Transcript of Deputy Governor Sharon Donnery interview with Dearbhail McDonald, Independent News and Media

19 June 2016 Interview

You joined the Central Bank in 1996, what was your path into the Central Bank and then obviously your pathway up through the organisation?

"Yes I studied in UCD and worked there for a while as a tutor. My first job after university was as a lecturer in Maynooth and  I had a decision to make at the time. I was interested in coming to the Bank, jobs here didn't come up all that often but   made the decision to go and work in university and then when the jobs were advertised, would I apply?  Would I not?  Would I stick with the academic thing?  And the work that was being done here at the time in terms of economics and jobs for economists, it was one of the few places where as a pure economist could come and work.  So I applied and I was fortunate I suppose to get the job because my career could have taken a very different path if I had stayed in academia and I joined at a really interesting time.  I joined monetary policy.  At the time the ECB hadn't even been established.  The European Monetary Institute was still setting up the preparations for the currency and I started out working on how single monetary policy was going to be implemented, writing briefing notes for the Governing Council and now I sit as an alternate on the Governing Council.  So that's interesting and I was here for all of that phase of set up."

So as a junior economist you were writing the briefing notes for that?

"Yes,   I was writing the briefing notes on how the policy was going to be implemented.  How we'd measure money and credit aggregates and things like that.  At a stage when, obviously the currency was introduced in '99 but not the notes and coin and we went on to that and of course the Euro was a really long time in the making in terms of the build up to the Euro.  So that was the first part of my career."

What led you in to it in the first place?  You know, when you were younger what made you get into economics?

"At school I was really interested in business, finance and I was quite mathematical. I was really interested in maths and when I went to university I was quite young and I was a bit unsure about what I wanted to do career wise."

Was there an alternate career?

"I was thinking at the time of doing law but I was quite young and thought maybe do an Arts degree, see where I want to go with things and take it from there and that's what I did.  Once I did economics and as I said, you know there was a lot of material being produced here in the Bank at that time in terms of thinking about the Irish economy which is what I found really interesting.  It was in my mind at some point that it would be nice to go and work there but it was a big decision, will I go down the academic route. I had really enjoyed being at university and I had done my Masters or would I take this leap and go into the Bank but it worked out all right in the end."

Tell me your career progression through the Bank ‑‑ through the Central Bank and what brought you to your current role?

"It was a really interesting time to be here and I was quite successful and I worked my way up to what is called Senior Economist after six or seven years and the big question then, internally, was, do you stay in this expert path or do you go into wider management?  The organisation was going through a big change at the time in terms of the establishment of financial regulation and so on and that part of the organisation was growing hugely and I went there into a management role to set up the Consumer Information function which was this function that we had about engaging with members of the public around what was called the cost, risks and benefits of financial products. We had a very successful website at that time and the information centre.  So it was a very outward focussed job, communications focussed really.  I was there for a number of years in a couple of different management positions and then in 2010, Matthew Elderfield came and the crisis had really emerged."

What role had you at that stage when Matthew Elderfield came in and when the financial crisis really hit?

"I was in Consumer Information, so for example when, Northern Rock happened. I was in the consumer front facing role where we were dealing with questions from people about their deposits and were they safe and so on. Governor Honohan came then in late '09 and Matthew Elderfield came in January 2010. I moved at that stage to what would have been my first supervisory role, consumer though, so looking at, consumer protection in terms of how firms deal with their customers. The big issues emerging then as a result of the crisis were around mortgage arrears, SME indebtedness levels, the introduction of the code of conduct on mortgage arrears as well as the more day to day issues around the normal codes and suitability and product sales. Arrears was a big part of the agenda then."

Can bring you back to the crisis because most people kind of remember when it was the big kind of moment, was it, was it Northern Rock for you?  Was it when the Governor indicated on the RTE radio interview that, you know, the IMF may be coming in?  What was the real kind of big kind of stomach, kind of clincher moment for you?  Or where were you when you heard that radio interview even?

"As I said it is around that time, I moved into a supervisory role for the first time in January 2010 and later that year is the time when Governor Honohan did that interview on Morning Ireland which for me probably stands out really in my mind as a key moment in the crisis.  Obviously things were very difficult leading up to that but that particular day I think when it became clear that yes the programme was going to happen."

And were you in work when you heard it?

"I was on the way to work and I was listening to the radio on my head phones on the way in and heard that just after the break Governor Honohan will be joining us from Frankfurt,  I obviously didn't know he was going to go on the radio so I was quite surprised but it really stands out in my mind I suppose as a moment around that time when, you could really see both the impact for the country but also the scale of the challenges that were ahead in terms of trying to deal with some of the issues that we had."

