax policy in the same way we hold dearly I think here the sovereignty over the tax rate. So whether it’s those particular examples or more generally the move to essentially having, making sure corporates somewhere pay a reasonable amount of tax this is, in the short term I think there have been benefits to Ireland because there has been clearly a move away from, through offshore havens towards international locations like Ireland which has a good regulatory system, has a well-respected revenue system so some of the interests in Ireland in fact has been in response to that. But clearly, as you say, for an open economy with highly mobile operations, highly mobile intellectual capital and so on in the same way there’s been a major benefit over the years, a reversal of that is a major risk factor.

Is Ireland reluctant to host large kind of banker trading operations? We don’t seem to be fighting as much as we should do in terms of competing for those businesses from the city post Brexit?

I think there’s two levels to that. One is clearly many firms can see Ireland as an attractive location and the government I’m sure through the IDA and other ways is engaging through, and working through any issues identified. And then the second issue is of course for financial firms is in terms of regulation, but our common message is, there’s a common regulatory framework in the EU. This is not so much a decision, an issue about Ireland versus other EU locations, it’s an issue about how to work out in a post Brexit world firms that will remain active in the UK. There are non US global businesses run out of the UK so working out a kind of a structure for these global firms which will retain a UK operation but also will need a significant EU operation. That is essentially a decision which is not specific to Dublin, it’s I think general across the EU. And that’s reinforced for banking because under the single supervisory mechanism there’s a single supervisor which is intent on maintaining a level playing field. Now beyond that…

So is that a thanks but no thanks or just a…?

No, no so for banking essentially it’s not a choice variable, it’s not something for banking where we as the regulator here in Ireland need to make a decision because the decision on the regulation of firms will be a single European decision for banks. For non banks the EU regulatory framework is common but there is more of a local decision there and we are essentially having exchanges at the moment, we’re explaining how we would go about any request to set up business here but I’m pretty sure the set of questions we are asking or the set of comments we make are similar to any regulator in the EU because there’s going to be lines of business coming into the post Brexit EU which were historically mostly in London. So it’s something that’s going to be new for any regulator in Europe. So that article was written from the point of view of Dublin but I think a similar story could be written for many European cities.

You don’t see it as your role to be essentially cheering on or welcoming in, it’s just you have a neutral position?

There’s a sensible split of responsibilities here, you know, it’s natural for the government to recognise the potential for significant employment in this sector, often quite well paid employment, but in the end, from our point of view, we have to be assiduously neutral and make sure that any firm that comes in understands the regulatory framework and can comply with it. But it is absolutely not the case we are saying to anyone do not come here, you know. We will consider any application that meets our requirements.

Are you gearing up in terms of staffing for that?

Yes, we already have enough indications, it reinforces our commitment to staff up so as I say next year we think the growth in the organisation will be about 10% but within that there will be a faster rate of growth in areas like insurance and markets which are the frontline of what we’re seeing.

You identified the future of Europe was one of the systemic risks. Are you concerned about the future of Europe in this broader sort of geopolitical context and how that will affect plans so as you say work on, you know, to work on further issues in terms of monetary union and those kind of policies?

So I think, you know, building on all that I’ve seen and studied over my career the answers to a lot of the pressures facing society, which is common pressures in terms of growing inequality, restricted employment opportunities and so on. The answer I think can be found in a Europe that manages the tension between common frameworks so common framework in a, monetary union is building solid foundations and that can deliver a lot of shared benefits to Europe. It can be extended to other areas so in terms of, I think, about migration frameworks and so on and reinforcing the completion of the single market.  So Europe is part of can be part of the solution.  In other words, this anti Europe sentiment I think if there’s a disintegration or fragmentation the natural cycle is going to say well actually we’ve lost a lot, moving back to national borders in a globalised world is not really the best way to address that. At the same time the democratic deficit issue is how do you manage a more integrated Europe while respecting that at this point in time democracy has remained national in scope and so that is a major challenge for political systems. It includes I think in terms of the monetary union, you know, I think part of my role is to explain the nature of monetary union, explain the benefits and also explain if you like the constraints. The constraints which ’we’ve unfortunately suffered through, as part of monetary union make sure there’s a fairly tight control on credit is important, making sure that the banks remain safe and so on. So we’re getting close enough to the first 20 years of the euro, you know, I think a lot of the reforms are in place. More needs to be done but I think the anchor of a common monetary union can remain part of this solution for the challenges facing Europe. But on these other dimensions of course it’s a major challenge for the political systems across Europe to deliver on that.

