Transcript of Governor Philip R. Lane interview with Ian Guider, Sunday Business Post

12 Nov 2017 Interview

Central Bank of Ireland

Transcript of Governor Philip R. Lane interview with Ian Guider, Markets Editor, Sunday Business Post

Ian Guider, Markets Editor, Sunday Business Post: If I could start off maybe on macro issues, the Irish economy, it looks in a pretty healthy state right now.

Governor Philip R. Lane: So, what we’ve got is a decent recovery which should not be underestimated. The fact that, you know, after the crisis I don’t think it could be guaranteed that we would have seen the recovery we’ve seen in recent years. So we’re on a recovery phase, where unemployment has come down a long way, where we’ve got decent economic growth which is broadly balanced. So you have the domestic sectors growing as is traditional in Ireland, we have a decent platform of export orientated firms. So that’s where we are now. It’s a decent recovery.

I think life is going to get interesting over the next year or so because if this continues we will start to hit capacity constraints in the sense of employment heading towards full employment and at that point, I think that’s good news, it’s fantastic that the economy is going to deliver more jobs for more people. But from a policy perspective it brings new challenges in terms of how to manage a fully-employed economy. It’s very different to managing the economy in recent years, where with so much slack the imperative has been, ‘Get the economy growing, get more people back into jobs’ and so on. The gearshift towards full employment, it’s not there yet, we’re not there yet, but I think we need to prepare for that day.

Ian Guider: The Minister for Finance has repeatedly said, ‘Next year and the year after there will be a lot of fiscal space available’. What’s the sensible thing to do in an economy that is growing quickly and doesn’t perhaps need any additional stimulus?

Governor Lane: Well, I think there would be an alignment because if you read the Summer Economic Statement, which lays out the government’s fiscal views, it does recognise the possibility of overheating. So I think the important issue to think about is, not so much the level of public spending, it's for the government to decide and we know for example with public investment that there is, you know all sorts of bottlenecks even there in public investment.

The big issue when you have full employment or risk of overheating is, how to finance that. So it’s perfectly consistent to say, for example, we need to have a uplift in public investment but at the same time to say, well, in order to avoid overheating the economy we need to take revenue measures, we need to take tax raising measures, either to collect more revenue or to deliberately slowdown some types of activity. Of course it's a difficult task to implement. First of all, you have to identify if the overheating risk is material. Second is to communicate the necessity of running significant budget surpluses if the economy is in an overheating mode. And that is something where there’s been some movements in the past towards that but I think the lesson from the crisis is, that is not an option. So, moving to a situation where we have to do more in terms of deliberate measures to make sure that the funding gap in the economy is not leading to unnecessary overheating pressures, that’s a big challenge.

Ian Guider: Have we measures in place either European or our own measures to stop the things that we might have done in the past to stop spending the surpluses, to stop public spending increasing too much?

Governor Lane: So what it’s very important to emphasise is the primary goal of a lot of the fiscal framework is to avoid excessive debt, so that there are ceilings on the size of the deficit. I think all of it enables a government also on the other side to run significant surpluses but it's fair to say globally around the world there’s probably much less by way of legal constraints or constitutional constraints on a government that has a significant revenues. So, in other words, the message is, governments will not be able to rely on some kind of a legal constraint saying, ‘we’re not allowed to borrow more’. It’s going to be a political judgement call and so it does require political leadership to deliver the types of significant surpluses that would be necessary if overheating arises. Again, let me emphasise, I’m not saying there’s overheating now, I’m not saying it's going to happen but it’s just a risk factor that needs to be managed and worked through.

Ian Guider: What would be the signs for you of overheating in the economy?

Governor Lane: Well I think it’s important for a small economy like Ireland, where we know there’s a lot of potential in terms of migration flows and capital flows that the speed limit of the economy, it’s much more difficult to work out compared to say, the US economy. Having said that, I think some of the indicators would be in the labour market, if we saw severe wage pressures. So sustainable increases in the wages great. I’m all in favour of living standards going up but the issue is, is it at a sustainable speed and that requires an assessment of what is driving the economy?

If it's something temporary then you would worry about, well this is not going to be sustainable. But if it’s something more permanent in nature then you can take a more relaxed view. But in the end we know the Irish economy, the labour market is reasonably flexible but what that means is that if the capacity constraints do get hit, what we will see is a significant drift upwards in wages, which if it goes beyond a sustainable level that is the most important signal.