And was that kind of quite frightening both, you know, individually in terms of the Central Bank in dealing with that, you know, that very very kind of febrile atmosphere at the time?

"Yes, it was a really challenging time.  I had moved, as I said into this new role just a few months beforehand.  There was a huge amount going on.  It was very, very difficult for the country, for people, for the Bank but I suppose at another level, Governor Honohan had come in and he was very much about how we have to deliver on this, we have to really get stuck in to doing the work that is necessary as part of the programme, very clear that we had to make all the commitments that were necessary to make sure that we would get through it successfully.  That people would work really hard on it.  We had good cooperation with the other authorities and so on.  I suppose it became very much focussed on that and to be honest, I would almost end the story with that interview that Governor Honohan did with another one that he did which also really stands out in my mind which was when he was interviewed on Prime Time when we exited the programme. You might remember there was a controversy, a limited controversy, at that time about whether we would exit with a precautionary credit line or not and he was interviewed on Prime Time in relation to that.  That I suppose comes to the other end and coming out the other side successfully from the programme which was obviously very important both for us in the Bank but also for people and the country. Another reason why that stands out in my mind is that in that intervening period during the programme, I had also moved role into the Registry of Credit Unions and we were dealing with some very complex issues then in individual Credit Unions and Newbridge Credit Union which had been going on for some time.  It was resolved around the time we exited the programme and the Governor was actually discussing that the night he was on Prime Time as well.  Those two things stand out as the beginning and end of a particularly difficult period."

Was it very difficult within the Bank just in terms of morale because obviously it was a lightening rod at many times, public anger to some extent it still is but was it difficult just kind of on a personal level during that time?

"Yes, I think it was a very difficult period for the organisation and the organisation has gone through an enormous amount of change since then in terms of how we work, our priorities, our culture, the type of supervision we do, etcetera, etcetera, which I think is well known.  It was a difficult time in the organisation but I would say also it was a time when people really, really committed to the job of public service. As I said Governor Honohan was very clear in terms of the programme that we had to work our way through the issues and deliver on it very successfully and I think the work that was done in the Bank in that respect, was really impressive.  In a time that was difficult for people but they did really knuckle down and work hard and the organisation was going through a huge change at that time in terms of some of the changes Matthew Elderfield and Governor Honohan were making and so on."

Maybe fast forward to your new role.  You were installed in January of this year?

"Yes."

How has it been since then?

"I would say really busy.  I had, as I said to you earlier, worked in monetary policy area previously, many years ago.  Things have changed enormously in terms of the current stance of monetary policy and the low interest rate environment and quantitative easing and so on.  The Bank's mandate though in this part of the organisation in terms of the Central Bank pillar has also become much more complex.  Part of the crisis has been this role around what's called macro prudential policy which goes into the mortgage rules and various other things that we might discuss.  Also, all of the resolution architecture has changed about how we deal with failing firms and we have a new European approach particularly for failing banks and the Bank has a new mandate in relation to that.  Our mandate has changed quite a lot and it’s been really busy getting familiar with some of those issues again.  I have a very big European dimension to my role and I am the alternate member on the Governing Council.  So that has been keeping me quite busy."

You've attended several meetings of that already?

"Yes, I have already yes.  The Council meets every fortnight, so I've been going to some of those meetings and then, it's a carryover from my previous role, but I had been lucky enough to be asked to Chair a European group on non‑performing loans."

The task force?

"Yes, which is continuing its work and I've now been asked to keep that so I'm busy getting used to my new job but I also have this other element of my old job."

And you are Chairing that task force which we will may be chat about later?

"Yes."

Maybe then just to get into the substance of some of the big issues.  The big one has been the mortgage caps that were introduced last year and there has been so much debate around that.  What would happen if those caps weren't applied or had not been applied?

"The key issue for me is that the Bank has undertaken research previously which we published at the time the caps were introduced that shows quite clearly --"

Your model?

"Yes, that high loan to value and high loan to income lending leads to higher levels of indebtedness and can lead to default and when those defaults happen, the losses on those defaults are higher and we have very clear evidence from the crisis to show that.  The caps have been a really important tool for us in trying to prevent a re-emergence of some of the issues that happened before in a number of respects.  First of all looking at it from the point of view of borrowers and their indebtedness levels and we obviously still have high levels of indebtedness here and issues of mortgage arrears."