And what about the role of those like you that have a monetary policy function which you look at issues such as globalisation and income equality or income distribution, a lot of these issues are expressed in political terms?

Yeah I think we recognise that so let me point out, I know it’s received a commentary in different ways across different sections of European society. We have a single monetary policy so currently when it’s accommodative when we have interest rates at the floor, when we have asset purchases, the goal there is to help the European economy recover and if you like to the extent the most damaging issue for societies is excessive unemployment, you know, if this policy brings down unemployment I think that is important. So if you think about the income distribution effects the accommodative monetary policy to the extent it helps to restore economies is ultimately going to be helpful for income distributional purposes. So if you like there’s two parts to income distribution, one is the overall growth rate of the economy and then around that is whether the rising tide lifts all boats. That second part of how economic recovery is shared across society that’s a political issue in terms of fiscal transfers, tax systems both national and globally because as we mentioned earlier on the global taxation corporates, you know, so that element is way beyond the framework of central banks. I would point out that for every saver there’s a debtor. Low interest rates are helpful especially for those with trackers here in Ireland and low interest rates have been important during the crisis in supporting the sustainability of people with high mortgages. Those who happen to be savers of course are losing out but that’s always going to be the case with monetary policy. There’s always going to be savers and debtors and in periods where interest rates are low the debtors gain more. When interest rates do go up the balance will be in the other direction.

Question, do you think that will be?

I think the ECB is a data driven organisation but the clear signal is we currently are engaged in quantitative easing and the commitment is that policy rates will not go up until after that programme is over.

Well the Fed, the ECB of which you are part and in Japan you’ve seen massive QE programmes.

What’s left in the tank for central bankers, where do they go to next because while it’s arguable they have certainly staved off a depression we haven’t perhaps maybe seen the growth rate so where is it, helicopters next?

I think it’s always interesting to conduct background research on other options but I think it’s important to keep this in proportion that the US is now emerging from this phase. Our assessment in the EU area is that it has been growing moderately but positively for quite a while, inflation is nigh on back to where it should be but, you know, I think the laws of economics still hold that, you know, I think we will see continued recovery but the nature of debt crises is that these recoveries can be quite gradual in nature. But I’m not, I don’t think monetary economics has broken, the basic laws I think remain in place and essentially as Europe recovers interest rates will normalise and, you know, economies will normalize.

So you think the QE…?

But let me say, it’s important to differentiate between that with essentially a cyclical versus a genuine underlying structural issue which is how quickly will the world economy grow so these issues like secular stagnation, demographics and so on, and this is going back to Japan. I mean the core of the Japanese experience is living with a shrinking population and a shrinking workforce and this is around the world, the aging story. So if you like I would hope that as the crisis recedes, far less attention is paid to essentially engineering issues like central banking and far more attention is paid to fundamental issues which is how societies will cope with the issues like age in the population and other big societal questions.

Should we be worried about sovereign debt at all, I know there have been changes in movements with the US, debt yields is something again that…?

So let me think, there’s two parts to that. One is these are, in the grand scheme of things, pretty small moves and they’re partly just reflecting recovery in the economy. So if you think the US economy is recovering and federal funds rates will go up, you know, significantly above where it is now in the next couple of years then you will see tenure rates go up. Equally in Europe it’s mostly I think for now a story about recovery so rates going back to more normal levels is essentially part of recovery. So long as there remain concerns about individual European sovereigns we have to remain vigilant to issues to do with the sustainability of sovereign debt and this I think is currently being managed in different ways but it remains an ongoing concern.