In the past, in the mid-2000s what we had was a credit driven boom but that’s not the only type of boom. So the credit channel, we now have the measures that we have in terms of the mortgage market but also more generally for how we regulate banks. There’s less chance of a credit driven boom but even without credit you can have a kind of, if you like a real type boom where it’s more and more FDI, more and more foreign firms coming in and that is essentially where fiscal levers will be most important.

Ian Guider: If we were speaking a year ago, I would highlight the risks to the downside being Brexit, being the political instability in Europe, a lot of that seems to have dissipated.

Governor Lane: I will agree about the latter point. So, after the wave of elections we’ve seen and if you look at the improving nature of the European economy, the risk about the euro area is less. I think that’s true but we can come back to that, but I would disagree about Brexit, in fact, until we see what the outcome is going to be in terms of the conclusion of negotiations. It remains a live risk. So I’m not going to agree that we can be relaxed by the Brexit risk.

Ian Guider: I agree with you that we don’t know about Brexit, but the impact so far has really only been in the currency market.

Governor Lane: Well, in and of itself of course, currency movements are pretty significant for the Irish economy. But what we’ve seen over the last year and a half year is a big debate about what is Brexit going to look like. And given that uncertainty it’s maybe not too surprising that not much has happened. But as the negotiations reveal what Brexit is also what’s going to mean, that’s where if it turns out to be a Brexit scenario where investors, consumers, conclude it’s going to be bad news for the UK, it’s going to be bad news for Europe, that’s where the kind of risk of more negative economic consequences would kick in. So up to now many people have been unclear about what would Brexit mean and therefore the kind of revision in spending plans that might trigger a more substantial slowdown in the UK has not happened but I don’t think the risk is going down, until we know more about Brexit that’s a live and material risk.

Ian Guider: Looking at the European economy, it has surprised many people how strongly it has performed this year, what’s behind it?

Governor Lane: I wouldn’t be as surprised because what we’re seeing is just a solid recovery from two severe crises. So you had the global financial crisis in 2008/2009 and then the euro area existential type crisis of 2011/2012. But we know the research literature is fairly clear, that recovery from these types of crises tends to be gradual and takes a long time. So what we’ve seen is, I agree, it’s remarkably steady so we have this nearly four years now, quarter-on-quarter, the growth rate of the euro area being pretty steady, not spectacular but steady. But what we’ve seen I think, what’s important in the last year or so is, if you go back to the first half of 2016 that momentum was there but there were alternative risks including for example, the risks in relation to the emerging markets, there’s concerns about the direction of oil prices. Now it’s very hard to point to significant headwinds. So what we have is a decent economy and residual concerns about world trade, about geopolitics but the nature of the risk profile, not just in Europe but globally, is much more moderate than it was a year ago and really what we have is, the combination of decent growth rates plus not too many severe downside risks looming on the horizon.

Ian Guider: Do you attribute it to the actions of the governing council or have we seen real reforms by governments across Europe to get their economies going?

Governor Lane: Well, I think number one is neither of those two, which is basically the natural cyclical momentum in the economy. Advanced economies have quite a lot of resilience, a lot of bounce back. So if you think about one narrative is essentially there was a deleveraging process, that many households, many firms are focused on improving their balance sheets. But at some point you’re going to convert from doing that towards spending again, so you’ve consumption recovery and investment recovery.

To the role of the ECB policies has been to support that, so I think we’re pretty confident and the analytics we do in the Euro system would convince us that the accommodative monetary policy has been supportive and in the absence of that the recovery would not be as strong. There would be some degree of recovery but not as strong. And the recovery of inflation towards target would be weaker.

The structural reform agenda in Europe is not about boosting the growth rate this year or next year. It’s just a basic observation, which is, if you look at a country’s performance over a much longer horizon, over a 20 year interval even, at that interval it becomes visible that various types of reforms can really make a difference in terms of long-term living standards. So the structural reform agenda is much more about showing a pathway, that there’s a pathway for Europe which can be much more optimistic than some of the adverse profiles that people talked about during the crisis.

Ian Guider: When we talk about how strong the Irish economy is growing and how the European economy is recovering, there’ll be many people either here in Ireland or in many countries across Europe will say, ‘we haven’t felt it yet’.

