Banking Sector: Quarterly Engagement with the Central Bank

I invite Professor Lane to make his opening statement for this part of the meeting.

Professor Philip Lane

I thank the Chairman. In the second part of the meeting, I will cover three topics, namely, the macroeconomic cycle, non-performing loans and Brexit. To give a one-line summary of where we are now, during economic upswings, as we are currently experiencing, it is vital to build up financial and fiscal buffers. If we want to have easing policies during downturns, that requires corresponding restraint during expansion phases.

In terms of the macroeconomic cycle, we are currently in a phase of strong performance, where we are seeing a broad based expansion in employment and an increase in earnings. The momentum in the labour market is moving towards full employment, although, as always, extra employment is possible if policies can lead to broader participation in the labour market. I emphasise that what we are seeing now is not being fuelled by imbalances in domestic credit or external imbalances. The unsustainability of the economy that we saw a dozen years ago is not in evidence at present. Having said that, there is strong momentum in the economy.

The Central Bank clearly sees, as can everybody else, clear downside risks, one of which is a generic vulnerability. We we have an accumulated stock of high public and private debt and we must recognise, as a small open economy, that we are especially vulnerable to international shocks. What might be those international shocks? One is an unexpected tightening in international financial conditions, which would be in contrast to the easy monetary conditions we have seen for a long number of years. If this happened, we could see a shift in the world economy in terms of a slowdown in world demand for investment and consumption. Two external shocks or risks which are especially relevant for Ireland are any change in the international trade or tax regimes, which might be particularly relevant for us, while a disorderly Brexit would pose immediate challenges for the Irish economy and financial system. As I indicated in my pre-budget letter to the Minister for Finance, the fact that we have these clear downside risks calls for the accumulation of financial and fiscal buffers now. That would help to limit the damage if any of those risks materialised.

On the financial sector, the Central Bank of Ireland has recently taken steps to further reinforce the capital positions of the banks. In particular, we announced the activation of the countercyclical capital buffer, which will require banks to maintain an extra buffer in respect of Irish exposures. If we exercise restraint now in terms of extra capital accumulated by the banks, in a future downturn this buffer can be released. This would help to avoid a damaging credit squeeze in the future. That is an important new policy which we turned on this summer. In parallel, in respect of fiscal matters, running of budget surpluses during strong economic periods is a precondition if the Government wants the flexibility to implement a stabilising countercyclical fiscal expansion in the event of a further downturn, in other words, to avoid austerity being piled on top of a downturn in the future.

In regard to the housing market, we share the consensus that a substantial expansion in supply is required if the high demand to own and rent homes is to be satisfied. The limited supply of housing has contributed to the increase in rents and house prices, in addition to positive demand factors such as rising employment, increasing earnings and supportive monetary conditions.

Our mortgage rules, which place ceilings on loan-to-value and loan-to-income ratios, have helped to limit the amplification of pricing pressures by limiting the credit dynamics. In terms of preparing for a future downturn, if we avoid overlending by banks and overborrowing by households at present, it will make the next downturn easier to absorb. We are committed to an annual cycle of review of mortgage measures and this year's review will be announced in late November in line with the normal schedule.

Ten years on from the crisis and five years since its peak, it remains the case that non-performing loans are a cause of considerable distress to the borrowers affected and are also a source of vulnerability in the banking system. Remaining on the general theme of preparing for the next downturn, it is a risk to both the lender and to debtor if these loans are not dealt with. It is a priority for us to reduce non-performing loans, albeit in a sustainable way that provides strong protections for borrowers.

A great deal of progress has been made, both in terms of what we and other parts of the State infrastructure have done in managing this problem, while maintaining consumer protection.

The code of conduct on mortgage arrears, CCMA, has played a critical role. By the end of June this year, more than 116,000 principal dwelling house, PDH, mortgage accounts had been restructured, with 87% meeting the terms of the restructured arrangement. Overall, the number of arrears cases has declined for 19 consecutive quarters, while the number of long-term arrears cases has fallen for the past three years.

The long-term arrears, however, remain a source of concern. Of the 66,479 PDH accounts remaining in arrears, 28,237 or 42% have very deep arrears, with arrears balances of more than two years past due. It is important to stress, in this regard, that engagement by borrowers is critical in order to avail of the safeguards available through the CCMA and the mortgage arrears resolution process, MARP.

To have a functioning secured lending market in Ireland, repossession must be a possible option. Notwithstanding the extensive use of forbearance and restructuring, there will continue to be cases where the lender will need to make alternative choices. The sale of NPL portfolios is an option that has been employed by banks to this effect. The reduction in the size of bank balance sheets, particularly through holding a lower stock of NPLs, reduces financial stability risks in the event of a future downturn. In terms of national risk management, the transfer of credit risk and funding risk to investment funds that buy loan portfolios constitutes a national reduction in macrofinancial risk, given that investors in these funds are primarily overseas. There are ongoing concerns about loan sales but there is a potential gain in terms of national risk exposure. The sale of such portfolios does not affect statutory consumer safeguards and the Central Bank applies itself equally to its dual mission of safeguarding stability and protecting consumers. Accordingly, the Central Bank is committed to ensuring that the consumer protection framework continues to cover loans that are sold. As a result of legislation passed by the Oireachtas, loan owners must use a regulated credit servicing firm to manage the loans and these firms are subject to the same codes of conduct as banks and retail credit firms, including the CCMA. In other words, the protections for the borrower travel with the loan. The CCMA includes requirements that arrangements are appropriate and sustainable for borrowers based on a full assessment of individual circumstances. Regulated entities must make every reasonable effort under the CCMA to agree an arrangement and repossession can be used only as a last resort. As requested by the Minister for Finance, we are undertaking a review of the CCMA to ensure it remains appropriate, specifically in the context of loan sales. We expect to provide that report to the Minister later this year. Finally, it is important to note that the Central Bank represents one part of the wider State consumer protection and debt resolution framework. In addition to the CCMA and MARP, there are other services and supports available to assist borrowers in mortgage arrears. These include the national mortgage arrears resolution service, Abhaile, the Insolvency Service of Ireland, and schemes such as the mortgage-to-rent scheme.