Is there a risk we could have gone back to if these caps weren't here to borrowing in the manner that we did?

"Yes.  I think a key issue has been that part of the issue previously was around what we call, house price credit cycle reinforcing each other.  Where the ability to borrow more leads you to bid more for a house price which leads you to look to borrow more and it gets into a vicious cycle.  Part of the purpose of the caps is to try to stop that kind of cycle re-emerging into the future and obviously the other aspect it is very important from a borrower indebtedness point of view but it is also important from a banking sector resilience point of view but those two aspects of the measures both borrowers and banks, I think, are important elements.  I spoke publicly about the measures last week and I said that it certainly would be my view that had we had similar measures 15 or 20 years ago certainly the scale of the crisis in terms of the impact from an indebtedness point of view the problem mightn't --"

The problem mightn't have been as big?

"Well not as big yes."

In terms of how long will you wait for housing supply to increase before, I know, obviously there is consultation in respect of it, but do you think that you'll wait for housing supply to increase before those caps are reduced?

"What we really want to understand in the review this year is, the early assessment of the impact of the measures.  They were introduced over a year ago but there was a back log of mortgage approvals that were already in the pipeline.  So really the full effect of the measures only came in last Autumn.  We are looking at the impact of them and whether they are meeting their policy objectives.  I think your point about supply is well made, we would absolutely acknowledge that there are issues with supply.  It is probably going to take a number of years to deal with those because it takes a particular time for housing supply to catch up."

So could they be with us conceivably for a number of years?

"The measures?"

The mortgage caps if ‑‑ obviously supply is critical?

"Our expectation at this stage is that the caps will be a permanent feature and what we will analyse will be the calibration.  Maybe the scale of the caps that are applied or some of the allowances or the levels at which they apply but our intention is that some form of cap around LTV and LTI would become a permanent feature."

A permanent feature?

"I think when we introduced them, we knew that there would be an adjustment phase.  The housing market is extremely complex and it takes a while for people to just get used to the whole concept of it.  So there was always going to be adjustments."

Are you surprised at that level of resistance to the mortgage caps, you know, let's say, you know, data showing that, the average, you know, you might have to save up to 50,000, 51,000 to buy a standard house in Dublin.  That's quite a big gap for people.  People like me?

"I think on a personal level, all of us know people who are impacted by the caps. Central Bank staff are impacted by the caps, friends, relatives are impacted by the caps and I think the Bank has been clear that we know that individuals, in terms of their decisions, their ability to borrow money, their ability to buy a house are definitely being impacted.  I suppose there are two aspects that we are really thinking about and focussing on which is the protection of the system overall.  Borrowers collectively, as opposed to necessarily as individuals, as well as the banks as a system and the other thing is, taking a more medium to long term view.  So, as I said, housing is an extremely complex market with a lot of issues around supply and all of the various issues that are being debated in the media at the moment but it takes time for things to happen in the housing market.  The view that we are taking is that really these have to become structural, permanent and we are looking at the moment from a medium to long term perspective as opposed to a very short term one."

What other signals would you look for that may affect your ability to, you know, to ease the restrictions and do you see any circumstances and it goes into maybe perhaps the broader economic debate and about Europe and Brexit, do you see any circumstances in which they could actually be increased?

"Yes, the issues that we are looking at are a number of different aspects.  We are going to look at the impact of the measures on borrowers.  We are going to look at the impact of the measures on banks and their lending behaviour.  We are going to look at the allowances, above the limits.  We are going to look at those and we are going to look at potential side effects of the measures in terms of supply, interaction with rental markets and also unsecured lending.  We are going to look across the whole spectrum.  I think there are circumstances that you could imagine where the measures would at some point be tightened if we felt that the data was showing that there was overheating in the market or there was any sign of an unsustainable level of house price increases or something emerging.  I think we've been clear that we are not targeting a level of house prices particularly.  We are not targeting a level of house price growth but at the same time understanding the dynamics about house prices is an important element of understanding the measures.  There are scenarios, I think, where you could imagine that the measures would be tightened but I think when we do our report in the Autumn, we will be looking at all of these different aspects and we will try to provide feedback in terms of the evidence that we see and why we've made the decisions that we've made."

