Transcript of Governor Philip R. Lane interview with John Walsh, Deputy Editor, The Times (Ireland Edition)

24 July 2017 Interview

Governor Philip R. LaneJohn Walsh, Deputy Editor, Times Ireland Edition: The Bank of England Governor Mark Carney made quite a hard hitting speech on the Eurozone in Iveagh House in 2015 which was in line with the commentary of the time. Obviously quite a lot has happened between then and now and the euro is on the upside but it still has it's critics some of whom say it's structural problems mean it is doomed to a high debt, low growth trap. Can I get your thoughts on that?

Governor Philip R. Lane: Since 2015 the recovery has been fairly steady. Quarter on quarter growth has been stable since then. There is no single reason for this. The signal by late 2016 is that the recovery is fairly solid. Where we are now is that we have a solid but modest recovery. For the ECB, it is still the case that, in common with other central banks, inflation is too low compared to target. But your wider questions in terms of the underpinnings for the long term future of the euro area, let me note that one of the biggest most robust lessons in economics is that monetary arrangements do not have a first order role in long term economic growth.

So the issue about living standards (I think you were referring to low growth, high debt issues) that has little to do with the euro. It can’t be the case that monetary dimension matters that much. In the US and the UK, you have high income areas and low income areas. Within the UK you have affluent areas such as London and the less affluent in the North of England, so it cannot be the case that the prosperity of a particular areas fundamentally turns on monetary arrangements. That has much more to do with fundamentals such as geography, people, institutions and policies.

So, Europe has a lot of other issues besides monetary arrangements. So the monetary issues to those issues is not fundamental. It remains the case that there is still a live debate about is necessary, what needs to be done to make sure the euro area is more robust and that is still an open question. The European Commission put out it's reflection paper at the end of May. In the Autumn, there is going to be more discussion about extra layers of institutional underpinning for the euro area. What is true is that the most important steps have already been taken. Banking union remains incomplete, but having the single supervisory mechanism and having the common approach bank resolutions, which importantly, I think, can protect the taxpayer from banking risk to a degree. Those are important. It is also important that the ESM [European Stability Mechanism] exists and it is important that the ECB has demonstrated it's ability to function as a central bank for the euro area. But I think there remains a valid debate about what else is needed. What else is needed in terms of  re-enforcing banking union? What else is needed in terms of common fiscal capacity?

But I think it's fair to say that for the euro area to prosper, there is no one answer. Replicating the US in Europe is one approach, but it is not the only viable approach. There are many possible pathways for the euro area. It would be an error to focus in on only one possible figure.

John Walsh: But if you were to characterise it now is the euro area moving in the right direction?

Governor Lane: Another way of saying this is the way you set up the question which is this – a lot happened that was driven by the crisis. We had the decision to form the SSM, but it was still embryonic when Mark Carney gave his speech. A lot happened in terms of Banking Resolution Directive, that only kicked in in 2016. And we’re seeing that now in the last couple of months coming into play to a degree. We have the fact that, you might have questioned would Spain recover? Would Ireland recover? Would Portugal and Greece recover? There is fairly solid evidence of a recovery in Ireland and Spain and there is welcome progress in Portugal. With Greece a lot has happened but it's probably fair to say that It remains a much more active debate about what is needed in Greece to sustain the recovery.

The passage of time has revealed that a lot can happen. Some of the predictions at the time was that it would be necessary for Spain to have a devaluation, or for us to have a devaluation, but the upside of being in the euro area is that the ECB has maintained an accommodative monetary policy and that has been very supportive. For many small economies in crisis, if you are on your own, if you are running an independent currency, yes the devaluation option is there. On the other hand, that would require interest rates to be high to attract financial flows. In the euro area, with a common monetary regime, that provides a lot of buffers for individual countries. My own assessment is that the euro provides a very important and positive environment for euro area countries. It remains the case however it's more sustainable if asymmetries do not build up. That is why part of the solution, and we have it here, is using options such as macroprudential policy. So if at a national level we can make financial systems more resilient, through measures such as mortgage lending rules and additional capital buffers for banks and so on that can help.