Governor Lane: I think there’s a number of factors behind that. One is the legacy of the crisis, is in many countries, the crisis was partly financed by a rise in sovereign debt. And so what’s happened here and elsewhere is, for example, tax burdens have gone up.

I’m sure if you look over your payslip, or if I look at mine, what remains after the taxes is going to be lower. So a basic issue is the distribution of income between the government because it has more debt to finance and what remains for the individuals has shifted, so that’s a long term feature.

A second feature is the last part of the recovery. Until the labour market tightens sufficiently that wages grow more quickly and this is what I was saying earlier on that I think is the last part of the recovery to happen. So you know, I think it's already happening in some parts of Europe, it’s happening here to a degree but I think more to come. So, as employment comes down to full employment as the labour market gets tighter we should see much more significant wage increases.

All the risk factors I was talking about earlier on is if it overshoots and that overshooting risk would have to be dealt with. But when we do see wages starting to go up that’s I think going to be important. Here there’s been a lot of employment creation but we’re not at full employment yet. So again if there remains many people who would like to get a better job, get more hours and that process is ongoing, a lot has happened, there’s more to come.

And of course the scars, there’s so many scars from the crisis that how people feel about their lives that will be carried around. We know the research studies have shown that people who lived through the Great Depression, it left a permanent mark, you know, that these severe recessions leave a permanent scar.

Ian Guider: Has it taken longer, I mean we’re 10 years now from the global financial crisis, five years on from the worst of the Eurozone debt crisis, has it taken longer do you think to cleanse the system and to get back to some sort of normality?

Governor Lane: If you look at the work of Reinhart and Rogoff who before the crisis conducted this universal study of previous episodes of debt crises, the strong pattern in that work was more or less it takes a decade to emerge from these crises. So at that level the fact it's been gradual is to some extent can be understood but I think the historians will be relooking and asking, were the fiscal strategies correct, were the strategies in relation to how the banks were pressed to restructure and recapitalise correct? So at a European level, at an Irish level, the challenging how the crisis was handled is going to be an industry in itself. It think that’s going to be very important to learn the lessons about what else could have been done, what could have been done better.

Ian Guider: The actions of the most recent government council meeting, reducing the asset purchase programme down to €30 billion a month from next year, is it a sign that the government council are satisfied that the recovery has taken hold and that the European economy can grow without these type of measures?

Governor Lane: I wouldn’t exactly phrase it like that because what have we decided, we’ve decided that we have to maintain what is really extraordinarily accommodative monetary policy. So we’re saying we’re going to add €240 billion more to the stock of assets, €270 billion between January and September to the stock of assets we already own, so that’s more stimulus. We’re saying we’re going to maintain the main policy rate, the deposit rate these days at minus 40 basis points well beyond that point. So that essentially is saying that we conclude, that to hit the inflation target over the medium term, more is needed. So the extension that we’ve done, which is an open-ended extension is saying we’re not in no way declaring a victory yet. The fact that we’re downsizing the monthly purchase reflects two factors. One is, the economy is definitely improving and therefore if €60 billion was the right number a year ago €30 billion is a reasonable recalibration. And number two is, at this point after the last year of purchases the mountain of assets that we hold is much bigger and the bigger stock in itself is suggesting you need to reduce the monthly net purchase.

Ian Guider: When do you think would be the time to start talking about normalising interest rates?

Governor Lane: I think the ECB has this very coherent communication where we have signalled that until September 2017 our assessment is it’s necessary to continue to make net purchases.

We’ve signalled that even after that point the principle of the maturing bonds will be reinvested and in relation to interest rates the time to reconsider the level of interest rates would be well past the end of the period of net purchases. That’s telling you it’s going to be, not anytime soon, if the sequencing is crystal clear.

In the coming months we’re going to have new forecasts in December, new forecasts in March, new forecasts in June and new forecasts in September 2018. So let’s see which decision point in terms of new data the evidence will be sufficient to indicate that what we should do after that. But it’s important to give the kind of stable message that we have our policy set and in terms of interest rate policy the core forward guidance is well past the end of net purchases. We have not set a date for the end of net purchases, so that indicates it’s too early to set a date for when interest rates might move.

