‘Regulatory policies and fiscal policy have essential roles to play in macro-financial risk management’ – Governor Philip R. Lane

• Macro-prudential policies such as the counter-cyclical capital buffer and mortgage measures contain pro-cyclical behaviour during expansion phases and improve resilience for future downturns.
• Tackling the excessive stock of non-performing loans improves the stability of financial system.
• High governance standards in banks also necessary to safeguard financial stability during growth periods.
• Running surpluses during upswings necessary to allow fiscal loosening during downturns.

Addressing the annual Central Bank of Ireland economics roundtable, Governor Philip R. Lane discussed the importance of macro financial risk management. He noted that both regulatory and fiscal policies have essential roles to play in macro financial risk management. In addition to the remarks, the Central Bank has also published Governor Lane’s annual pre-budget advisory letter to the Minister for Finance, Paschal Donohue TD.

In relation to regulatory policies, he discussed the Central Bank’s actions to prevent excessive credit growth and leverage at a system-wide level, including the recent activation of the counter-cyclical capital buffer (CCyB) and the mortgage measures. He said ‘by limiting the risks of over-borrowing by households and over-lending by banks, household and bank balance sheets should be more resilient in the event of a future downturn’.

In relation to supervisory priorities and associated risks, he said that, while the direct restructuring of troubled loans by banks plays a vital role, the sale of loan portfolios to international investors is also an important element in macro-financial risk management by reducing national exposure to adverse shocks.

Governor Lane said ‘the current upturn in the European economy also provides an opportunity to address legacy issues such as the excessive stock of non-performing loans (NPLs) that accumulated in the wake of the crisis. While the tackling of NPLs is a pan-European supervisory priority, it has particular importance in countries such as Ireland that experienced the most severe increases in troubled loans in the wake of the crisis.’ He stressed that the sale of such portfolios cannot – and does not – affect statutory consumer safeguards including the Code of Conduct on Mortgage Arrears and the Consumer Protection Code.

He added that maintaining confidence in the management and governance standards of banks is essential for financial stability and requires that all banks adhere to high risk management and governance standards.

Discussing the details of his pre-budget advisory letter he said, ‘if fiscal buffers are not built up, there is a risk of repeating the historical patterns by which economic downturns have been amplified by pro-cyclical fiscal austerity’.

Governor Lane said ‘there are three further reasons to set more ambitious fiscal targets in the current environment. First, it cannot be ruled out that the surge in corporation tax revenues may have some temporary elements, indicating that some part of these revenues should be categorised as a windfall. Second, to the extent that the current low interest rate environment is not expected to persist indefinitely, a tighter non-interest budget balance offers protection against future increases in debt servicing costs. Third, the legacy of high public and private debt levels mean that Ireland is relatively more vulnerable to reversals compared to other countries with less-leveraged public and private balance sheets.’