Also a message from the crisis is that if governments want to use fiscal policy aggressively in a downturn, then it must build up substantial surpluses in the good years. So a lot of what we saw in the crisis is avoidable if good policies are adopted at a national level. Countercyclical fiscal, prudential, macro financial policies. So that recipe is there and if it's implemented the kind of crisis mechanisms that were lacking in 2008, those mechanisms, though necessary would be called upon less often.

John Walsh: Another residual effect of the crisis is still evident in the banking system through the high level of non performing loans. Do banks selling portfolios of non-performing loans to private investment firms, or so called vulture funds, present a threat to consumers?

Governor Lane: That concern has been addressed here by the legislation which requires that non-bank purchasers of loans to comply with our code of conduct on mortgage arrears. That is because they have to use credit servicing firms. And those credit servicing firms, we regulate them and they have to comply with our law. So we have found a way to address that concern. It is a valid concern in that the level of consumer protection should not rely on who is the loan provider because consumer protection legislation should focus on the consumer, it should not be conditional on who is holding the loan. So that potential problem was solved here by bringing in that legislation.  It is also important to acknowledge that the strategies of non-bank lenders may be different to banks. They have different funding models and different business models. And there we will see over time. In some cases it may lead to these lenders cutting a deal, so in some cases the debtor may get a deal as some will be focused on quick answers. In some cases these firms may take the view that they want a greater degree of repayment. It is an open question, but those are commercial decisions. All of that lies within the realm of - Ireland has an extensive framework for the protection of those in mortgage arrears and that applies regardless of who owns the loans.

John Walsh: One impact of the crisis is that there is a lot more regulation than there was before and the cost of that on a small bank, for example ptsb. It still has a high level of non performing loans. If it were to sell a portion of those loans it would reduce it's scale and in this environment where the cost of regulation is at a certain level. Are smaller banks viable in the future?

Governor Lane: I won’t comment on any individual banks. I could not phrase it in that way. But behind your question is about scale the banking sector. Let me say one is regulation, two is technology. All of trends in finance is essentially that heavy IT investment is necessary. Necessary to serve the new consumer in competition with Fintech. It's necessary given the high costs of cyber protection. So there is no doubt about that, there is a big fixed cost to running banks as we currently understand them. On the other hand there may well be potential for disintermediation in the banking sector. There could be new entrants which take advantage of multi country operations through online delivery. That is the more hopeful message – that the scale effect of technology could deliver a lot for consumers.

Let me come back to the fixed cost of regulation. There it's important to look at the data. Yes it's gone up but compared to the cost base of these organisations but it's not the case that this is the most important cost. Yes the industry might prefer to hope that lobbying efforts mean costs go down, but we have a duty, the whole European system has a duty, to be economical in how we regulate. But all of this in the end is coming back to the kind of light touch regulation, is demonstrably a failed approach. So more intrusive regulation has to be there but it is not a very large cost.

Here and internationally there is another type of regulatory cost which is avoidable, which is the cost of cleaning up after conduct failures. It is of course the case in something like here, the mortgage tracker examination problem arises, then the clean-up of that can be costly. We’ve seen in the US large fines as well. So those kind of conduct costs can be avoided if firms conduct themselves in a more consumer oriented way so these failures do not occur in the same frequency or scale in the future. So my sense is when people talk of regulatory costs, a chunk of it refers to conduct costs. Our running costs for normal regulation of banks is not that high.

John Walsh: Still a lot of trackers on the banks books. Some allegations that banks are squeezing other mortgage customers for losses on the tracker books. Fianna Fail is introducing a bill to cap variable rate mortgages. Is it your sense that variable rate mortgage holders are being squeezed. Is that a concern you would have?