You used the phrase normalisation, we would share that view, is that this is not normal now and the recovery in the economy is such that I think people do need to look ahead. People who are signing long term debt contracts or people trying to calculate what is the reasonable valuation for a given asset, it’s important to recognise what we have now is not normal and that it’s not going to last for an indefinite period, that there’s enough signals of recovery, that the next phase when interest rates move again it’s within the foreseeable horizon.

Ian Guider: Is it possible we’re locked into an era of low inflation and low growth?

Governor Lane: I think there’s a strong consensus on the fact that growth rates have come down and the number one reason for that is simply demography, that among the advanced economies and also some of the major emerging markets the kind of growth rate of the workforce, is it slowing down or going to reverse. The big unknown, the second big factor is what’s going to happen to productivity. Essentially over the last decade we have this period of where not much information is being revealed because of course during a deep recession, the incentives to invest are much less, the hoarding of labour goes on in firms. So if you like the pressure to innovate, the pressure to move forward in terms of adding productivity, enhancing capital is less. So it’s only when you come back towards more or less full employment will we see what are the genuine prospects for productivity. As you know there’s a contest. There’s a contest between those who are optimists where they look at the potential for artificial intelligence, they look at the potential for various developments in different fields - versus those who are more pessimistic you know people who read the work, for example Robert Gordon and so on. On that front we’ll have to wait and see. But what I would emphasise is, I don’t read too much into the productivity numbers for the last decade because I think that’s overwhelmed by the fact that the world was in a recovery from crisis mode.

Ian Guider: From a domestic and from a European point of view, what are the risks in 2018 that you’re looking at?

Governor Lane: Let me zero in on one type of risk which is more or less connected to the nature of what we just talked about. I’ve just said that the ECB policy rate is going to remain at its current level for a significant period of time but the rates that are relevant for lending to small businesses or corporations or for mortgages, let’s say if you take the five or 10 year rate. Those rates are some mix of what people believe will be the future for the policy rate plus various types of risk premia. And so every financial stability report you might read from the IMF, from the ECB or from us here, will refer to what might be called snapback risk, which is, unexpectedly those rates moving up faster than the world imagines. That could be because, for example, a change in savings behaviour in emerging markets, it could be an assessment that geopolitical risk is surging upwards. So, the fact that market volatility has been very low in recent times maybe doesn’t exactly match the underlying true distribution of risk.

If you see then a tightening of financial conditions could leave people who are making new investment plans, consumption plans to revise those opinions. I will come back here to Brexit because we know 2018 is going to be a big year in terms of the negotiation. That's a significant and concrete risk for the Irish economy and then at a global level the other risk factors are geopolitical and I think the future of the world trading system remains uncertain. So, until we know more about what the various pressures in various countries to look again at the gains from globalisation where that concludes that the risk of serious disruption to the global trading system is material. And maybe finally I’ll just mention something that all the time now the awareness of it is going up which is some kind of very significant cyber risk event which could really be quite damaging.

Ian Guider: Just on Brexit, if we head towards a no deal Brexit, if on the 29th March 2019 Britain crashes out, how bad could it be for the Irish economy?

Governor Lane: There’s two levels to that. One is, I think there’s a reasonable degree of convergence about the long term implications. So the long-term implications if you have more trade frictions between the UK and the EU it’s bad news for the UK, it’s bad news for the EU and what it means is that living standards will fall by a few percentage points over a long time period. That’s regrettable but it’s maybe manageable. If it’s a disorderly Brexit where as we’ve talked about up to now by and large, activity levels in the UK have remained OK, activity levels here are good, but if it turns out that there’s a surprise, an negative surprise and there’s hope for a deal and then the deal doesn’t happen, then you could have more of a disruptive short-term effect in terms of a more severe slow down in the UK and so on. That disorderly scenario is for the near term of most concern.

Ian Guider: Why haven’t we seen more foreign bankers flooding into Dublin?

Governor Lane: My view of Brexit is there’s two phases. For now what we’re seeing is contingency planning. So firms are looking around and saying, ‘well I need to have a hard Brexit plan’ and what we’re seeing is some institutions - and let me generalise to the general financial sector not just banks - some institutions are coming here, others going to Frankfurt and by and large most of this seems to be driven by, where they already have a set up. It’s easy to say, ‘well, I’ll just expand or go back to a location which I know about’. I think phase two, once the parameters of Brexit are known, is many firms can look again and say, ‘well, now we know financial industry is going to be in terms of the possibilities for trade between the UK and the EU and then we think about our long term future’. That second phase will happen in the future. In relation to the first phase, you know, we think there are significant amounts coming here, we’re staffed enough to deal with that, already there’s some concrete applications moving forward across numerous sectors.