Is the level of public frustration at the housing crisis and the mortgage caps in particular, is that unfair when you look at the ‑‑ as you said it is a very, very complex ‑‑ is it just that it is something tangible that the public can [add]‑‑

"I think these are very important decisions for people.  Housing is a very emotive issue.  It is a very personal thing.  Lots of people aspire to own their own home.  It's very much in the Irish psyche about owning your own home and so on.  We know absolutely that people would have a strong interest in the measures and have strong views on the effectiveness of the measures and the impact of the measures.  The key things for us are first of all, looking at evidence and that's looking at evidence to support the measures or to support changing the measures.  So evidence in either case.  We do want people to understand why we are taking the action that we've taken.  We are after all accountable to the public.  We are here to serve the public interest.  We want people to know why we are making the decisions that we make and, in terms of when we introduce the measures and also the report that we will produce in the Autumn, part of the reason for doing that is to try to explain to people, 'maybe you have this particular view but this is the view we are taking' and as I said that is very much driven by the protection of the system."

And welcome personal submissions as well sectoral or even from the banks?

"We welcome submissions from anybody in terms of the views that people have.  The only thing I would say in terms of caveat of that is that we really want to understand evidence and I'm not necessarily saying people have to be sending in data and so on but we really need to understand reasons why we would change or reasons why, for example, we would keep them.  When we did consult when the measures were being introduced a large number of the submissions were actually from individual borrowers saying, "if house prices get out of control again, I'm not going to be able to afford to buy a house".  So, actually these things are a really good thing.  We have to have an open mind at this stage."

From one emotional issue to another?

"Yes."

Vulture funds are non-bank entities.  It has got very personal for people because whatever about the commercial real estate and the takeover of those loans, maybe perhaps people didn't feel as connected to that issue but for people it has got very, very personal because down to the ordinary mortgage holder, their loan or any other loans may have been taken over by a non-bank entity.  Are you concerned that the Vulture Funds or non-bank entities will increase SVR's or have such penal interest rates that it actually tips people over into further, you know, or lets their situation deteriorate?

"The critical issue here, on which we have commented for a number of years, has been around the protection of borrowers and borrowers have equivalent protection really regardless of who their mortgage is with.  There has been a process over a number of years for some mortgage books to be sold to non-bank entities.  I know you are saying, Vulture Funds, but I think, let's call them the range of non-bank entities is quite wide, some are different types of regulated firms and so on. The key issue has been trying to ensure that those protections remain in place particularly around people engaging when they are in mortgage arrears.  In general about the SVR issue, of course there are concerns about the vulnerability of borrowers to both interest rate shocks but also to income shocks and other shocks more generally in terms of the remaining high levels of indebtedness in Ireland and an underlying fragility post the crisis. The particular issue around the non-bank entities has been trying to ensure that the processes and the protections that applied under the code in terms of being offered alternative options and sustainable options and so on would apply to everybody equally."

Well obviously the credit service firms that they use are regulated to some degree?

"Yes."

There has been a lot of criticism saying not enough, should the funds or the owners of those loans themselves be subject to regulation and can it be done retrospectively considering that any other firms that are in the market including banks and other financial firms are regulated, is it fair that they are not?

"Yes, there were some complications at the time the credit servicing legislation was being introduced in terms of the location of some of the owners and whether our regulatory reach could stretch into those areas.  The effort was to try and make sure that the outcome would be the same.  So regardless of whether you look at the entity or not, that the borrower gets the protection.  That really has been the priority or where we have focussed most of our attention.  At least from the borrower perspective they still get the protections."

Just in relation to that, have the Vulture Funds, because there is a flip side to the argument, have they served the public good?  Have they been good for the public interest, you know, there is an argument that perhaps none of those commercial real estate loans and the really troubled bank loans and the non-performing loans, the system might not have been cleaned up to the extent, do they serve a public function?  Like is there a defence of them?

"When you look at things maybe from the perspective, for example, of non-performing loans and the negative impact that a large portfolio of non-performing loans can have on the economy, then getting non-performing loans off the balance sheets of banks is generally a good thing in terms of restoring the health of the banks and allowing banks to return to lending money and the way then that credit goes into the economy in terms of boosting economic recovery.  At a European level this is obviously one of the big debates for Europe around the scale of the non-performing loan problem in Europe and whether it is having a kind of drag on economic growth or not. Certainly in dealing with non-performing loans, I think all the international literature would suggest that banks abilities to sell on non-performing loans to other entities is a good thing and of course leads to risk diversification because it takes bad assets off the balance sheets of banks and puts them somewhere else and therefore helps to manage risk."

Well I will move on to the next question, but just in terms of ‑‑ because it has got very, very personal, should we be looking at this stage to increase regulation of them.  I know obviously the borrower, the individual borrower protection you are trying to harmonise that or make sure it’s regulated but should we be actually be going and regulating them now?  Is that something you think that needs to be done to further protect any borrowers?