Governor Lane: When you boil it down the market concentration in Ireland is quite high. Only a small number of what you would call significant banks. Europe suffers from overbanking. There’s too many banks chasing business. So margins in many countries are too low. So we have the opposite problem in Ireland which is essentially that with the consolidation after the crisis we have a small number of banks with large market share. In that scenario there may well be an element of market monopoly. There may well be a monopoly element in pricing. So that is the issue. What we see is some mix of risk premia. Given what’s happened in Ireland if you run a computer based model on Ireland given the high rate of default there is you’re going to come up with a model that says interest rates here are going to be higher than elsewhere in Europe. But also going to be the case that any model will say the level of the interest rate is going to depend on the number of competitors in the market. So when you see these relatively high interest rates in Ireland, the important issues are what is the relevant contribution of risk premia vs market power. The market power has it's own solution which is, if market power were the most important factor then that provides the opportunity for new entrants to come in. So it has it's own solution. We have an integrated banking system in Europe. We have a single supervisor in Europe. We have very good conditions to promote entry to the Irish banking market if banks believe there are margins there that are desirable. So until we see that, until we see entrance by firms that monopoly concern is going to remain.

The problem with looking for price ceilings is, the price ceiling is very hard to work out. The level of precision of working out the level of contribution of reasonable risk premia vs monopoly price margins…that I think is the core issue, is the range of plausible risk premia is such it would be very hard to extract out what is the contribution of monopoly power. So I understand the motivation of the proposed bill but this is the implementation issue. Given the demonstrated risk in the Irish system, being able to carve out the element that could be regulated away by regulating the monopoly power, that is a task which would be forbidding and would also rule out the main market based solution which is promoting entry.

John Walsh: And how concerned would you be if this Act finally makes it's way through the final stage and becomes law that would distract potential investors in the market?

Governor Lane: I think it has to be the case that any type of price ceiling legislation will deter entry. We live under the legislation the Oireachtas passes so if the decision is made to pass some version of that law we will operate it, as we’ve just discussed, working out where the ceiling would be placed is going to be quite tricky.

John Walsh: Been quite a lot of activity by the Central Bank in the last couple of years in fines for banks, some in the case of the tracker mortgage examination. How much more can we expect in terms of that?

Governor Lane: So we have a comprehensive Examination going on at the moment. Biggest priority there is to make sure customers who were adversely harmed receive redress and compensation. So our primary focus now is that customer focus, to make sure that banks are identifying customers and making appropriate offers in terms of redress and compensation. Sequentially after that let's see whether there remains more enforcement cases after that. So it would be a mistake to prejudge that issue. So in all cases the issues would be looked at but we’re not going to prejudge what the enforcement dynamic is going to be.

John Walsh: In terms of the housing market at the moment there are concerns of a bubble forming. Did the Central Bank’s decision to relax the mortgage lending rules for first time buyers contribute to the surge in house prices?

Governor Lane: There are many factors contributing to what we’re seeing, although it is tempting to look for a mono-causal explanation. What we would look at and we have an annual calendar for doing this analysis. In late November we will be releasing our analysis of where the mortgage market is in relation to our measures. In terms of policy, there is government’s help-to-buy but that is limited to newly built homes for first time buyers so it is a segregated part of the market. It is also the case that the adjustment we made in our rules is also limited because we didn’t change loan-to-income and we didn’t change deposits for second time buyers, which is half the transactions. We didn’t change deposits for buy-to-lets and for first time buyers there was no change below €220,000 and above €220,000 there was only a change to the margin.

So we made a definite but limited change in our rules. When we made that decision, please remember for people in that category, buying above €220k, only about 11% of purchasers were being bound by our rules because under the previous regime there was a lot of exemptions because people were going to their bank and saying please exempt me and under the previous regime, the ability to provide exemptions was more generous than now. So now only 5% of first time buyers can receive an exemption. Previously it was 15% of the whole lending book.