We essentially are here to facilitate so our role as the regulator is facilitation in the sense of, if a firm approaches us to declare that they either want to obtain a licence here or to expand the business they already have here, our focus here is to make sure we are efficiently responding to that and, the good news across Europe is essentially there’s been a high degree of convergence. So, in other words firms don’t have to calculate which country is going to be the friendliest in terms of regulation, they know the basic answers are the same everywhere and by the way that’s totally locked in in banking because of the SSM. And so the focus is more on the general relative attractiveness of different cities for now, I don’t think it's necessarily going to be the conclusion of the whole Brexit process but for now where is the most convenient location for my contingency plan.

Ian Guider: But it does look like we’ve lost out to some places where you think we should actually be winning.

Governor Lane: Again, that language is not the language of how we would think about it. So, I think the fact that we are seeing a significant amount of firms coming here and it’s not just a question about the number of firms but the materiality and the size of the firms suggests to me is that firms understand that this is a feasible location and a number of significant firms are indeed moving to expand operations here.

Beyond that the fact that I think it's very important to appreciate is that this is if you like a dynamic process where firms are searching, they're trying to work out where the best location is going to be but also that in part depends on the decisions of other firms. So, there isn’t some kind of a planner saying, ‘well let’s replace London with one other location'.

It’s a search process which for now is leading firms to move to certain locations and let’s see how that dynamic continues because there may well be future waves of firms deciding to move again or to relocate. But I think it would be surprising. It would be genuinely surprising if Dublin were either receiving zero interest, that would suggest there is a problem and it would be equally surprising if we obtained an outsized share because the European Union is a large economy.

We’re part of the EU single market, what that means is that Dublin is a very successful exporter of financial services across the EU. But equally by the nature and you know fundamental characteristics of a single market, it also means we’re part of a single European system and the fact that firms are also going elsewhere and may sell products into Ireland from elsewhere that should be fine It’s part of developing a single financial system in Europe and the most important thing for us is that that’s the most efficient competitive financial market you can find on a European basis.

Ian Guider: The most recent minutes of the Commission noticed that activity from firms enquiring had levelled off, has it improved since?

Governor Lane: Obviously in the initial months and let’s say the first year after Brexit, firms had to get going so of course there was this, the surge of enquiries was most intense in year one through the summer. There are continuing approaches from other firms but at this point many firms will have an indication of what they think they want to do. I think it’s fair to say in this phase one, this initial phase of firms making contingency plans many firms have made those initial plans, even if they haven’t necessarily concluded. But let me emphasise is a live issue is the duration of the transition period. So I think for some firms if it turns out the transition period is longer than expected, then there’s a possibility there to look again. Because with a longer transition there’s more time to plan and they can think about well where’s my better medium term prospect rather than just focussing on, I need to get something in place for March 2019. So if there’s a longer transition period that may lead to a new wave of thinking by firms.

Ian Guider: Do you think there’s been unfair criticism of the Central Bank for not having a greater promotional role of targeting firms?

Governor Lane: I think the division of labour is appropriate. We know Ireland has a very successful industrial development authority whose job it is to promote Ireland and I know they’ve been working hard to explain the attractiveness of Dublin to the financial industry. There’s no shortage of capacity in the Irish system to and also through the work of the Minister for Financial Services and the wider government, there’s no shortage of people making the case for Ireland. What’s super important and I think it's attractive for firms is they know that the regulator is a rock solid, top tier, European regulator who’s intent on maintaining an appropriate pro-European reputational approach as opposed to in some way trying to find backdoor entries. By and large my experience is firms are very happy to know that we are absolutely in line with European expectations of what regulators should be doing.

Ian Guider: Just before I turn off this topic, from the conversations you’ve had with firms, have they said to you that if you go to other countries they are prepared to offer inducements or any enhancements or anything to go that bit further to get to them?