Brexit will be negative for the Irish economy and financial system, as compared with a scenario in which the UK remained in the EU. Financial stability risks are being closely monitored and addressed to the extent that it is possible. A hard Brexit with no deal and no transition period would be disruptive, notwithstanding the work the Central Bank is undertaking at a national and European level both to mitigate such risks and to ensure Irish resident financial firms are suitably prepared. We are preparing for plausible worst-case scenarios in order to safeguard stability in the event of a disorderly Brexit.

Supervisors across the EU continue to prepare for these challenges through a co-ordinated and consistent approach. The Central Bank is working as part of the Single Supervisory Mechanism, the eurosystem and the European supervisory authorities to ensure consistent, shared approaches to mitigate Brexit-related risks. Supervisory expectations have been developed and communicated to firms in a number of areas. These include booking models, internal governance, risk management and the design of internal risk models.

Preparedness and contingency planning on the part of firms are imperative as theirs is the lead responsibility. This holds for firms that are already present in the EU 27 as well as those that intend to move to the EU 27 as a result of Brexit. The transition period is not guaranteed and would only become a certainty if it were reflected in a signed withdrawal agreement, so firms cannot rely on it. We at the Central Bank, in line with other EU supervisors, are urging all firms to prepare for all plausible worst-case scenarios. While we recognise the challenges that firms face when making preparations for Brexit, the only way to minimise disruption is for firms and regulatory authorities to work together to consider and take all necessary mitigating actions in a timely fashion.

Even under the softest Brexit scenarios, the UK and EU 27 will constitute separate financial systems. This is a major change to what we have now. A manifestation of this is the fact that we have received more than 100 Brexit-related applications for authorisation, across a number of sectors. These include applications both for new legal entities and from existing entities seeking to extend their current authorisation. The applicants intend to sell directly to Irish customers or sell from Ireland into the European Union. The potential activities range from banks, investment firms and trading venues to electronic money institutions, commercial insurance and retail insurance. Our approach in assessing the plans of existing firms and new authorisations is focused on ensuring we deliver our important gatekeeper and supervisory role in a proactive, predictable, transparent and consistent way. While there has been some focus on the potential attractiveness of Ireland for firms choosing to relocate and on the number of firms coming to Ireland, the Central Bank’s clear objective is to deliver financial stability through assertive risk-based supervision. We have engaged effectively with our colleagues across the European regulatory ecosystem to ensure that we are operating to, and influencing, the European norms of authorisation and supervision. In doing so, we are mitigating the risks of regulatory arbitrage being a basis for firms’ relocation decisions.

In summary, the Central Bank has a number of key objectives as we look towards 2019 and beyond. We will continue to focus on strengthening the resilience of the financial system, so that it is better able to withstand external shocks and future crises. We will seek to mitigate the risks posed to the economy, financial system and consumers by Brexit. We will also seek to further strengthen our approach to financial conduct regulation in order to protect consumers and investors from a systemic perspective.

I wish to clarify something about the sale of loans to vulture funds. Who established 5% as the target bad debt ratio for banks?

Professor Philip Lane

Mr. Sibley will answer that.

Mr. Ed Sibley

There is no 5% target. The figure came from the fact that at a certain point in time it was the eurozone average for non-performing loans. There has been a supervisory drive to bring down non-performing loans for a variety of reasons, on which the Governor has touched. The eurozone average now is around 3.5%.

There is a general, but unstated, political view from Europe that we should try to stick to the average of 5%.

Mr. Ed Sibley

The nature of non-performing loans across the eurozone is that they are high in some jurisdictions and in some institutions, and typically quite low in other institutions and jurisdictions. The use of an average is not very helpful, particularly as there are very low numbers and quite high numbers. There is not a push or a target. It is a reference point to discuss. Actually, we should be striving to reduce non-performing loans because they cause distress for borrowers, are problematic from a resilience perspective and give rise to issues in the context of the functioning of the system. There is not a 5% target.

The point is that there is no directive of a 5% target from the SSM and the Central Bank here has no target of 5%. It was an average across Europe at one point. That is fine. Mr. Sibley has clarified the position.

In circumstances where a bank has warehoused part of a loan, can Mr. Sibley clarify what is defined as a non-performing loan and what he might expect the banks to sell? I am talking about the recent experience with Permanent TSB and others.

Mr. Ed Sibley

It is absolutely possible for restructured mortgages with a warehoused element to "cure", as we would describe it, so that they would become performing. We have had much engagement with our colleagues in the ECB and across the SSM on being very clear as to what is required because similar approaches to restructuring are used in other parts of the eurozone. While this is slightly simplistic, the key requirement is that the warehoused part is fully provided for. That has been the practice in some banks operating in Ireland but not in others. So-----

What would Mr. Sibley say to banks that are using the excuse of the warehoused part of a loan to deem it as non-performing and then sell it on to a vulture fund?

Mr. Ed Sibley

I would say that the loan can be cured without having to sell it. That is a decision around the amount of provisioning-----

Can the Central Bank do anything with banks that are selling on these loans that have been partly warehoused? Can it do anything to make its view known that the banks cannot claim these are non-performing loans because they are, in fact, a solution within the bank?

Mr. Ed Sibley

I ask the Chairman to say that again. I am treading somewhat carefully because this is really focused on one particular institution.

No, it is focused on all of them. They are all at it in one shape or form.