Given that first time buyers are half the market, in principle up to 30% of first time buyers could get an exemption under the previous rules. Secondly there are a lot of cash buyers in the market, so when we were looking at the rules last year, of the mortgages above €220k, only 11% were being hit by our rule. Either they were getting an exemption or they had more cash than our rules required. So in that context we decided to simplify our rules to say 10% for all first time buyers. Number one we recognised that if reflected in part a reality, which is that it was not the case that everyone buying about €220k was  being bound by our rule. Second is in the context of house prices still being in recovery mode. So we’ll come back to what’s happening this year. At the time it was our assessment that house prices were not above what a fundamental base model might say.

Thirdly, the number of transactions in the market was very low and far below what might be considered a normal amount of transactions. When we released our decision in November last year, to the extent that there was an increase in credit to this section of the market, it had to be understood, where is the risk here. If house prices are still in recovery mode and if the rules are being applied, the fact that house prices may go up, especially when credit volumes are relatively low, this does not pose an immediate risk to the financial system.

In fact more lending volumes may be good for the overall health of the banking system and for the efficiency of the mortgage market having more volume of transactions. So what we are seeing now is, over the summer we will get the first half of the date on what mortgage are being provided. What we have seen in our analysis of 2016 is that those who have received mortgages are those on high incomes. When you see the profile on those that have received mortgages in 2016 compared to 2015 there is a significant drift up in income. That is not helpful for affordability issues. If we are saying that only people above certain incomes can get a significant mortgages, it doesn’t help the general housing situation in the country in terms of affordability and we know there are all sorts of supply challenges there.

But from our point of view, if you have a high enough income, that makes it less risky. Secondly in terms of typical loan to value in terms of what types of deposits are being put down, let's see what the first half of 2017 has delivered. We haven’t seen the data yet. The submissions from the banks are still coming in. We will analyse those.

There are still people with significant cash in the market. Not everyone is bound by our rules. There are lots of buyers who have more cash than is necessary.

So let me come back to your phrase of a bubble and that the only thing that moved was our rules. But what really moved was the economy. Employment growth in the economy is very strong. The fundamentals of any housing market is employment growth, income growth and interest rates. Policy rates are low, market rates are low. There is a lit bit more competitive pressure, not enough, but a little bit more competitive pressure in the mortgage market. In the absence of other market opportunities, you have the issue of a lot of people with a lot of cash thinking property is the best use of their savings. So you have a situation where there are a lot of factors contributing to the increase in property prices.

I said last year, and I continue to hold it, it’s possible to identify risk factors that could lead to a reversal in house prices. One is dependent on global risk factors, whether that’s a rise in global protectionism, whether it’s a messy type of Brexit, whether it’s a correction in global asset markets. You could have plenty of scenarios where the positive fundamentals go into reverse. You could have house prices falling for fundamental reasons.

In that case some people might say the bubble is bursting, but when you have a cash financed increase or at the very least limited leverage, the dynamic is different. We know that when equity markets fall, the macro implications are much less severe than when it’s a decline that leads to problems in debt. What we are seeing now is not primarily being fuelled by credit so the fallout from a reversal in house prices will be limited as well. This is where our rules put in a lot of brakes. So the deposit requirement, the loan to income means that household incomes, loans compared to household incomes are limited. So if you have a decline in household incomes it doesn’t immediately make your mortgage unaffordable. So we think what we have now provides a lot of stability. What remains to be the case is if we see excessive credit or an interaction between excessive credit and house prices, then definitely I would be totally committed, if needs be, we can tighten our rules, if needs be. But the condition for that has to be we think there is adverse interaction between credit and house prices.

John Walsh: And can you say at this stage if there is any evidence of that?

Governor Lane: Well I'm not going to prejudge the review. One extremely important element in our analysis is we have the loan by loan data. So when we look at what’s happening loan by loan it gives us much more information than looking at aggregate house prices or aggregate credit dynamics. This is why we take a systematic approach to our analysis so over the course of the coming months we’re going to be doing that with a view to converging on a policy review which will be announced in late November. 