"I think the issue at the moment, there are many things going on in the housing market right now and the government is obviously looking at a range of measures that might be introduced.  That is one thing I think that can be looked at.  I think from that point of view what needs to be considered is how all of these things in policy terms fit together overall in terms of dealing with some of the housing issues that we have at the moment."

Good stuff, okay I'm going to move on to the negative interest rate, obviously on Tuesday the German bonds dipped below zero and European shares are quite low at the moment.  How can banks be profitable in a negative interest rate environment?

"There are a number of issues here maybe that are different at international level necessarily to domestic levels.  So, I said earlier in terms of non-performing loans it is a big issue at European level and that continued low growth and general economic weakness across Europe is creating risks for banks and that goes into the future in terms of low interest rates and the ability of banks to generate profits and so on. That is a big issue in terms of ECB banking supervision including profitability of banks.  Business model viability of banks is really being called out there as one of the supervisory priorities.  For Ireland the issues are maybe a little bit more mixed because we have these further complications around legacy issues post the crisis and the banks returning to profitability as the Macro Financial Review described earlier on in the week, returning to profitability but profitability being somewhat weakened and also varying quite considerably across the different banks.  So, yes the low interest rate environment, I suppose is challenging but from a monetary policy perspective, in terms of boosting economic growth and restoring the inflation target, it is a really important element of our monetary policy stance at the moment."

And obviously at a European level there's been a lot of criticism particularly from Germany, their savers not too happy, has that criticism of the negative interest rate and the bond yields is that justifiable, you know, is it very difficult to have an entire policy for the Euro Zone that is obviously having a different impact in individual countries?

"Yes, I think one of the challenges of being in a monetary union is that from time to time there can be differences in terms of how the policies impact on individual countries or individual member states.  It is one of the reasons why the macro prudential toolkit that we have now is really important.  So, for example if there are issues emerging in any particular economy in the Euro area, like credit issues for example, we now have a much bigger took kit like the LTV/LTI measures to complement our monetary policy tool kit.  The key issue for me around monetary policy is the ECB has a very clear objective around inflation.  In general the view is that low stable inflation rates are a good thing for the economy and so the target of at, or close to, 2% is extremely important in terms of the overall health of our economy."

We are some distance from that yet?

"Yes, the key focus now is on implementing the monetary policy measures that have been taken over the last few months."

How far can a negative interest rate policy go and are there downside risks with it?

"There is a big international debate at the moment about whether we've kind of reached the lower bound or whether there is further that we can go.  There are obviously very mixed views in relation to that.  I think, as I said, the focus for now really has to be on the ECB and the national central banks’ delivering on the package of measures that have been introduced so far…"

What about ‑‑ just to bring you back domestically, obviously the big kind of ‑‑ one of the big ticket items will be the proposed sale of AIB by the State and is that a good thing in circumstances where we are operating in a very negative interest rate environment?  Presumably that is affecting its profitability as well as the others?

"The key issue in terms of AIB is that it is a decision for the government in terms of its shareholding generally in the various banks.  I think it would represent, again a furthering of our return to normality when we are in a position that the State can divest its shareholdings in the banks and obviously on recouping some of the investment that was made in terms of capitalising the banks."

Should we wait until the interest environment changes because obviously the, you know the negative interest rate is, you know, or the measures introduced by the European Central Bank, you know, two years ago and the whole process of quantitative easing.  It's kind of going in one direction, you know, should we ‑‑ is there an argument for waiting until the interest rate environment improves?

"The key thing is for the government in terms of the advice that they are getting is to make a determination around when the best time is to make the sales."

Okay, something that is obviously in the macro financial review that you spoke about earlier this week, what are the key vulnerabilities that you see for the Irish economy and are there any demographics in particular that you are really, really concerned about, age groups or are there demographics?

"Yes, the review found that output grew very strongly in 2015 which we know and the outlook in the macro financial review is that output will continue to grow strongly into 2016 and 2017.  Overall though we found that risks are weighted to the downside and there are a number of elements for that.  At a European level there are geo‑political tensions for want of a better term and we also have questions over the impact of the referendum in the U.K. in terms of the future of the U.K.'s relationship with the European Union.  On a more domestic level there are a couple of issues.  We have continuing high levels of indebtedness for both households and firms which creates challenges for households and firms and makes them quite vulnerable to interest rate shocks or income shocks for example.  We also have a significant level of government debt and it’s important in terms of the fiscal stance that we remain on a sustainable path.  One of the interesting things that the MFR does show is around borrowers. Some of the key groups where there are vulnerabilities are particularly younger borrowers and borrowers, for example, that are on SVRs.  There is some analysis on the macro financial review about that and I think they are key issues for us in terms of more forward looking thinking about where the vulnerabilities lie in the economy."