Mr. Ed Sibley

There have been sales, but the particular example the Chairman gave was in reference to one institution. As part of our engagement with all firms, we are ensuring that they are addressing the levels of non-performing loans they have in a way that is sustainable and respects the need to address the problem but also protects their consumers. We have raised this previously. Regardless of the ownership of the loan, it is really important that customers remain protected under the CCMA. We are ensuring that any decision taken in respect of loans factors in very sharp consideration of the end consumer.

I wish to ask the Governor about competition in the mortgage market here and the role the Central Bank's capital requirements play in our ability to attract new entrants. I ask him to clarify the rules that apply. Do the capital requirements lenders need to put in place act as a deterrent from such lenders coming here? The risk weighting for a mortgage by way of capital must be put aside. For a bank coming here and offering mortgages, what level of capital needs to be put aside?

Professor Philip Lane

I will ask Mr. Sibley to expand on the detail in a moment. The first point is that it is a level playing field. Sometimes we think of a bar to competition that a new entrant would be treated differently from existing participants. That is not the issue here.

It is still a factor.

Professor Philip Lane

Let me ask Mr. Sibley to outline our thinking about risk weights.

Mr. Ed Sibley

The Deputy will forgive me for the fact that there is a degree of complexity to the answer. The core point is that the risk weights, the amount of capital a bank needs to hold here relative to its mortgage book, reflects the risk. That is the core principal. Some of the banks operate on the basis of what is called a standardised approach, which involves a defined risk weighting for everyone. Therefore, everyone uses that approach regardless of the jurisdiction they are in. For residential mortgage lending, that is the standardised approach they use.

The larger institutions would typically use their own internal models. That is based on the performance of the book over a period of time. Typically, in most instances in most jurisdictions, those risk rates - through using the internal models - would be lower than the standardised approach. However, because of the history in Ireland with the level of loan losses experienced, the level of non-performing loans that remain in the system and the losses associated with those non-performing loans, there is not that much difference between the standardised and the internal models.

To expand on the Governor's point, we would expect exactly the same as would be expected across the entire eurozone. There has been a big programme of work, which is called a targeted review of internal models, to ensure banks across the eurozone are following similar approaches, similar methodology and similar outcomes in terms of calculating the amount of risk weight relative to the loan book. However, it is absolutely the case that risk weights in Ireland are higher than many, but not all, other jurisdictions.

Professor Philip Lane

This runs across much of the debate. Why is it that ten or 12 years later, these risks are deemed to be so high? One element is that time needs to pass in order for Ireland to demonstrate it will maintain the stability to avoid the boom-bust cycle we saw previously. We think it will not be like it was previously. There are many policies now to avoid what we saw in 2006-07, but in terms of the legacy of history, that is there.

The second element is what is called loss given default - if a bank has a default, how much can it recover? Banks consider the ability to repossess homes and so on. A perfectly legitimate choice has been made here to allow considerable forbearance and avoidance of repossession, but an external bank looking at Ireland would identify the difficulty to recover collateral in this situation as a clear factor.

I am looking at a table from the European Banking Authority, EBA, which shows average internal risk weighting for residential mortgages during the first half of 2017. It shows Ireland at 42.5%. Sweden would be at the other end at 4.2% and the UK is at 10.5%. Is it appropriate to levy those very high risk weightings on mortgages that are being issued now in an entirely different environment and under new macro-prudential rules, including those relating to 80% loans and a loan-to-income ratio of 3.5? Is such a high risk weighting shaped by history and our experience during the crisis and the fallout from the crisis? Is this a deterrent for foreign lenders coming into the market when they look at the risk weighting they are required-----

Professor Philip Lane

I emphasise that this is not coming from us. This is the assessment of the analytics if one looks, with a cold analyst's eye, at the risks in the market. I agree with the Deputy. We think the system is structurally different now. The issue about the recovery in a default situation, the long delays and so on in restructuring a mortgage, that remains an issue. However, let me turn to Mr. Sibley-----

Before Mr. Sibley comes in, that risk weighting has been shaped by a history of 100% mortgages and a loan-to-income ratio of six. While it is now fundamentally different, we are still attaching a very high risk weighting to new mortgages under entirely different rules.

It seems to me to be a real issue as we are trying to get more competition into the Irish market.

Mr. Ed Sibley

I referred to this earlier. It is absolutely our desire to have a functioning financial services system that serves the needs of the economy. That includes a functioning secured lending market. Part of that is to continue to address some of the dysfunction that we see. We might get into that if the members so desire.

In terms of what the banks themselves are calculating under the rules of the capital requirements directive and capital requirements regulations, from an internal audit perspective, the number the Deputy quoted is still based on their entire book. It would reflect elements of the new lending but still, because new lending has been relatively muted relative to the whole books that banks have here, it will also reflect the risk profile of the entire book. I have not got the precise graph in front of me and may have picked the Deputy up wrong. Certainly, the risk weights that banks are being required to hold reflect the risk profile of the entire book, both new and back.

Mr. Ed Sibley

Of that institution. A new entrant would have the opportunity to look at the risk profile of the lending it was doing and, if it was at the more advanced or sizeable end, it would have to model that itself based on the profile of the mortgage lending it was doing and on comparative history, because it will not have its own experience, and come up with an appropriate risk weight using the methodologies that are standard across Europe. In making those calculations, it would be looking at the dynamics and functioning of the Irish mortgage market. Given the levels of default that were here historically, recognising that was the past, and given the level of risk within the country, I imagine it would form the view that that risk profile of lending into Ireland today is different from lending into the likes of Germany. Whether the difference would be by the factor that is in the current risk weight calculations is another discussion.

I will move on to Brexit. In the event of a cliff-edge Brexit with no transition period and no deal, how prepared will we be in respect of financial services and products being sold into Ireland on the basis of the passporting provisions and branch operations? The question goes the other way as well in respect of companies that have their prudential regulation here and are selling into the UK market. From the point of view of Irish consumers buying insurance products and so on from very big firms, to what extent are they all going to be ready in the event of there being no deal at the end of March?