John Walsh: To move on the wider economy the word overheating has been used quite a lot lately. Are there signs that the economy is overheating or is there a danger that government policies could lead to an overheating?

Governor Lane: Of course when wage data remains relatively modest, we have not yet hit full employment. So there remains some scope in the economy. But I would agree that the shared analysis is clearly, the amount of slack resources is more narrow now than it has been for the last decade and given there is strong momentum it is not so much a question for budget 2018. The government has a target of a broadly balanced budget for 2018 and that sounds like a reasonable target.

The big challenge for the government is that from 2019-2021 is in the scenario where we do hit full employment in late 2018 or early 2019, then the economics of full employment are totally different to the economics of a slack economy. We saw this in the 1990s. The Celtic Tiger could roar quite quickly as unemployment fell from the high teens to four or five. But once it hit full employment then very quickly wage pressures built up quite quickly and that can lead to a change in the nature of the economy.

So the nature of the economy totally changes when you hit full employment and everyone recognises that this has to be handled. And in particular, if the source of the overheating is because of a really strong economy then that is different to what happened in the mid-2000s when it was a construction driven economy – and a credit driven, construction driven economy. Again the double hurdle of construction with credit.

We as regulators, in terms of the macroprudential rules, can play a central role if it is a credit driven construction boom. But it is possible to have a booming economy without a reliance on credit. So it could be a lot of FDI coming it, it could be very successful domestic economy. So it's possible to have full employment even if credit is not the main engine.

So this comes back to the core policy challenge that is ensuring that fiscal policy is appropriately counter cyclical under those conditions. So I thinks it's appropriate now, and we’ve seen speeches by the Minister, signalling this, it's also contained in the Summer Economic Statement, which is a recognition there is a macroeconomic role for fiscal policy which may be needed to cool down the economy in certain situations. For example, an interesting issue is how to think about public investment. So public investment, adding to the stock of public capital can help Ireland meet it's economic and social objectives. But the process of adding to through a surge in public investment, how does that work in full employment. Other parts of the economy may need to cool down and this is where the government’s overall fiscal strategy may come into play.

So for small economies the type of budget surplus needed could be significant and this is where the economic expertise, whether it is in the Department of Finance, the Irish Fiscal Advisory Council or the ESRI, us for that matter,  have to come out and say that in this type of scenario we are facing and if the government wants to add x amount to public investment, then what should be the offset so that is not a problem in terms of macro economic risk.

So, raising taxes, taking measures for the purpose of cyclical, temporary taxes. Not saying we’re going to raise taxes forever. But raising taxes to make room for a surge in public investment or to make room for the fact the economy is operating above potential.

John Walsh: Obviously that would require a good deal of political will?

Governor Lane: This comes back to the, there has been a lot of reform of fiscal institutions. We have IFAC, a new parliamentary budget office that is under construction. We have the framework for fiscal rules and we have the evidence from the crisis. I agree, it is a political challenge but one that the system will have to address. We are not overheating now and we may not overheat because of downside risks, but it may be the case that this debate fades away because some of those downside factors kick in. But the scenario in which overheating becomes a reality, then it is much better to have this political debate and also underpinned by the analytics that could be provided by the economics profession.

John Walsh: You mentioned one of the lessons from the last crisis is have as many fiscal buffers as possible to smooth over the inevitable turbulence. There has been a change in tone on potential easing of debt reduction targets and a halving of the rainy day fund. Is that consistent with prudent economic management?