And what about, it is kind of going back, but what about the SVR cohort, you know, obviously you have to look at it at a broader view but what about that cohort?  What in reality can be done for them?

"Policy issues around SVR rates are very complex and   the Governor has spoken a little bit about this in recent times in the context of the potential for proposed new legislation.  The market in Ireland is very disrupted after the crisis and there has been a lot of commentary around there being fewer players in the market and the impact of competition and so on. I certainly think, if you take a more medium term perspective or view, is that regulating interest rates is not necessarily the best way to drive competition.  We also published some analysis last year on the factors that underlie the current state of interest rates in Ireland.  There are a large portion of borrowers on tracker mortgages which has an impact on the banks,  I know that is not of much comfort to people who are on SVRs but that is the wider context and then there are issues around pricing of mortgages in Ireland to do with ‑‑"

Are we pitting different types of home owners against each other?  It almost seems that way.  It is the trackers versus the SVRs?

"Yes and I think that is the challenge.  If you are an individual borrower and contractually you have one thing you are obviously in a very different position to someone who contractually has something different.  I think when you take the system as a whole though, that research that we published last year has showed that there are many factors that are impacting on rates. Pricing for credit risk, some of the legacy issues that we continue to have since the crisis but I would say again on the policy issue around SVRs that our view has been clear that we don't necessarily think it's the best way to get the outcome that we want.  There may be unintended consequences particularly if other institutions are looking at coming here. Obviously if that's the mandate that we are given then it is incumbent on us to do that."

And obviously there is legislation there that can give you those powers.  There is probably a big question over whether or not you would use it in part because of the whole system of analysing what constitutes a market failure but what would be the impact on other institutions, you know, come in?  There seems to be an underlying concern that would we deter both the Vulture Funds and indeed with the SVRs, would we deter other entities coming into Ireland if there were ‑‑ if it was perceived that there were restrictions or things that would affect their collateral or other issues?

"And that is the critical issue when we talk about the potential for unintended consequences that potential entrants into the market will look at the circumstances in the market and if they feel that there isn't a viable business proposition here that they wouldn't enter the market.  So when we talk about a concern around that, that's primarily what that's about."

And would for example our lack of repossession culture, there is a lot of people in mortgage arrears particularly I know the situation is improving but if you look at the long term mortgage arrears people in two years or more but there is a sort of cultural reluctance for repossession.  Is that something again that might deter other players from coming into the market if it’s perceived that the value of their collateral cannot be enforced?

"The situation has changed quite a lot during the crisis on that issue.  When I was first starting to work on this issue in early 2010 there were lots of uncertainties around the legal framework in Ireland, around the ability to repossess, around bankruptcy and the judicial process, around the Central Bank's own rules and codes.  There is a much clearer framework now if someone is looking at Ireland in terms of coming here around everything from the Central Bank's requirements but also the insolvency approach now is much clearer and everybody understands what that is. The government was very clear around that time that the policy objective was to the extent possible to keep people in their homes.  That's well understood.  One of the things that potentially causes a problem is uncertainty.  If people look at a market, not just on this issue but on any issue, if there's uncertainty in the legal framework, there's uncertainty in the regulatory framework, it makes people think twice about decisions. And, not to bring up Brexit too much, but some of the talk around Brexit has been around that.  Uncertainty drives people to stop making decisions while they just wait and see what happens."

And obviously the legislation again, it's not mandatory but it's a 'may' rather than a 'shall', do you think that there would be uncertainty around just the fact that you've been given that power potentially.  Do you think that that creates its own uncertainty?

"If the Bank is given those powers, it will be really important for us to set out the framework under which we will consider them.  So again, if I just use the mortgage rules as an example, when we were given those powers, which don't just constitute the mortgage rules but constitute a whole range of other tools like capital buffers and so on, we did set out at the very beginning the framework in which we would assess things.  In terms also of our public accountability it is very important that we set out how we would implement such powers were they to be given to us."

Perfect, okay we can go back on that, that is grand.  Sorry ‑‑ okay, on the vulnerabilities, the European system has been battle tested to some extent since '07 and '08 but given those vulnerabilities and the concerns you've expressed around particular demographics, how well are we prepared for a next recession if there was to be one?