Mr. Ed Sibley

We have been very focused on this, as the Governor stated in his opening remarks. We have been very focused on Brexit for a number of years, thinking about the macro risks and also the particular risks the Deputy has identified in respect of the continuation of the provision of services to customers and consumers in Ireland. To use the Deputy's example of insurance, there are many providers of insurance into Ireland from the UK and, to a lesser extent but still of relevance, from Gibraltar. We have made sure that we understand to the greatest extent possible the volume of those contracts and policies and that we have as good an understanding as possible of the contingency plans that are being put in place and invoked to address the issue of the provision of service after Brexit. For the big firms that are passported in and are providing ongoing service in Ireland, we would be very confident that they have contingency plans that they are implementing and that they are addressing the issues. The volume is such that at the very tail, there is a possibility that we will not get to 100%. We may get to 99%, in which case there is some risk there around a hard Brexit.

On housing, the Governor has welcomed the moderation in house price growth. He made some comments the last time he was before this committee, as well. What is his assessment of the housing market and house prices? Is supply coming on stream at the pace he expected and does the Central Bank see further moderation or perhaps an end to growth in prices? What is the Governor looking at over the period ahead?

Professor Philip Lane

On investment and construction activity, there has been significant growth this year compared with last year. We see the pipeline between now and next year and between 2019 and 2020 as quite significant. Definitely, regardless of whether we are looking at completions of new homes, in addition to which are other elements such as home renovations, which are another part of residential investment in terms of improving homes and so on, all of that is showing strong growth year by year. There is a supply response happening, but given the many years of underinvestment, it is not closing the gap completely. This remains a multi-year challenge.

It also remains the case that there are many public policy issues about affordability, social housing and all of these things, which are in the hands of the Oireachtas. As the members know, we have a budget next week, and under public investment programmes and so on there are choices to be made. According to our current projections, it is the case that there is a significant pick-up this year compared with last year, and we see it continuing to expand year on year. It is definitely moving and the situation is different now from what it was two years ago, but it is not enough to close the gap. That is true.

What is the position regarding prices?

Professor Philip Lane

Prices are a contest. On one level, the economy is growing. There are more people in employment and wages are starting to pick up. In some sectors, they are picking up quite a bit. That probably affects some districts more than others but there is momentum there. We do think our rules are biting and, at least in Dublin, there is a clear effect. I emphasise that there are still plenty of non-mortgage transactions going on, especially in lower price segments. The price growth is disproportionately out of Dublin because there is more room for expansion in some of the lower-priced regions. There is one experience in Dublin, which is hitting the limits, but that is the experience throughout the whole country.

One of the Central Bank's deputy governors, Sharon Donnery, has applied for the role of chair of the Single Supervisory Mechanism board. We were in Frankfurt recently as a committee and met the current chair. We wish the deputy governor all the best in that application. The Governor has confirmed publicly that he is interested in the chief economist position in the ECB, which will become available next year. From the point of view of corporate memory and top jobs within our own Central Bank, there is the possibility of two of the top three people moving on within a period of months. We may not get both, looking at it from an Ireland Inc. point of view, but has the Governor any comments or observations to make about the need for continuity, retention of experience and knowledge and so on?

Professor Philip Lane

From the word go, from the time I joined the bank, the whole ambition here and the only way the bank can be sustainable is for it basically to be a machine. Whether it is me, Ms Donnery or the people beside me, we have to operate on the basis that everyone is replaceable. What we need is a pipeline of people who can step forward. A lot of the effort we go to in the bank is to cultivate and build the next wave. Regardless of any individual, it is the case that there is a remarkable set of talented people in the bank. The committee gets to see the most visible layer at its meetings, but in terms of the talent in the bank, we are operating as a team and as a machine, so the individuals should not be so important.

I want to revisit the issue of Brexit, if I may.

We can all say it is definitely more likely than when the witnesses were here before that we could see not only a hard Brexit but Britain crashing out of the European Union with a no-deal scenario. That could mean no transition period and that all bets are off in about six months.

Could I clarify Mr. Sibley's comments in terms of preparedness? Do those figures relate to that context or to a scenario whereby we would be prepared, 99% of institutions would have contingency arrangements and there would not be disruption for either insurance holders or any others availing of financial institutions that are located or have headquarters in Britain?

Mr. Ed Sibley

To be completely clear, in the scenario Deputy Doherty described there, which is unfortunately plausible, it would be rocky. There is a high degree of interconnectedness between the Irish economy and the UK economy. From an economic perspective it would be very challenging. I am sure Deputy Doherty is very well aware of that.

From a financial services perspective there is also a high level of interconnectedness in a number of ways, and in addition to the interconnectedness the UK, and London in particular, is such a provider of financial services capability and flow into the rest of the EU that, in the event of a hard or chaotic Brexit, it would be disruptive. It would be disruptive economically and from a financial services perspective.

We are very focused in terms of our work between now and the end of March on making sure that we have a very good handle on those cliff-edge risks. We are driving the firms to mitigate the risks as much as we can and we are mitigating them ourselves as much as we can, but it is plausible that there will be something of a gap between where we can get to and where we would like to be in terms of fully mitigating the risks.

I used the example of insurance. From a freedom of services perspective, the example I have used elsewhere concerns insurance protection for car rentals. They are one-off policies that are not necessarily part of an ongoing relationship with a policyholder. There may be potential issues there. We are very focused on closing them down as much as we can, but given the nature of the scenario described by Deputy Doherty I do not think we could give 100% assurance that there will not be some rockiness.