Governor Lane: So I think the place to look for this is in the detailed Summer Economic Statement, which I think takes care to signal that these projected plans are subject to wider considerations. So in other words, so if there is overheating pressure then these plans can be looked at again. So I think governments always have to have plans but there has to be the flexibility to changing circumstances is signalled in the Summer Economic Statement. Importantly the 45% debt target is retained. I think what they are signalling is that the time it will take to get there might be slower with the plans to make more public investment and so on. But the core of it remains. It remains the long term debt target is 45%. That remains. So I think behind all of this is ultimately the commitment. If the ultimate commitment is to keep Ireland stable that overrides any particular plan for any particular number.

John Walsh: One of the biggest challenges facing Ireland is Brexit. Has huge implications for Ireland. A potential upside is increased FDI from financial services firms. The Central Bank has come in for criticism on whether Ireland is losing out on investment. Has that criticism been valid?

Governor Lane: So our commitment is to be efficient and responsive regulators. So our regulatory commitment is to implement the European regulatory framework. And essentially what we’ve seen since Brexit is increasingly the European Supervisory Authorities – SSM, EIOPA, ESMA, EBA – are making sure that as far as possible all countries give the same answers. And I think by and large that’s what has been happening. It's going to be the case when the dust settles that by and large firms when the look around Europe will get the same answer on regulatory issues. And that’s what we’re saying to firms. This is the expectation on what Europe considers to be a reasonable regulatory setup, especially in relation to firms that have to have a multi country approach. So I think the system, wider society, wider policy infrastructure can be reassured that’s what’s happening. We are neither more forgiving or less forgiving than the expected European standard.

As a matter of reality, firms have different strategies and a number of firms are coming here. Every so often you will see firms making announcements about where they’re going. And we are internally resourcing for a significant number of Brexit related incoming activity.

John Walsh: And the level of activity at the moment? Is that roughly in line with what you would have expected?

Governor Lane: Well you know it’s, I think it’s, compared to our current level of activity it’s a significant increase. What’s happening so far, many firms have not made a decision, it's significant. Let me make two more points on this – this is wave 1. As the Brexit negotiations conclude, firms now have to make preparations based on worst case scenarios, let's say there is no deal, no transition. They have to have something place for March 2019.

Wave two is when the negotiation becomes clearer, depending on the outcome, it might lead to some firms rolling back those ideas. It might lead to other firms becoming more interested in developing EU subsidiaries. And it may lead some firms that went to location A as speed trumps everything else looking at things again and seeing location B.

So the dynamics of this are quite fluid. You might have firms going to where they already have an office. So it might be convenient for the first wave to go where they exist. But long term the deeper fundamentals – what is the location that makes the most sense for trading? What is the location that makes the most sense for fund management? And so on. I would not view that these initial decisions will necessarily signal the long term patterns in the European financial system for the years to come. I’ve said before and it remains the case – there’s no alternative to London.

So when you have an integrated regulatory system, having a system where some firms go here, others go there, may well be the best alternative to recreating the City of London. But it’s a fluid situation. But the idea that we are not open for business just cannot be true because we already regulate so many firms. WE have really large international financial centre here and in terms of new business we are seeing enough indications that we think it's quite consequential in terms of the level of activity here and making our resource plans on the basis of a substantial increase in activity.

John Walsh: Resources are an issue for many central banks, including the Irish Central Bank and competition, particularly on salaries in the private sector. Were lack of resources and issue when Brexit happened? Did you have to play catch up quickly?

Governor Lane: No, so I think not at all. So of course Brexit – we have a national and European responsibility to handle Brexit correctly. Brexit has been the first priority of this organisation. In advance of Brexit a lot of work was done. Of course we didn’t predict the referendum outcome but just in case we had a big internal project to prepare for Brexit. So we’ve done a lot of work and compared to a lot of Europe because we were on the front line we got a lot done very quickly. So it is not an issue for us.

