So my introductory remarks today, Cathaoirleach, will necessarily have to be very selective to respect the time limits. So I'll cover, in essentially chronological order, matters that were dealt with in my written statement. First, the recapitalisation of the banks in 2010 in the context of NAMA purchases, then the September 2010 bank funding cliff, the move to the EU-IMF programme in November 2010 - which, understandably, is this afternoon's topic but I'll cover it all in one ... remarks today - the programme structure and, finally, the improved funding conditions which helped to make the programme a success. I will conclude with a few remarks about institutional change.
So on recapitalisation of the banks, given the existence of the watertight guarantee enacted through the CIFS legislation of October 2008, in designing policy with regard to bank capitalisation I was guided by a fixed principle, informed by the Central Bank's statutory mandate, that any event of default by a bank - as would trigger a large cash call on the State - was to be avoided in view of the financial instability that this would cause. In practice, this implied that the Central Bank had to ensure that all of the guaranteed banks would continue to maintain regulatory capital compliant with international standards. This would help ensure that they had access to the ECB standard liquidity facilities as well as, where necessary, ELA. As the NAMA purchases would necessarily be staggered over a period of months, the Central Bank decided to take the announcement of the valuations of the first tranche of NAMA loan purchases as the occasion to establish the necessary capital infusions for Allied ... for AIB, Bank of Ireland and EBS, the going concern guaranteed banks selling loans into NAMA.
When they became available late March 2010, the initial NAMA valuations, based only on the handful of exposures that had been fully valued in time for that date ... these entailed much higher percentage losses than had been generally expected by industry specialists. So the capital requirements announced by the Central Bank at the end of March 2010 - in what was known as PCAR 2010 - assumed that all of the NAMA purchases would involve haircuts as large as the first tranche. They also took account of forward-looking loss estimates in a base case and stress scenario of the non-NAMA books. For example, a flat 5% loan loss estimate much higher than that assumed by the banks' managements themselves was applied to the residential mortgage portfolios. Given the prevailing uncertainty surrounding these badly impaired portfolios, there was still a large margin of error which might eventually consume the apparent surplus above the international minima ... the international capital standard minima. Unfortunately, the later tranches of NAMA purchases which became available in August and September did imply much higher losses, with the result that additional capital requirements had to be announced in September for AIB and also for Anglo at that time - in that case because of Anglo management's estimate of additional costs implied by the wind-down plan that the Government had just already announced in the same month.
Now, the September 2010 bank funding cliff. Faced with a steep cliff of bank liabilities ... liability maturities in September 2010, I gave some consideration to possible alternative courses of action which might be recommended to Government. As explained in my written statement, the only safe way forward seemed to continue to rely on ELA while also pursuing all possible steps to rebuild confidence and recognising that recourse to an IMF programme would be the fall-back position. By that month, September 2010, most informed international observers began to factor in a likely need for Ireland to enter a programme of official financial assistance. The main influences were the perspective rapid increase in ELA - due to the funding cliff, which arose because it was the end of the initial guarantee period - and the growing evidence that the Government's multi-year fiscal plan at that stage would not stabilise the debts ... the State's debt dynamics. The drip feed of bad news about bank recapitalisation needs did not help.
Now, the move to the EU-IMF programme: by 4 November 2010, when spreads on ten-year bonds exceeded 500 basis points or five percentage points and depositor outflows were accelerating, also reflecting a loss of confidence, it was clear to me that application for a programme could no longer safely be deferred and by, well, the following week, I guess, 11 November, the Minister for Finance had agreed to exploratory discussions with troika officials in Brussels.
Delayed until 14 November, apparently because of the need for the troika to agree a strategy among themselves - though that's conjecture, I guess - these discussions, attended by about 20 Irish officials, confirmed that there was a basis for full negotiations on a programme which, with the approval of the Minister, began in Dublin on 18 November. These meetings took place in an increasingly tense situation of national and international media speculation, market tensions, which had brought the yield on Irish Government ten-year bonds above 8% and considerable international official alarm at the highest levels.