Professor Philip Lane

My sense is that the whole European system of regulators and lawmakers can do a lot to manage those kinds of risks, but the major focus will not be so much on that as on the financial market speculation. We are probably going to see swings in the exchange rate between sterling and the euro, and possibly swings in UK interest rates, and changes in equity markets, among other changes. If the probability of a hard Brexit goes up in the coming weeks, the financial volatility could in itself be damaging, even if the situation ends up being okay at the end of March. Unless there is very rapid and very clear progress between now and the end of November, we will witness volatility until the final answer is there.

Obviously all of us want to ensure that does not happen. On what we can control or manage in that scenario, going back to insurance, for example, if the Central Bank has sight of companies located in Britain that are using freedom of service rules and can sell products into Ireland and the bank has a feeling it will not meet the end of March deadline or there is a risk that the service could be disrupted, is there an onus on the Central Bank in its consumer protection role to notify individuals about that? It is not a liquidation process but, for example, a person taking out a product in February thinks it might be one of the 99 companies that will be okay but it could be among the 1% that does not have the necessary contingency plan in place at that time. I understand the difficulty for the Central Bank in that regard but how do we deal with such a scenario?

Mr. Ed Sibley

It is important to state that we are not doing this on our own. We are very heavily engaged with our colleagues in the UK and through the European Insurance and Occupational Pensions Authority, EIOPA, in the case of insurance companies to make sure that there is a very clear handle on who is writing business where. Deputy Michael McGrath also referred to the outward question as well on which we are also working. We are making sure to the best of our ability that we close out this issue. Similar to other non-financial areas, it may result in a reduction in the levels of supply in certain areas. It is very difficult for us to say to policyholders today what we would require them to do in the circumstance that their contingency plans are being implemented, but we will keep that very much under review. The focus we have had to date is very much driving the firms to address it and to communicate with the brokers that are selling the products to make sure that they can fulfil the policy for its duration, but there is some tail risk, which is basically what I am talking about, which we are keeping very much under review and how we are engaging on that with the firms as well as in our engagement with consumers.

Has the Central Bank updated its forecast for the no-deal Brexit type of scenario where Britain crashes out of the European Union come next March and the impact in terms of jobs and economic growth?

Professor Philip Lane

We have a quarterly bulletin coming out some time soon where we will dedicate the study to that issue. It is not quite finalised yet, but in general terms this goes back to the financial market turmoil issue. The way the models work is that it is clearly negative for the UK and for us for two reasons, one is that if the UK slows down we will lose export customers and, second, on top of that all of the models say sterling is going to depreciate quite a bit, so there is double hit here from the reduced export customer base and sterling moving. There is no doubt it is a negative, but my view is that the models understate the negativity because they have not taken into account the financial speculation. We must ask whether there will be a plunge in the stock markets or increasing risk premia in the bond markets, among other things. We will be reporting what the models say, and it is negative, but I think they understate.

Is that because the model does not capture that volatility and speculation?

Professor Philip Lane

Yes, it is an add-on.

I wish to ask the witnesses about non-performing loans, NPLs, and the sale to vulture funds. We have been inundated with people phoning and emailing us to tell us that although they are not in arrears, the bank has turned its back on them and their family. Other mortgage accounts which had a small amount of arrears have also been sold. When we queried that with Permanent TSB, for example, the bank told us in broad terms that the definition of an NPL, while complex, is that if a person was in arrears at any point, even if he or she was making full payments, as was agreed in the original application with no arrears, that loan is defined as a non-performing loan.

The committee has teased this out with banks previously, and maybe I missed something, but I have never understood an NPL to be defined in that way. For example, if Professor Lane, anyone else or I missed a number of mortgage payments ten years ago and had arrears of €1,000 that were cleared nine years ago, that mortgage would still be deemed as non-performing. Is that the case?

Professor Philip Lane

I will turn to Mr. Sibley.

Mr. Ed Sibley

As the Deputy described, there is some degree of complexity. In complete isolation of anything else, if a borrower was in arrears, cleared those arrears and was repaying the loan as originally taken out, he or she would have to demonstrate an ability to repay sustainably over a period. Typically, that is a year.

Did Mr. Sibley say one year?

Mr. Ed Sibley

The probationary period is typically a year. That loan would then return to performing. However, that is if the example was in complete isolation. There are other circumstances where the loan might not return to performing, for instance, if the borrower has another loan with the institution, that is, there is a connection with another loan, that is in arrears or is non-performing for some reason. In complete isolation, the circumstances that the Deputy described of one loan and one borrower should queue out to performing, but there may be other reasons for it to remain non-performing, for example, another loan.

That is the definition that is used across all of the banks.

Mr. Ed Sibley

Yes. There is a standardised definition. It was written by the European Banking Authority, EBA.

When we are considering the percentage of NPLs, a number of them could be meeting their original contract agreements. Indeed, they could have been meeting them for nine months, but they would still be deemed as non-performing.

Mr. Ed Sibley

I appreciate that there is a degree of confusion, as we are talking about arrears as well as NPLs. There could be a loan that is not in arrears but is still classified as non-performing. It could be a question of timing. The loan could be returned to performing for nine months and going through a probationary period or it could be connected to another loan. I have seen instances of people with loans that were meeting their terms but who also had connected loans with associated pulling factors.

We discussed the culture of the banks and how to change it. For many people, including me, this sums up the banks' culture. People who made genuine efforts to catch up on their arrears six months ago may now be caught in this loophole and have had their loans deemed non-performing, and their banks have just tossed them over to a vulture. Do the witnesses not see the question of fairness in this? According to the Central Bank's report, the banks need to consider what the customer wants and needs instead of considering their own objectives first before conducting a customer impact analysis. Surely to God what is happening at the minute is the best proof that the culture of the banks is as bad as it was. While I disagree with the sale of any of these loans to vultures, in this context I am specifically focusing on those individuals who are no longer in arrears and whose loans are being sold to Start Mortgages or other firms.