Governor Lane: No, no. So I think firms are by and large engaging on the basis of, we want to comply with European expectations but for those who - of course there’s a kind of education process I think - they might be saying, please educate us about what is exactly needed so we understand the basic principles and that’s what the regulatory engagement is. It's converting from general principles to the specific circumstances of individual firms but I think firms know it would not be a good idea to look for special treatment.

Ian Guider: I want to turn to the domestic banks a bit and the tracker mortgage issue. I don’t think I’ve seen the level of anger at banks, at the Central Bank, that I have for any other issues than tracker mortgages.

Governor Lane: If you look at the numbers that we’ve put out, we’ve said so far we’ve identified 13,000 cases plus the 7,000 we had handled before this examination started. So that gets you to 20,000 and we’re pretty confident there’s going to be a lot more, you know [a] significant number...

Ian Guider: How much more?

Governor Lane: That I can’t really speculate on but, you know, obviously there’s an upper limit but there’s going to be significant expansion [of] that number. But that is why the Central Bank launched this examination. We’ve had these two phases that from 2008 onwards there was quite an amount of intervention knowing the risks associated with tracker mortgages and as we’ve put out in some of our publications on this, there’s quite a number of interventions which led to about 7,000 handled in the pre-examination period. And this examination which is unprecedented is exactly to make sure that all of those who’ve been harmed by this process do receive redress and compensation from the banks.

Now, I understand that there’s a lot of frustration out there and we would share with all those affected and the wider public that this is a significant failure by the Irish banking system.

We have a Consumer Protection Code, we brought this code in originally in 2006 and you open page one it says firms are expected to act in the best interest of consumers and the fact that they have not done this, the fact that they have repeatedly either tried to interpret contracts in the interest of the bank, as opposed the interest of the consumer, has led to this situation. It’s a violation of our code and this is why we’re able to chase them now. We’re imposing this process on them.

We’ve already delivered a process where the banks have agreed about 20,000 cases. I think we’re in an intense phase right now where more of these cases are going to come into the process. So there’ll be a significant uplift in the number of people who are going to be covered.

But I think it's very important to emphasise to everyone is the Central Bank through its consumer protection work has been really intent on making sure banks go beyond their legal minimum requirement and truly put consumers first and that’s why we’re going to have so many of these cases realised that there’s so many cases are going to be delivered by this examination.

The Central Bank is absolutely working to make sure that consumers, even those who may not have realised they’ve been affected. I think that’s going to be part of what we see is because we’ve asked the banks to go through their whole book and by insisting on that, there will be cases uncovered where people have been overcharged, not put on the right rate, not been given a tracker, right to return to a tracker after a period of fixing and this is going to deliver for many thousands of people.

Ian Guider: The examination began after and it was only after the High Court case didn’t go to the Supreme Court, after Permanent TSB came out with its own redress scheme. There was a period of time before the Central Bank began its examination, were you letting the banks just decide, well we don’t want to deal with this, you go ahead and do it.

Governor Lane: No, I cited to you already there were over 7,000 cases handled at different points in the pre-examination period. So, there was a lot going on there and it was not the case that this is just being driven by what happened in the courts. The Central Bank was involved well before that. But the decision to go from, if you like, interaction with these individual cases or individual institutions to a universal examination that was essentially the Central Bank deciding - there’s so much going on here, is rather than respond to emerging evidence of problems in this area, let's flip the burden of proof and basically say, until you show otherwise let’s look at every single tracker mortgage.

This is very unusual and it’s really an expansive role by the Central Bank to move from responding to evidence of problems, to just saying listen until you show us otherwise all of these mortgages need to be examined. And so this universal examination is really a very powerful way for the Central Bank to deliver outcomes for many thousands of people and as we’ve seen over the course of the examination, the numbers have been climbing because of the fact the Central Bank was unwilling to accept the original estimates from the banks.

Several reasons explain why it’s been taking a couple of years to deliver this, but a lot of it is basically because of Central Bank repeatedly going back saying, 'we think you’ve taken too narrow a view of which cases have been impacted, which people have been damaged by this…you need to look again, you need to go back and expand the definition of those who’ve been harmed by the handling of tracker mortgages’. And through this persistence by the Central Bank, this is why it’s going to deliver outcomes for so many people.

Ian Guider: But the banks are still in control, the process, they’re in control of the compensation awards being offered. Should it not be taken away from them, given how they’ve behaved over the last number of years?

