Introductory Statement by Governor Philip R. Lane on the Publication of the Central Bank of Ireland Annual Report 2016

Good afternoon and welcome to our first annual report press conference in our new Dockland Campus.

I am joined by Deputy Governor Sharon Donnery, acting Deputy Governor for Financial Regulation Bernard Sheridan, and our Chief Operations Officer Gerry Quinn.

The Annual Report and Statement of Accounts and Annual Performance Statement we are publishing today are the centrepiece of our framework for accountability. The Annual Report provides a comprehensive account of the fulfilment of our responsibilities and governance, key activities and developments for 2016, and the Statement of Accounts gives a detailed overview of our financial operations and accounts. In addition, today we also publish our Annual Performance Statement on financial regulatory activities undertaken during 2016 and planned for 2017.”

I will address some aspects of each in turn.

The first chapter of the Annual Report provides an overview of our Strategic Plan 2016-2018, as well as outlining some of our desired outcomes with regard to our wide-ranging mandate. The Strategic Plan articulates how we aim to deliver on our mission to safeguard stability and protect consumers, as well as provides the benchmark against which the Commission measures the performance of our activities. Our activities span areas such as price stability; financial stability; consumer protection; supervision and enforcement; regulatory policy development; payments, settlements and currency; economic advice and statistics; and recovery and resolution of financial institutions.

The third chapter of the Report gives an overview of our governance arrangements such as our internal committee structure, the key responsibilities of these committees and records of attendance by members of the Commission at these key fora.

We hope that elaborating on these factors facilitates enhanced transparency to the public, in keeping with our commitment.

The Annual Report also gives an update on key activities and developments in 2016. I will briefly touch on some of these now.

First, ensuring the best interests of consumers are protected is a core part of the Central Bank’s mission. The Tracker Examination is one of our key priorities and is the largest, most complex supervisory review undertaken as part of our consumer protection mandate.

Major progress was made in 2016 and will be brought to fruition for many affected customers this year. We recently published a comprehensive update including our redress principles. Our priority is to ensure that lenders carry out a full review and that they ensure all affected consumers are appropriately redressed and compensated for the harm caused to them. We are committed to taking the necessary supervisory action, including enforcement action, to ensure that lenders deliver fair outcomes for all affected consumers. A further update will be published by the Central Bank in Autumn 2017 and a final report will also be published after the conclusion of the Examination.

Second, our macroprudential powers allows us to deploy a suite of measures to mitigate systemic risks. These include the mortgage measures, which aim to enhance the resilience of both borrowers and banks. In 2016 we completed the first review of these measures, which examined their performance against stated objectives as well as assessed possible side effects. The review found the overall framework appropriate and effective in meeting the objectives. However, some revisions were introduced to improve their sustainability and effectiveness. In line with our procedures, the calibration of the mortgage measures will be reviewed in November each year.

Third, while the domestic economic environment continues to improve, external risks remain significant. These include risks relating to the effects of Brexit but also the risks associated with any increase in global protectionism and/or elevated levels of risk aversion in international financial markets. In 2016, a Brexit Taskforce was established in the Bank prior to the UK referendum and it continues to assess and analyse the implications, including the potential for a more diverse range of firms and business models that would require the Bank’s authorisation and supervision. We will also ensure that any entities seeking to locate in this jurisdiction will be substantively run from Ireland. While we have considerable experience in dealing with authorisations of large financial firms, we have also set up new teams to deal with the expected increase in the volume of applications and are satisfied we have calibrated our capacity to deal with both expressions of interest from firms, to substantive discussions regarding authorisations.

Fourth, the IMF reviewed Ireland’s financial system under its Financial Sector Assessment Programme (FSAP) during 2016. The FSAP found that the Irish financial system has strengthened significantly since the financial crisis and has undergone major structural changes. While recognising the considerable progress that has been made in the quality of supervision and the capacity of the system and authorities to manage and resolve financial crises, the IMF noted that vulnerabilities remain. The global scale of the international funds industry in Ireland was also noted, with recommendations that the Bank continue the supervisory innovations, collaboration with other agencies, and data monitoring already established in this area.

Our Macro Financial Review due out next month will update our assessment of risks and remediation on vulnerabilities across the financial sector. The Bank is committed to providing regular public updates on our assessment of risks and vulnerabilities; these are also captured in the publication of meeting accounts of our Macroprudential Measures Committee and the Central Bank Commission.

The Annual Report contains our Statement of Accounts. Today, the Central Bank is reporting a financial profit of €2.3 billion in 2016; after retained earnings, surplus income amounting to approximately €1.8 billion will be paid over to the Exchequer. The Central Bank’s profits continue to reflect the legacies of the financial crisis both domestically and in the euro area. These factors will diminish over the medium term and the Central Bank’s profit flows will correspondingly normalise to more modest levels. The current high profit levels are primarily driven by interest income and realised capital gains on the special portfolio that was acquired as a result of the liquidation of IBRC. This contributed €1.9bn to the 2016 profits.

The Central Bank has stated that it will dispose of the government bonds held in the special portfolio as soon as possible, provided conditions of financial stability permit. These high profit levels will, therefore, inevitably decline in future years as disposals of the special portfolio come to an end.

Furthermore, a general assessment of financial risks has identified a potential interest rate mismatch related to the purchases, as part of monetary policy implementation, of low interest rate instruments in recent years. Considering this risk, the Central Bank has prudently chosen to set aside a provision of €165 million in its 2016 Annual Accounts. This provision has been established to cater for the possibility of such mismatches arising.