"We've been clear that we consider that there remain a lot of vulnerabilities particularly for households, corporates and the government.  Significant progress has been made in terms of dealing with some of the issues that we have from the crisis and we'd like to see that continuing.  Some of the analysis is in the MFR we published earlier in the week.  It's around people repaying debt to the extent possible.  We also see that many of the arrangements for people who are in mortgage arrears are performing and we would want that to continue.  The key issue is being alive to the risks and if there are risks emerging that the Bank, or whoever else needs to take action, can do that and to be honest that's part of the issue around the LTV/LTI measures.  It is about trying to take policy actions before things get out of hand."

What about Brexit and we won't go into it too much.  There's been so much about it but we have been reassured by Mario Draghi and others that there are detailed plans in the event of a Brexit but we don't know much about that detail.  Can you give us any insight into what our Central Bank is doing and even as part of the broader picture for that?

"We've been doing a number of things.  We undertook a wide range of analysis in terms of the potential effects and we've been clear both in our previous publications and in the publications this week that there is potential for side effects both in the short term and the long term from a Brexit.  In effect when you get to the level of individual firms, those impacts depend very much on the business model and the interactions with the U.K.  The other thing which obviously is unknown is if the U.K. leave is the nature of any arrangement with the European Union, this will be an important determinant of how severe those impacts are in the medium to long term.  I would say on the short term issues, we have been talking to the individual firms that we supervise in terms of their own preparedness ‑‑"

If there was a big sterling crisis of those ‑‑ a huge valuation of those extreme short term volatility, will banks and businesses be able to access the Euro and the Pounds that they need?

"First the ECB's monetary policy stance now, in terms of monetary policy means that there is ample liquidity in the system.  So I don't think there is any concern from that perspective.  The Bank of England has already announced a number of contingency arrangements around its plans should institutions require Sterling liquidity. I would reiterate what I said earlier in the week which is that the required contingency arrangements are there should they be needed."

Yes, so there would be enough liquidity for Irish banks in the event of a big drop?

"Yes."

Excellent.  The role of the Central Bank, in a lot of the public debate, there can be a lot of anger, frustration and otherwise directed at it and there could be possibly huge public misunderstanding about its role.  How do we differ from other central banks in terms of what we do and do we do more?  Have you much more as an institution to deal with than other central banks?

"If you take the Central Bank of Ireland in its broadest sense including all of its regulatory responsibilities, we have generally quite a wide role particularly compared with a number of other central banks.  If you think about it more from a central banking perspective particularly some of the changes I mentioned to you earlier around a central bank that has responsibility for macro prudential policy like the LTV/LTI measures and a Central Bank that has responsibility for resolution and failing banks for example, we probably have a lot in common particularly with many of our European partners but it does mean that the Bank's role has changed significantly since the crisis. Our mandate has become broader in terms of those new tools for example like the macro prudential ones and so on but as I said that's largely speaking in common with others.  We would see that as an international development as well.  Part of the issue though about people understanding that is, accountability is extremely important and we have taken a number of measures in recent months, for example, publishing our Commission minutes which Governor Lane decided we would do.  Also proactively publishing a range of information under freedom of information to try and help people see what the Bank does. Then in terms of our policy it's standard practice for us to have public consultations and so on, to make sure that people can both inform us and then we obviously have to inform people about what our decisions are."

Could more be done?  There has been some sort of criticism in some media about FOI access, is that something that could be improved?  How do you feel about that?  Are there sensitivities still around a lot of the work?

"We are a public body, freedom of information is an important element in terms of the transparency of our work.  Clearly we deal with a large amount of very sensitive information.  Some of it monetary policy, Euro system related.  Some of it related to regulated firms, very sensitive data and so on.  So I think it's about getting the balance right.  The Act has applied to us for a year and I think we are still in the process of really understanding if there's more that we can do and we are looking at taking further measures in terms of putting more information into the public domain."

You've a lot of staff.  You've increased staff.  I know you spent about just over a million last year in increased staff but the institution isn't immune from criticism, from politicians, you know and from others and how do you deal with that in terms of your independence as an institution and is that something that's difficult to manage?

"The theory and practice of central banking independence is a really important element and part of the reason for that is there are very big policy decisions to be made and they often have this medium to long term objective.  Our independence is really important.  The flip side of the coin of independence is around accountability and it's obviously very important that we are held to account by the Oireachtas but also that the public understand the rationale around some of our decisions. The measures that we've introduced on the mortgages, for example, have been extremely controversial.  Equally sometimes when we don't do things, that's equally controversial.  It goes to that point about us trying to explain what we do and a big part of my role and the role of the Governor is to be accountable in that way in terms of explaining."