Governor Lane: What’s happening is under the examination, under the principles of redress and compensation is we’ve been pushing the banks. So it’s not the case. The final redress and compensation schemes that are now being set up - some banks moved earlier and are near the end of the process. Other banks have moved really recently. It’s only at this point there’s a conclusion about what is acceptable.

I would think the correct way to think about it is, we are insisting on minimum standards, that they have to be at some zone of acceptability. But it’s important we should not be putting a limit in under your interpretation. I think the counter argument would be, ‘why are you limiting the [compensation]. If we imposed a limit on what the banks should offer, I don’t think that would be in the interest of consumers. So basically our strategy is, we are insisting on if you like a general framework, that’s part of what we expect from the examination.

The final compensation offers appropriately are coming from the banks, because we don’t want to put an upper limit on what the banks should offer. Let me heavily emphasise this, we’ve also insisted on an independent appeals mechanism. So if an individual believes that the offer from the bank doesn’t capture what happened in their individual case… we’ve heard many stories where, or many cases where people had had severe personal additional losses because of the effects of these overpayments then the appropriate compensation should be a generous offer from the bank.

But if the person affected is not happy, there is an independent appeals mechanism and after that there’s also the option to go to the [Financial Services] Ombudsman and in situations where there’s a legal dispute to go to the courts. We anticipate that provides several layers of protection for those affected but as I say the basic point here is, it’s the responsibility of the banks to be as generous as is appropriate to deal with those who’ve been harmed by this.

Ian Guider: Does the fact that some of the banks only came out with their numbers after persuasion from the government, does it show that they’re not fearing the Central Bank right now?

Governor Lane: So, I think there’s a distinction between the nature of the engagement between the regulator and the banks. We’ve had this persistent interaction with the banks through the examination. So at the level of the interaction with us, what we have been doing is disclosing only what’s been agreed. So in the October update we said, ‘well, here’s what's been agreed so far’, we knew and we know there’s more to come and those are, but until they’re finally agreed we don’t publish. Now, that reflects the importance for the Central Bank to be putting out accurate and reliable numbers. So, we have been doing it on a lagged basis. Here’s what's been agreed, we’ve signalled in the report we put out in early October that there remained a number of, a significant amount of cases that remain in dispute. And what we see right now is the process to bring those to finalisation. So, that’s how we’ve been interacting with the banks. Given the social importance of this tracker examination, the fact that the Oireachtas Committee on Finance was able to have public hearings with the banks, was very important in shining the public spotlight on this issue, which was reinforced by the fact that the engagement between the Minister and the banks led to the banks making these public apologies and public statements.

At any point during this process, any bank could have gone more public and could have gone in more detail in terms of offering an apology, disclosing, 'here’s how we’re handling the issue'. That was always an option for these banks but for us, we were in these detailed negotiations and they way regulators necessarily have to operate is, we can disclose aggregate numbers which is what we have been doing. Whereas it's up to the banks, because in the end it’s the responsibility of the banks to disclose the numbers in relation to their own organisations. I think the balance is there. We have our role and the banks had a responsibility to disclose what’s going on and it’s desirable and natural that the Oireachtas, the Finance Ministry and indeed the general media hold the banks to public account.

Ian Guider: The Minister for Finance described the behaviour of the banks as disgraceful, do you echo that and can you maybe assure people out there who have been affected that they will face real sanctions, real enforcement activities that will hurt them?

Governor Lane: I first spoke about this in 2016 and at that point, you know, I was absolutely straightforward in describing this as a scandal which it is. It’s scandalous that there was this widespread mistreatment of people especially in very difficult situations that has several responses from us. Number one, the first priority has been to make sure people get paid back. So redress and compensation, even before that where people were on the wrong rate that they were put on the correct rate. Parallel to that, is the fact that these banks were not treating their customers properly, will lead to regulatory sanctions. So, already...

Ian Guider: Do you think the bank fear a €4.5 million fine?

Governor Lane: Let me say a couple of things. As you say already in the case of Springboard that fine was imposed. Now we operate under a legislative framework you know which is obviously the Oireachtas passes the laws that put parameters on what type of fines can be imposed. And I think there’s a general understanding that the fine is only one element, the fine is one element. The wider issue is the reputational damage. The fact these banks now they’ve had public apologies, banks that are subject to an enforcement action by us. We have a strict policy here of publishing the outcomes, that’s not universally true. Sometimes in some jurisdictions the regulator makes a private settlement with an institution. We insist on publically announcing and you see from our recent years we’ve had quite a lot of enforcement actions where there’s a public announcement.