Professor Philip Lane

The Deputy cited an example of the one-year window to return to performing. The number involved in that is quite small, but there is a larger group comprising restructured loans. They have come to some arrangement with the banks. For example, they may have arrears capitalised or split mortgages, be making interest-only payments and so on. There is a whole category of borrowers who are not meeting the original terms of the loan but have met some kind of-----

Restructured agreement.

Professor Philip Lane

Yes. This goes to the issue. It is not unique to Ireland but, in general, banks may choose to sell loans, be they wholly performing or non-performing, and there are many reasons for doing so. I appreciate the concerns that arise when people get letters saying that their mortgages are now owned by X, Y or Z, but let me revert to the consumer protection framework. The framework applies regardless of who owns the loans. That is not the only perspective of how these loans will proceed, but the consumer protection element remains regardless of whether a bank or investment fund owns the loan.

I know that there is consumer protection and that the legislation does not increase that protection in respect of the regulation of the owner, but that is not the core issue. If I borrow €100 from Professor Lane, I know that, because he is a nice guy, he might give me a couple of months longer than the original terms to come up with the money if I find myself in trouble. If I borrow off Deputy McGrath, though, and not meaning to pick on him,-----

-----he is ruthless and will hike up the interest rates.

He is not like that.

Obviously, I am sure that he would really give me the interest holiday as well. The problem is that these vultures have no interest in the type of restructuring in which some of the main banks engage. Vultures have short-term interests whereas banks have a long-term interest. They want people's deposits, people's children's accounts, student accounts and so on. That is why we expect it to be safer for individuals to be with institutions that are in Ireland for the long term.

Professor Philip Lane

I appreciate that that is a widely held perspective. While what I am about to refer to is not a complete perspective, there is a certain perspective on what has happened so far. Mr. Sibley might discuss what we have seen in terms of funds versus banks.

Mr. Ed Sibley

I appreciate that we have had discussions with the committee before about letters received and phone calls made, and I appreciate the distress involved. That is why the CCMA and consumer protection code exist. In terms of repossession as a last resort when dealing with the percentage of loans that are in distress, there is no evidence that the funds are pursuing repossessions from a strategic perspective more aggressively than the banks. Where there is a difference, and we discussed this last-----

Is Mr. Sibley just referring to repossessions?

Mr. Ed Sibley

I am referring to-----

I am asking about this because, whereas the banks would make arrangements, asset appreciation must be recognised as a factor. It makes sense for the vultures to sit back while the assets increase in value.

Mr. Ed Sibley

That is a reference to those that are currently classified as being pursued through the courts. There is a difference, which we discussed somewhat the last time we appeared before the committee, between the restructures that are in place in the banks and those that are in place in the non-banks. For example, there is typically less use of split mortgages in non-banks. There is some evidence of a greater willingness to agree debt write-offs through the non-banks than there is through the banks, but that is more anecdotal evidence than hard evidence. The fundamental point is that, regardless of who owns the loans, there are protections through the CCMA and the consumer protection code, which Ms Rowland can discuss.

I accept that, and we have continually made that point to individuals, but there is the other issue.

Professor Philip Lane

Let us revert to the economics of this, which we referenced earlier. The funds have bought the loans at a discount and do not face the capital charges that banks do. In other words, the running costs of holding these mortgages is less for the investment funds than it is for the banks. That creates room. It is not obvious which way the situation will go. I respect the Deputy's point but, on the other hand, that these mortgages have a lower cost for the funds creates more room for bargaining.

I agree. It is Professor Lane's comment that it is not obvious which way it is going to go that is the problem. There is a huge risk. I have represented people who have had debt write-down.

Professor Philip Lane

If there was no reason to have these sales and, with that uncertainty, why do it? If these loans are left on the books of the banks and if we experience a negative event in terms of a severe downturn, a sharp change in funding costs or in the macro-environment, it is a risk to everyone. There is a social reason for doing it. The move from only banks owning mortgages to diversification of ownership is a global movement. There is a reason for it and it has to be set against these other factors. There is a review of the CCMA under way. The investment funds have purchased restructured loans which have agreements and they are respecting them. The question is what might happen next. I will ask my colleague to comment on the CCMA.

Ms Derville Rowland

As the Deputy will be aware, we are carrying out a review on the effectiveness of the CCMA, particularly in the context of loans that have been sold. We have done on-site inspections in the credit servicing firms and we are reviewing their general compliance with the provisions of the CCMA. We have met a number of stakeholders in the process to get their insights into what is working well, where the blockages are and the changes or improvements that need to be made. An important part of the work we are doing is analytical. We are gathering data on the loans that have been sold, the alternative arrangements and what is happening to them, the range of options the banks have in place and what options are being agreed with customers. We are comparing this data with the same scenario in the non-banks, which gets to the issue being discussed of which way might this go. We are analysing this data and it will be reported on. Some of the data will assist us in having an evidenced-based discussion around the outcomes that we may see occurring. There is a backdrop to this that we will have to factor into our thinking. Some of the loans and people affected by them - those in deeper arrears - may be in the non-bank scenarios such that the range of options that they offer could be influenced by the circumstances of the individuals they are dealing with. This work will give us some insights into precisely this point. We have done a very deep exercise in gathering that data in order to assist us.

It is true that the protections of the CCMA have helped many families. The approaches of the Central Bank helped restructure their loans. It is important that the broad message goes out to people that where they are in difficulties it is important that they engage with their lenders. Their lender is obliged to treat them sensitively with a view to seeking to resolve the arrears constructively, where possible. This is an outcome that is possible through the use of the CCMA. It is important that people engage with the process if they find themselves in this awful circumstance.