It was once unspeakable but are there and should there be any plans, contingency plans, in place for the breakup of the Union?

I think, you know, 2011, 2012, you know, of course there was a lot of discussions, I think in 2015 with Greece there were discussions so of course any prudent organisation is going to think about contingencies.

The Central Bank sometimes if the lightning rod for public anger in respect of a lot of issues and there’s an argument in that sense maybe from an ignorance or a lack of understanding about what you do. Do you get frustrated sometimes that you’re the bank and the yields governor and in the frame as it were?

I think it’s very hard to conceive of an alternative way at the moment. I mean the Irish economy has been battered by this crisis. Many people, those directly affected by mortgage debt, people now affected by the surge in insurance costs, the cost of living and so on, that is inevitably going to lead to both the political system and then the general public looking for answers. And I think, as we’ve talked about throughout the morning, in many cases the underlying answer has many dimensions which includes one element of that is improving the Central Bank’s performance in terms of financial stability and regulation. So, you know, I think we try and welcome the criticism, reflect upon the criticism. I think a lot, it’s very important to say, a lot has been done in recent years under my predecessor and it’s ongoing. There’s a big body of work there of self-improvement here at the Central Bank and in some cases if you like there’s legacy issues that some of the problems reflect events that happened in the past which are now crystallising in terms of the costs facing consumers or debtors and so on but, you know, my commitment is that we will do the best we can to make sure we deliver a stable financial system which also protects consumers. We do this through our mandate.

What made you apply for the role?

Well I think if you look around the world it’s a kind of a natural evolution for someone like me who, you know, from my initial time studying economics in the late 1980s to now has always really been looking at the world of financial stability, trying to work out what is it that makes economies run smoothly or in particular how can small economies manage volatility. So having studied it, having had quite a lot of interaction over the years with different policy organisations, you know, I think, I hope it’s a good match between my experience and expertise in this area and making a difference. So clearly compared to being in a university there’s much more scope now for me to convert my views on the world into policy actions and that is with a heavy responsibility but also quite rewarding.

And how do you manage that responsibility?

So I mean you have to I think have a world view so I do have a world view which I think I’ve tried to communicate in this interview in terms of that the world facing Ireland is quite risky and that prudence in how we conduct affairs whether it’s our regulations, whether it’s fiscal prudence and also from the point of view of individual households how individuals manage their finances, recognising that the world is risky, that reversals can take place even though these reversals may be driven by external forces. So having that world view is essentially, you need a kind of anchor and that is the world view that I have. And then essentially making sure that the work of the bank is consistent with that. So how we did the mortgage rules, how we do regulation, in terms of the types of people we appoint to leadership positions that informs all that we do.

And even though your work is macro prudential does that kind of micro image, it’s the householder, the young couple; does that very much inform your view or your way of working?

Sure I mean I think the most, you know, the kind of evidence anyone picks up it’s partly if you like the hard data so datasets that come in, the spreadsheets we look at but it’s also concrete. I mean I always do try and work through concrete examples and I receive, you know, I get an amount of concrete evidence whether, you know, just in terms of engaging with all sorts of people or, you know, sections of society that, there’sa heightening of awareness about the individual circumstances facing people.

What has been your worst day, your best day and what do you hope your legacy will be when you leave, will it be in 10 or 15 years time?

Ok I mean I very much hope that when my time as governor concludes that the bank is basically seen as a, not for me if you know what I mean, but that the bank is seen as a source of stability, that it’s smooth running, it’s self-aware and it’s helping to stabilise the economy rather than to accommodate risk taking. So I would hope that the bank’s reputation as a source of stability is widely recognised so that is essentially my core personal goal. The worst day is clear, it’s the day of the Brexit results so when I received that news I…

Were you in Ireland or abroad?

No there was a meeting of central bankers in Switzerland that day so I was in Switzerland when I received that news. But of course we had done a lot of preparatory work here in the bank but it was immediately obvious that essentially the rest of my time as governor this is going to be a defining challenge for the country, for Europe and for us a central bank is to manage Brexit.