Those public announcements mean there’s a serious reputational damage which it’s not just in terms of reputation in terms of customers, you know of course that should be sufficient. But for these banks of course who are looking for investors, who want to keep investors happy the reputational cost when an investor reads the public announcement that such and such a bank has been sanctioned by its regulator. That is an important part of the enforcement approach and over and above that.

Let me emphasise we also can hold individuals to account and part of what we’re doing is looking at the individual accountability. And if you look right now we have the Inquiry Hearings for some board members of Irish Nationwide. So we’ve a long memory here. We’re saying, we consider these violations of corporate governance to be such that we are running a sanctions procedures now against those individuals. So where we see the case for sanctions against individuals those will be pursued.

So the enforcement actions are absolutely there but of course building those cases especially given the volume of files to look through, holding interviews with those involved and so on, that takes time. So I can understand the frustration with that, but I think I can provide the assurance that there’s significant enforcement actions on the way and these will conclude with significant sanctions where the fine is part of it but these wider reputational issues are important.

Ian Guider: I know we’re tight for time but on the macroprudential rules review, that’s coming very soon and also your views on the housing market, we’re seeing double digit growth in house prices, are we at risk of going back to the old times and house prices and what are you doing about that?

Governor Lane: I agree that the housing market assessment is an important element in how we think about the macroprudential rules. Now, I’ve already said in September, what is true is it’s possible to have misprice in the housing market even without any contribution from lending. So the macroprudential rules are basically restrictions on lending behaviour. But what we’re seeing internationally is many people with cash in a world of low interest rates for various reasons are deciding, maybe a good investment is to buy property. So the cash driven investor, they may be making mistakes but if they make a mistake those individuals will lose money. It’s not going to put the banking system at risk. A fundamental issue is if there’s a significant proportion of cash buyers in the market, that doesn’t rule out mispricing but the consequences of it, if there’s a reverse on house prices, are quite different to what we had before. So our role is to avoid the spiral between credit and house prices, that’s the role of the mortgage framework because with the loan to value limits, the loan to income limits, the dynamics where high house prices induce more credit, more credit drives house prices and you get that spiral. Which then reverses. That is severely limited by our rules.

So, let me come back to house prices, what we’re seeing, the way to think about now is, number one the credit issue is not the dominant element at the moment. What we have is some supporting fundamentals, employment growing, wages going up, low interest rates and then of course the fact that rents are high. So behind high rents and high prices is the housing shortage. So what we saw in the mid-2000s is when there was a surge in supply, that was an important factor behind the reverse in house prices. As we see more building that in itself is going to push down rents and push down house prices. So the fact that the fundamentals today are supporting the increase in house prices, that doesn’t mean those fundamentals can’t go into reverse.

We talked about earlier on mortgage rates at some point will go up. We think if the housing supply goes up the alternative to buying of renting will become more affordable and you know, if Brexit risk materialises, if other risks materialise that the decent growth rate of incomes at the moment, there’s a risk of reversal. So for me there’s significant downside risk and because of that downside risk, it reinforces the importance of having down payments, insisting on down payments where we have the ladder between first-time buyers, second-time buyers and a pretty significant one for buy-to-let. So the dynamic where buy-to-let feeds the momentum with our 30% down payment for buy-to-let, you know, we’re doing a lot to protect against that downside risk.

House prices are growing strong at the moment. There’s natural economic reasons for to support significant increase in house prices but that does not mean they’re sustainable. That depends on your view of where incomes are going, where interest rates are going, where housing supply is going and really, anyone who’s thinking of buying a home should be alive to that fact that it’s a two-sided risk, it's not a one-way bet.

Ian Guider: All of which would suggest that there will be no changes to the rules?

Governor Lane: I would not want to preview what the decision is going to be. What we saw last year was a redesign and you know, the fact that we have these rules regardless of whether the tightening or loosening dimension, the fact that these rules have a structure, that structure - one part of any review would be to say, ‘Well, are these exactly the right parameters we want to have?’ So, let’s see what the decision is.