I thank Ms Rowland. Professor Lane made no reference in his presentation to an overheating in the economy or any risk of same. I am aware that none of the agencies, internally or externally, has said the economy is overheating but they have referenced a risk of this happening. When the Irish Fiscal Advisory Council appeared before the committee, it provided us with a report and a heat map, which I am sure the witnesses had sight of. Its analysis is that the largest risk to an overheating of the economy is commercial property. In terms of what happened in the past in terms with property and what led us into the crash, commercial property was at the heart of that crisis. Does Professor Lane share the view of the Irish Fiscal Advisory Council that it is commercial property that is overheating or at risk of overheating and, if so, has he proposed any measures to prevent that happening? Stamp duty was increased in the previous budget but the commercial property sector is still booming. I have raised my concerns in regard to the emergence of a bubble in this sector, which I accept is not being bank financed. We will never have an exact mirror image of the crash but this creates other risks.

Professor Philip Lane

In general, overheating is an economy-wide issue. An imbalance in a particular sector is a separate issue. In terms of the overall economy, we are not seeing overheating yet. In terms of unemployment, there is still a way to go before we get into the red zone in terms of the labour market. We should not be too early in declaring any overheating of the economy. As long as unemployment remains above where it should be, we should not do that. When it comes to an individual sector and assessment of what is going on therein, there are few issues arising. What one sees in terms of the number of cranes around town is the completion of a lot of buildings. Construction on these buildings was initiated several years ago when sites were bought at a bargain price and the companies now want to complete and sell them. It is not my understanding that there is a new wave of construction under way. In other words, a bubble is created when construction is amplified even when the market grows closer to completion. I do not think that is in the pipeline. We gather information from the commercial brokers in this regard.

Pricing was very strong for a while but in recent times it has become much flatter. It is not the case that there is onward acceleration in commercial real estate prices. What is true - the IMF has highlighted this - is that there has been an international synchronisation. In other words, there are a number of funds in the world which are active in a number of cities, including Dublin. If funding conditions change or they experience a shock somewhere, it may lead to a synchronised reversal everywhere. Much of the financial risk is in those investment firms, not in the Irish banks. There are spillovers because the Irish banks rely on that pricing to price the collateral of what they hold.

The Deputy raises a valid concern. We will release more work in this area. We have been working away on this issue, prompted a little by the Deputy's communication to me in regard to one of these firms. We have been working on understanding the role of investment firms and how they are funded. We have some interesting work that we will publish. The international message is that commercial real estate has been de-linked from local circumstances. It is part of an international financial play which may go into reverse at some point. It is an interesting sector but I would not call what is happening in it a bubble. There is no local element to the bubble. There may be a global element to it but it is not the case that there is some mania going on in the Irish market.

I welcome that additional work in this area will be published. My concern is in regard to the sharp increase in prices in commercial property. I note Professor Lane's point that they are not increasing at the same rate.

I would like to discuss the issue of interest rates and mortgage interest rates. While I acknowledge that a number of lenders have been reducing their interest rates over the past 12 to 18 months they are still double the European average. We expect that ECB interest rates will start to increase in 2019. This is likely to happen sooner rather than later. We have never had the benefit of European average interest rates.

Does Professor Lane see a day when interest rates in Ireland will be in line with the average? If he does, when will it be? Consumers are being ripped off and they find it very difficult to understand how we can talk about NPLs, the drag on banks and so on and then see AIB and Bank of Ireland making profits of €1 billion at a time when they are not paying any tax in the State and are charging twice the interest rates of the European competitors.

Professor Philip Lane

As the Deputy indicated, there has been some movement, which is encouraging. We think the policy swerve has helped a little with that by making switching easier. Information campaigns and so on have assisted in this regard. We see some evidence that people are waking up. Many could save money by moving to cheaper rates, even within their own banks. The wider point is that, as we indicated, while there is no doubt that there are some factors such as NPLs, the history of the crisis, etc., there is also an issue of competition. There are no barriers to entry here and we are not in a different bloc. We have a single banking union and there is no longer a concern about whether a national regulator will do something odd or surprising. People can rely on a single European regulatory framework. The answer is that, as time goes by, the more we have a track record of the economy growing and of credit not going crazy, of mortgages being relatively low risk, of low LTV ratios, of reasonable loan-to-income ratios and so on, the more the fundamentals will appeal.

Internationally, there was a period when everyone was so busy fixing their own problems that there was no appetite to enter new markets. There are many discussions on cross-border banking. We need to have consolidation and to allow the strong, good banks to expand. I am hopeful that there will be new entrants or that even the threat of this will force the incumbents to reduce their rates. There is room on the margins for those to come down but the only way to really deliver in this regard is by not erecting new barriers to entry and not creating unstable conditions here. The reality is that commercial banking relies heavily on private funding. People take a risk in funding these banks and until they are confident they can make a return here, this may persist. It is all going in the right direction. More stability, a lower risk credit environment, etc.,will help to create conditions for new entrants but I cannot tell the Deputy when that will happen.

Professor Lane is aware that there is an ongoing review relating to bankers' pay that is looking at whether the cap of €500,000 is appropriate going into the future. Of course, Bank of Ireland has always breached the latter threshold. Has the Central Bank fed into that review? If he is in a position to do so, will Professor Lane outline his opinion in that regard? This was probably instigated by the scheme going before the AIB board, which was looking at a bonus. What are Professor Lane's views on that, on the culture of the banks and on how remuneration can or cannot affect it?

Professor Philip Lane

Mr. Sibley covered this earlier. There are firms in Dublin and even more in London which pay more than that. Some individuals will decline to work for banks here in which there is significant State ownership because of the pay on offer. It is for the Oireachtas to decide the trade-off. Does it want the market forces to dictate that if the banks decide it is good value to hire people at higher salaries, they should be allowed to do so? In the context of public acceptability regarding a State-owned bank, is it prepared to wait to see what happens, maintain the cap and fill positions despite the fact that the bank may not get all the individuals it wants? I read that someone has been allocated a contract to evaluate the position in that regard. There is a need to consider the pros and cons of that. There is a genuine trade-off. We have always recognised that there is a good case for performance-related pay that is aligned with socially desirable incentives, especially in a volatile industry such as banking. When the economy slows down, their pay is cut and that provides a degree of stability. One also needs clawback mechanisms whereby any bonuses can be clawed back in the future over a long period if necessary. Have I missed anything?