Any regulator in a major financial centre, I’m sure the Bank of England or the New York Fed have similar challenges, there is always going to be the issue of how to compete with the other opportunities. So what does that mean. Many of our staff have long careers here. Many are totally dedicated by public service. There are a lot of interesting jobs. We have many attractions. Also the case the experience built up here can be quite attractive to many employers. So we do have ot accept the reality of an outflow. What we’re doing though is growing. We grew last year by about 5%. We want to grow more this year. In an economy approaching full employment there is no point filling a vacancy if you don’t find the right people. Part of that is through training, partly through putting a lot of effort into hiring and retention.

But those challenges are much more about making sure the careers we offer here are stimulating. Decently paid but remaining public sector salaries. WE are a public sector organisation. But that’s not unique to us. A challenge many regulators face.

John Walsh: But last year you did propose a new remuneration regime?

Governor Lane: There was an internal project. We did not… so long as there is a centralised public pay policy we will comply with that. Under the FEMPI legislation that sets out that there is a collective strategy in public sector pay. WE had an internal project and that project has an alternative proposal in it. But we are not proposing that. That can only move forward under the conditions that the public sector pay strategy sets out. I approve of the public sector pay strategy. An we’re not going to deviate from that.

John Walsh: But is it affecting ability to get the people you want?

Governor Lane: Let me come back to that. Of course if the health sector paid more they would have less recruitment issues. That applies to all. Not unique to us. Certain sectors of public sector, including us, it's more challenging but it remains the case we cannot have a public sector pay strategy which says, well, here are exceptions. Because once you have exceptions the overall discipline that has marked public sector pay in Ireland would be threatened. So I think if the public sector pay strategy evolves over time and is successful, or if there is a high degree of consensus in the overall strategy that certain sectors require different treatment then we will look with great interest on that. But we cannot make special pleadings. We can manage the resource challenges. WE are managing the resource challenges which many parts of the public sector have to as well.

John Walsh: In terms of the Brexit investment a number of high profile insurance firms have gone elsewhere. We have done quite well in asset management. IS that a trend you would have expected? Or would you have expected more insurance wins from day one?

Governor Lane: So I think the time to review this is much later on. It's not the case that any of these sectors – many of these decisions remain to be made. It's way too early to form a judgement on that. So I think it's too early to tell.

But let me come back to the points I made earlier that these are wave one decisions. There may multiple waves later on so let's see what the final configuration is.

John Walsh: In terms of the implications of Brexit for the financial services sectors overall. Would you agree with potential implications for the City of London as a financial services centre?

Governor Lane: So I think there is two parts to that – one is The City of London is a global centre. The EU-UK relationship is one of only many that matters to the City of London. So leave to one side the City’s global role and let's focus in on it's role in the European financial system. So if you think about the European financial system now , you have the UK, other non EU countries such as Switzerland and then you have the EU27.

First of all, I think a lot is going to turn on the details of the negotiation. A lot is open to what the negotiation delivers. Again it's too early to conclude on that. But I think the general issue is although the UK and EU now operate under the same regime, once Brexit has occurred, what type of post Brexit understandings can be developed between the EU and UK authorities. Goes back to what Brexit will deliver. If Brexit delivers what is essentially two systems but essentially very similar in regulatory philosophy then the amount of cross border financial trade between the EU 27 and the UK can be substantial.

If Brexit delivers a situation where the UK adopts a different approach to financial regulation, that may well lead to a greater need for the European system to be more inside the EU border and the UK taking a less significant role for the EU 27. So this is what it's going to turn on. Whether these systems remain very similar or will grow apart. And I think that remains an issue for the negotiation.

John Walsh: And obviously the future of Euro Clearing is…

Governor Lane: That’s a good example because that comes back to exactly this point. Currently the European Commission has outlined it's vision of this, which essentially turns on this point, which is the importance of location. It's not important if two systems are going to be similar and everyone recognises the value of multi currency netting, the value of having a scale of this, which would say that the UK would remain a significant clearer of euro denomination trades. On the other hand if there is a significant distance between the UK regime and the European regime then location becomes a live issue because in the end euro clearing can be an important part of the stability of the European financial system. The kind of criteria are very clear here. The negotiation will determine the distance between the UK and the EU systems and therefore the salience of details like location.

