Deputy Governor opens Economic History Symposium, stresses role of macroprudential mortgage rules in limiting risk of future crises

• Central Bank has introduced the rules to protect financial stability
• Data highlights link between higher LTV and LTI ratios and borrower defaults
• Central Bank invites evidence-based public submissions on the rules from June 15

Deputy Governor, Sharon Donnery, has announced a public call for evidence of the impact of the macroprudential mortgage measures ahead of the Bank’s review of the measures in November. The Deputy Governor made the announcement when giving the opening address ‘Lessons from the past, safeguarding stability for the future’ at the Fourth Centre for Economic Policy Research History Symposium in Malahide. The two-day conference organised by CEPR and supported by the Central Bank of Ireland, brings together leading researchers on macroeconomic and financial history.

In her first speech since her appointment, Deputy Governor Donnery reflected on the recent actions taken by the Central Bank to contribute to financial stability in Ireland through the introduction of macroprudential policies.  Measures introduced to help prevent the recovery from becoming destabilised  include the countercyclical buffer (CCB), the other-systemically important institutions (O-SII) capital buffer, and the macroprudential mortgage measures.

On the mortgage measures, the Deputy Governor said if they had been in place fifteen years ago, the scale of Ireland’s financial crisis would have been much more limited. She said data clearly showed a link between higher loan to value (LTV) and loan to income (LTI) ratios and subsequent mortgage defaults and also between higher LTV ratios and banks’ losses from defaults. The mortgage measures are designed to act as a restraint on excessive repayment burdens and unsustainable increases in household debt and limit the risk of another house price-credit cycle emerging.  They are constructed to protect the financial system as a whole across the medium to long term. 

The review will bring together in-depth analysis on the measures’ early performance against their stated objectives, as well as analysing the potential side-effects of the measures.  The review will also draw on analytical practices, house price and credit dynamics, in addition to insights on the rental market, housing supply and unsecured lending.  It will also focus on the utilisation of allowances to the measures. 

The public evidence will inform the review, and the submission period will remain open for eight weeks from 15 June – 10 August. More detail on the call for evidence will be detailed at the publication of the first Macro-Financial Review for 2016 on June 14^th.  The Macro-Financial Review is published twice a year and provides an overview of the current state of the macro financial environment in Ireland to help the public, financial market participants and international authorities better evaluate financial risks.  This assessment and related data on the  financial system’s strength and weakness and efforts to strengthen its resilience will provide a useful reference for those providing submissions for the review.

The Deputy Governor stressed that while the parameters may in the future be amended in response to cyclical conditions, these measures, which amount to prudent lending standards, have been introduced as permanent, structural features of the Irish mortgage market.  She also stressed the evidence threshold for any change would need to be high.