Were you surprised?

Yes, I mean I expected the vote to go the other way, but on the other hand, going back to what we were talking about, I wasn’t overly. So we had to prepare either way for Brexit so we were, had done a lot of preparatory work in terms of the financial condition of the banks, our market supervision but also our framework in terms of macro forecasts and so on. So the bank, before I arrived, had done a lot of work so the bank was well set so in that sense. I try not to be overly surprised about the world so whether it’s Brexit, who wins the US election and so on we have to deal with it either way, you know. And obviously in a private business you have to make big commitments, you say I think this is the way the world is going to be and I’m going to invest on that basis, as a regulator and as a central bank we have to basically absorb whatever arrives in terms of shocks and news. I think the nature of central banking is unlike maybe corporations where there’s some big wins or something, the nature of central banking is day by day, steady progress so there definitely is scope for loads in this job. I’m not so sure there’s scope for acute highs but I would say maybe the biggest change from being an academic to being here is how much, you know, I think I’ve found quite rewarding is, basically the work of the bank is a lot of teamwork. Teamwork, you know, the recent review of the macro prudential measures there was a huge commitment there, the Brexit work, from all across the bank people working together and so on and that kind of team based work is only true to a limited degree in a research position but it’s basically a very rewarding part of the job here.

Additional interview conducted on Wednesday 14 December

Dearbhail McDonald: So this week here in Frankfurt there are a number of meetings. Every two weeks the governing council meets because as the oversight of the European Central Bank is by the governing council. So on all sorts of issues to do with ECB policies and operations the governing council, like the board of any organisation, has to meet to make decisions.  So we’re not talking about monetary policy this week, we’re talking about the whole range of other issues confronting the governing council. So, that’s one meeting. And what are those top issues facing the governing council this week?

Governor Lane: Oh, I don’t think we in advance disclose the agenda. There will be some point of disclosure of what was discussed, decisions, non-monetary policy decisions, but in advance I don’t think it’s disclosed. The second meeting this week is the general council of the ECB because in the end the ECB is a European Union Institution and all member states have a role at that level and so the general council will meet tomorrow morning. And then the third meeting is the European Systemic Risk Board which is a meeting which combines Central Bank governors and financial regulators from across Europe and so that meeting is essentially assessing systemic financial risks facing Europe. Those could be general risks or they could be risks facing individual countries so that’s an important part now of the European system that financial risks are no longer seen as just a national topic but they have to be assessed in a European setting and as a European framework for how to deal with those risks.

And so I suppose that would include for us the likes of Brexit?

Brexit of course is a significant financial risk but at this point it remains hypothetical in the sense of until the Brexit negotiations happen. So far as we know the reaction has been relatively orderly although of course the large movement in the sterling/euro rate matters quite a bit for Ireland. But if it triggered in the future market disruption - market disruption is seen as generally a big risk. In addition to that the typical risks looked at would be property markets. So property market risk and also of course, risk to do with the health of the European banking sector for example.

And obviously we didn’t feature in the November report of the ESRB, does that, is that an indication that Ireland is reacting quite well in terms of regulation of the property market, is that a vote of confidence?

I think there’s two levels to that. One is the risk assessment includes the kind of risk management framework, and the fact that we now have a vigorous macroprudential framework which includes the mortgage rules, which provides significant reassurance to the European system that property related risks are being controlled in Ireland. So I think that is important, yes. On top of that of course we’re still recovering from the crisis whereas in some other countries the conditions are much better than at home. So partly it’s we’re at a different point in the cycle, partly it’s we now have a fairly robust risk management framework in the form of the mortgage rules and other measures.

Are you happy with the current impact of the mortgage rules despite all of the various different players having a view on them?

So, our assessment is that our role is to keep the financial system and the financial health of households safe. And so from our perspective the mortgage rules are delivering that. But of course we have committed to an annual review. If we assess that there needs to be an adjustment, we will be prompt to adjust as needs be.