And how do you manage that conflict or that tension between, you know, your goal, your objectives medium to long term, it's stability versus the very, very immediate needs that the public have.  Whether it is around motor insurance or insurance generally.  Whether it's about credit unions or you know their ability to secure mortgages and is that something that you take into account or do you just have to keep the head down and keep going to look at the medium to long term?

"We all have to take into account the impacts of what we do, be they short term impacts or medium to long term impacts and this is why we talked about the evidence in terms of the mortgage measures.  It is really important for us that we have the data and the evidence to underlie and support our decisions and we absolutely have to accept that our decisions have very real consequences for people.  The mortgage measures are one example of how people are sold financial products.  What happens when something goes wrong and they make a complaint?  Our rules obviously play into all of that.  We have to be really alive to that mission of safe guarding stability and protecting consumers so being alive to the impact on individuals is important."

Was there another way?  Was there any alternative to the mortgage caps?

"The critical issue post the crisis is that these various tools have been given to many central banks not just us.  There are other tools we could use, for example, additional capital requirements on the banks but our view in this case was, the most effective tool to deal with this particular issue which is borrower resilience, bank resilience and preventing a credit house price spiral re-emerging, is that this is most appropriate tool for those circumstances."

Just internally within the Bank, obviously you have been on a huge expansion that has required a lot of recruitment, is the cap on public sector pay, is that something that is a risk in the medium to long term if you're not able to get in ‑‑ obviously you've been recruiting a lot of people but in terms of recruiting kind of key talent, is that itself maybe a strategic risk for the Bank?

"We’ve been clear in communicating that particularly since the economic recovery started and the jobs market started to improve that retaining staff is becoming more difficult.  There are constraints in place and we have to abide by them but I think we are conscious that this is certainly causing challenges for us in both recruiting and retaining people.  The other dimension is, we've had a number of external reviews of the organisation and this issue has been commented upon a number of times by international assessors."

Would you prefer if there was, I know it is a broader public policy issue, but would prefer if you were not subject to the caps or had more freedom to recruit directly to people that you wanted or to accommodate that?

"Firstly we are a public sector body and we are covered by the legislation and that is the legal fact.  We would certainly welcome being able to look at some more flexibility particularly in the medium term about how we deal with this issue about making sure that we can attract and retain the right people."

Perfect.  We are almost there.  I want to ask you just about your role in Europe and being on that task force, you know, of the non-performing loans, what's the scale of the problem and what are the main challenges that you are facing?  I think recommendations will come out later this year, November?

"It’s an area where unfortunately through the crisis Ireland has gained a great deal of experience in dealing with non-performing loans and there is a lot of expertise within this organisation.  On the plus the situation in Ireland is improving and the report we published earlier this week shows that while still a concern, the level of non-performing loans is now down to just around fifteen and a half percent.  We have made significant progress and the trajectory is in the right direction. 

"In terms of dealing with non-performing loans, we took a wide range of supervisory steps over recent years in terms of how we engage with banks, the imposition of targets, requirements that we put in place around provisioning and so on.  We’ve got a lot of expertise to offer.

"At a European level, you are talking about very different issues in different countries that have different local economic challenges, different judicial systems, different requirements on their supervision of individual institutions.  So really the work is about trying to find the best practices and best experiences of a collective group of supervisors that will then be used to form a plan for dealing with Euro Zone banks."

Two last questions.  One is just actually on Brexit, has there or will there or is there a requirement for extra provisioning for banks and businesses in the event of needing, for Sterling or for Euro during that if there was short term volatility.  Does that require extra provisioning?

"For us in terms of regulated firms, we've had a lot of discussions with firms to make sure that they are well ready for anything that might happen.  If you look at the wider economy it would be important for firms to be looking at their own business model and their own exposures to see if there is anything that they need to do themselves in terms of risks.

And obviously with Irish banks, even having a particular exposure in relation to property in the U.K. in terms of their lending?

"The effects could be quite varied, it depends very much on the business of the individual firm, its relationship with the U.K., whether that's inward or outward, etcetera, etcetera.  Each firm has had to look at its own individual circumstances and how the risks might play into those circumstances."

Very, very last question, was there ever a moment, you know, throughout the crisis where you thought, we are not going to get through this?

"No."

Excellent.  Thank you.