But nothing is concluded now. We will have to see.

John Walsh: From this remove how would you see it?

Governor Lane: Central Banks are not doing the negotiation. These are big political judgements and in the end the negotiation is conducted by the political system. The core decisions have to be made at political level. Once those decisions are made obviously regulators, we as a national regulator in the European system, will live with that. But that has to be secondary to the political choices.

John Walsh: When Brexit happened there were initial estimates from Bruegel, I think, that Dublin could be in line for 15 thousand jobs. Does that estimate sound likely?

Governor Lane: I think behind that number is the overall migration from London to the EU and then Bruegel chop it up into different locations. I think that if there is a hard Brexit which remains to be seen and if there is a deeper division between the UK and the EU. I think Bruegel are a good organisation and they usually come out with good numbers. But in terms of one scenario it’s a scenario that’s not yet clear. The scenario where there is indeed a hard  Brexit, a scenario where there is a failure to have a high degree of trade between the UK and the EU in finance will mean a significant relocation to the EU 27 of which I think Ireland will receive a significant amount. But that is not a prediction, it’s a scenario. But I think all of that is totally secondary, for us as the financial regulator, what happens to the financial sector is directly important to our responsibilities. But for the European economy and the Irish economy all of that is dominated by the macro effects.

Trade frictions between the UK and Europe is going to be bad news all round. Of course it is far more interesting to follow the playbook in terms of who is going where in term of finance. But for the wider economy, of more substance is going to be the relocation of non financial services firms. Because we know financial firms, there can be a lot more money involved and lots of jobs. So In terms of relocation of non financial firms that’s going to be an important issues.

I should say both in terms of the financial and non financial sector, this is going to be two way. European firms will have to set up in the UK, including possibly Irish firms who want to do business in the UK. This all depends on how severe the Brexit rupture is going to be. So I think the wider economic forces are far more consequential than what’s going to happen in the financial sector.

John Walsh: The Irish Independent published emails between you and Deputy Governor Roux where he raised concerns about the number of resources within the Central Bank. Were they valid at the time?

Governor Lane: If you like, that was a snapshot in an internal process in terms of how the staffing plan for 2017 was being developed and the out turn was proportional. In the end it's one bank. When we look at resources the commitment is for the Bank to deliver on it's objectives. So it would not be accurate to think about how we allocate resources to think about there being a pot for this division or that division as we do reallocate people as needed. But there is no doubt the big driver of the expansion in recent years has been financial regulation. So by and large we’re not particular adding to staff in monetary policy. We’re not adding to many parts of the bank.

The big drivers are – one is financial regulation. Two is the corporate affairs of the bank. Like everyone we have to do more in terms of IT systems, in terms of good governance and so on. Resolution, covering the resolution directive. We have the macroprudential mandate. We have new mandates, we have new ways of doing business. But behind all that is essentially a determination that we are going to be an efficient and economical regulator. We’re not going to spend more than is necessary. But what is true is post crisis the nature of financial regulation has changed and given what happened in Ireland we have to make sure we’re doing it correctly.

John Walsh: Speculation has started on who will ascend to the top job in 2019 and one name being mentioned is your own.

Governor Lane: So it’s a great industry to be in, your own, because you know years away from a vacancy arising there is an industry in terms of speculating on these positions. This is going to be for the Eurogroup to decide, and I think this speculation will continue. But I think the people to ask are the members of the Eurogroup, not bureaucrats like myself.

John Walsh: But if they offered it to you?

Governor Lane: It is an invidious question. Of course it’s nice to be mentioned but it’s for the Eurogroup to make it's decisions all in due time. But I would say it's not helpful to engage in this discussion. The agenda now is busy. You know this autumn we’re going to be busy with trying to work out the next phase of monetary policy for the euro area and those are the substantive discussions. The secondary gossip is for another day.