And then maybe just to come back to the issue of trackers. There are more people who are going, you anticipate, who are going to be addressed following the Central Bank’s assessment of that issue?

Correct so I think early next week, it might be Monday, there’s going to be an update in terms of the Central Bank reporting on how the review is going and I think some important messages are coming out of that. One is its turning out that the issue is extensive, that many people have been affected. And so the kind of comprehensive approach mandated by the Central Bank where each institution has really had to go back over its files going back quite far in time and review its treatment of customers is proving I think to be I think the correct way to do it. There’s a big administrative challenge there. The banks have to, in tandem with their external consultants, have a lot of work there. And of course, in many cases everything is OK. But there’s way too many cases where it turns out there was a misapplication. There were people not being correctly offered to return to trackers and so on and so we’re seeing it now. More and more banks are indicating there’s going to be widespread redress and compensation offered.

And in terms of, it’s obviously now we believe it’s in the thousands in terms of the people who are going to be, who will have their position restored, are you surprised at the scale of the people affected?

This has proven to be a wide scale problem. So it’s not random, it’s not idiosyncratic, it was a very wide scale problem but not universal. So of course in many cases, not every person on a tracker was affected so it’s important to be proportionate about it. But it was just not acceptable, it was not acceptable and is not acceptable and so it’s important that banks fully redress and compensate those affected.

And obviously you went a lot of detail in order to compensate or to address the issue, looking at the contracts and, you know, and really picking through the details of those. What about the role of the banks in the terms of the way they constructed these products and the way they constructed the contracts as legal documents in terms of, you know, because obviously one of the reasons why people have been able to have it restored is because of maybe anomalies or bits in the contract and what do you think of the role of the manner in which the products were devised or produced?

So, I think here there’s an important lesson for the future which is for consumer protection, you know, which is a core function of the Central Bank, making sure that the financial products are transparent and understandable to the typical consumer is important. So, the value of simplicity in terms of the design of products, the value of transparency. So that, on both sides those managing these contracts inside the banks fully are aware of what is the commitment from the banks side and fully flag to the consumer the menu of options facing the better. So, I think that’s an important lesson for the future is that we need to be, banks need to be very clear about their responsibilities and that that should be consumer orientated. A part of our consumer protection approach is to promote a culture of consumer orientation inside financial institutions that, you know, if the mind set of financial institutions is what kind of products are appropriate for the consumers we’re selling to, you know, I think that’s that very important in delivering much more satisfactory outcomes for consumers. So simplicity, transparency I think are very important.

And just the final question, this year has been a big year for the Central Bank in terms of enforcement and using that variety of tools that you have at your disposal. Obviously, the banks in trackers have onerous obligations in respect of reviewing their files and having external and even, you know, even paying for financial advice for people who are affected. Is there any case for attempting to take stronger measures against individuals or others who oversaw the management of these products?

So, let me make a couple of observations. One, that we have already seen with, is there’s been a settlement in one case, so one has been concluded. I don’t want to preview future cases, and I don’t think it would be a good idea to preview an individual enforcement cases. So let me generalise that, where we assess that there’s been a failure, a failure to properly comply with expectations in terms of how financial firms should operate, there are essentially two types of enforcement actions. One is at the institution level and I think holding institutions to account there’s a collective responsibility in these institutions. I think that’s very important and we have seen an increasing volume of enforcement actions against firms. In relation to individuals where there is evidence that there is clear, verifiable information against individuals behaving in not a fit and proper way then we can and do take actions against individuals. And at the extra level if we ever see hints of criminality then we pass the file to the relevant authorities. So, there’s different levels of enforcement actions that are open to us, and we see it increasingly though the conclusion of various cases, that we have identified enforcement as a vital part of our regulatory approach. I mean the ideal is we come to a situation where everyone understands enforcement will be vigorously pursued and in turn that will modify the behaviour of banks and other financial service providers. If these institutions face the credible threat of future enforcement, it increases the pressure to comply with our regulations.

ENDS