So, on the structure I would just say the following, the EU-IMF programme structure, the programme finally agreed with the troika, it largely reflected the four-year budgetary plan which was published by the Government at the outset of the negotiations, or during the course of the negotiations might be more precise. Indeed, in the negotiations, the target date for reaching the threshold deficit level of 3% of GDP was pushed back to 2015. But would the implied degree of fiscal adjustment be sufficient to bring the public finances back onto a sustainable path? Here the remaining question mark over the banking system was key. All in all, the Central Bank found the financial terms of the programme disappointing and unsatisfactory, especially in regard to the high interest rates and the lack of some kind of insurance mechanism against tail risks in the banks. Nevertheless, it was crystal clear to me that no better terms could quickly be achieved. Therefore, having set out these concerns, I advised the Government in writing that it should proceed on the basis of the programme, given that the alternative of struggling forward without access to market finance would have been more economically damaging. If the programme proved unable to deliver a sustainable debt path, as seemed at that point possible, even likely, then the financial terms could probably be renegotiated. It is a fact that, had programme funding not been availed of, much more severe spending and tax adjustments would have been needed.
Now, the better financing conditions that subsequently made the programme a success. Indeed there were subsequent, considerable improvements in the terms of financing, not least through the reduction of EU interest rates from the initial level of about 5.7%, 5.8% per annum and the lengthening of the loan maturities and subsequently through the carefully designed financial arrangements around the liquidation of IBRC, especially the so-called promissory note exchange. And these improvements, combined of course with close adherence to the budgetary targets in the following three years, allowed the Government to take the decision to exit the programme on schedule at the end of 2013. Despite the risks and pressures involved at the outset, recourse to the EU-IMF loan proved to be a successful policy move for Ireland, limiting the need for fiscal austerity because funding was made available in amounts and at costs far below what the market would have offered and underpinning a relatively rapid return to confidence. Successive Governments' adherence to the programme in difficult political circumstances helped restore Ireland's international reputation for disciplined macroeconomic management, a reputation essential for sustained recovery of employment and incomes.
So, just a few words on other aspects. I ... clearly I've omitted a lot that could be said, including in particular on the areas of institutional reform that were introduced in the Central Bank since 2009 to enhance the bank's ability to deal with new tasks, as well as upgrading its capacity to deliver on the remainder of its mandate, having regard to the weaknesses that had been identified. Very extensive changes in regulatory and supervising staffing, methodology and culture brought into the Central Bank, 2009 to 2013, have been documented in papers submitted by the Central Bank to the inquiry and I believe that the smooth transition of the prudential aspects of Ireland's supervision of banks to the ECB's single supervisory mechanism in November 2014 testifies to the credibility of the transformation that was achieved in those years.
On the rehabilitation and restructuring of banking in Ireland, I suppose the central banking, aside from the recapitalisation aspects in this period, I have spoken repeatedly to Oireachtas committees about the disappointingly slow progress in dealing with non-performing loans, especially, but not only, mortgage arrears.
Banks have now got reasonably effective systems in place to deal with collection and restructuring on the scale needed, but they did not introduce adequate system until chivvied or harassed by the Central Bank from late 2011. The mortgage arrears targets introduced in early 2013 simplified a quantitative assessment of progress being made by the banks. An increasing number of loan restructurings, designed to be fully sustainable, have been agreed. Compliance with the restructured payment schedule is high, though deeper restructuring would be desirable, as it would arguably increase assurance that borrowers would not fall again into arrears and would also reduce debt overhang in the economy at large. However, despite all of the efforts, including the initiation of court repossession proceedings, there is still insufficient engagement between borrower and lender in a large number of cases, resulting in lengthy delays, leave the borrowers in a limbo of over indebtedness and hamper both the borrowers' and the banks' ability to put the crisis behind them.
So, in conclusion, in the period under review the Central Bank has sought to help the Irish economy recover as much as possible from the calamitous economic and financial losses resulting from the collapse of the bank-driven boom. As far as banking regulation and macro-prudential policy are concerned, these are complex and ever changing fields of endeavour, demanding skilled and committed officials. The failures of the past provide lessons for the present, and at the Central Bank, we have tried to learn and apply those lessons.