Mr. Ed Sibley

I think that is pretty much it. From a regulation perspective, we addressed this earlier. The governor refers to clawbacks and ensuring that incentivisation is consistent with looking to the longer term. That is enshrined in the regulations. That is a different matter to the specific point with regard to the legislation. We would be very keen to have the cultural change espoused by the banks, which we want to see, being properly incentivised. That is not necessarily always monetary. We talked a little about this matter earlier in the context of who is getting promoted and about how people are being recognised for good performance. That should be aligned with the cultural changes required within these institutions.

The witnesses have given an answer which is neither here nor there. I prefer the answer that was given by the representatives from the European Central Bank when they came before the committee recently to discuss the SSM. Danièle Nouy said it is not yet the right time to consider changing the current salary or bonus rules in place for Irish banks. That is pretty clear. I certainly agree with the message and think the Irish public would like to hear from the Central Bank about it. The banks and the Government operate in a manner where they say they will look at something and compile a report. Such a report will come up with the same reply the witnesses have given, namely, that it is one thing, on the one hand, and something else, on the other. In my opinion, the reply is that they have enough. Banks being profitable to the tune of €1 billion a year while stripping people of their dignity is just not acceptable.

I return to the NPLs and the 5%. Let us consider a situation where a main bank provides a loan. There may be difficulty with repayments, as was the case with the banks themselves. That loan is then restructured and the customer lives within the new terms. Despite this, the bank sells the loan to a vulture fund. Professor Lane indicated how one can perhaps do a deal with a vulture fund because it bought the loan for less. Once one gets to that point of having a loan owned by the vulture fund, one's credit rating with the Irish Credit Bureau, ICB, is affected, so one has no hope of getting a loan from anyone except the same vulture fund at a rate of 10%, 15% or 18%. As a result, one can never buy oneself out of the loan. That is an issue, especially for business people who find themselves in this situation and are attempting to rebuild. It is also the same for homeowners. The option of a credit union, which was there for generations, where one could get a loan from it if one got into debt, is not there because one is listed by the ICB, which is a difficulty.

In addition, the Central Bank continues to say that the protection travels with the loan. Mr. Sibley indicated that there is not a great deal of evidence of the opposite happening. I keep repeating myself by stating that there is ample evidence of people being crucified by vulture funds as they attempt to rebuild portfolios, homes, businesses or whatever. I have dealt directly with them, a point I have repeated to Professor Lane at previous meetings. For me, the experience as been hugely negative. I pity the people who must deal with the vulture funds. I ask Professor Lane to address the following situation. A bank states that it is required by regulators to reduce the percentage of loans which are classified as non-performing. That is probably accurate. It is selecting its words quite well and blaming the regulators. In a second paragraph, the homeowner - or the loan owner - will read that for regulatory purposes, the bank generally describes a loan that is or has been in arrears as one that is in default or can be sold. I would like the Central Bank to comment on what I have just said and what I have cited from this letter and to tell me why the banks cannot be instructed to drill down into their bad loan books and bring about individual resolutions. Yes, there will be those who will not pay and, therefore, their loans can be sold. However, why can the Central Bank not force the banks to do as I have outlined and make it an option for them to drill down and solve the loan crisis? They are flogging off the loans in any event and at massive discounts, the profits are going out of the country because the vulture funds take them and we have outlined here before the damage done to society. Why can the Central Bank not emphasise this other option to them?

Professor Philip Lane

I will turn to Mr. Sibley in a moment. We have always emphasised exactly what the Chairman said. There are choices here. It is not the case that we instruct any bank to engage in loan sales. I emphasise that many mortgages have been restructured by banks over the years, so it is not the case that they have not gone down that road to some degree. Ultimately, however, the commercial decision as to whether to do more direct restructuring or whether to put provisions aside in order that an otherwise non-performing loan can be put on the road to performing versus the decision to sell is not our decision but the decision of the banks. Mr. Sibley may be able to say more.

Mr. Ed Sibley

To respond to the Chairman's final point, what he articulated is what genuinely has been happening for the past eight years or more. We pushed the banks really hard from 2010 onwards to restructure loans sustainably in to address borrowers' individual circumstances. Behind every number - and I will talk about the number presently - there are individuals, and I genuinely appreciate that. To give a sense of the matter, one in eight owner-occupier mortgages was in default at the peak of the problems with non-performing loans. That is down to about one in 16. That is still obviously too many, but that number has been achieved through the splits to the arrears caps, the term extensions and the forbearance. At an individual level, the individual circumstances of these borrowers have been understood, assessed and restructured on that basis, and this has required sacrifices on the part of the borrowers. It has also required engagement with the banks. Underneath that, through the waterfall, there are protections in place, via both the private sector and the public sector, in the form of organisations that are there to try to assist borrowers in distress. I refer here to the Insolvency Service of Ireland and, ultimately, the courts. The process the Chairman describes has been happening. Now, however, five years on from the peak of the level of difficulties with non-performing loans, we still have a big chunk of borrowers who are not just two years but five years past due. If we are going to have the functioning market we talked about that serves the country, that does require those to be addressed. Whether those loans are with a bank or not with a bank, the bank is required to engage and consider the individual person's circumstances and try to address them.

One point of detail the Chairman raised relates to portfolios. The CCMA's protections are focused on owner-occupier mortgages - that is, those relating to the family home. If a borrower has invested in a portfolio of loans, that is a different matter and the protections are somewhat different.

I do not know whether Governor Lane or Mr. Sibley have answered the question. I do not know whether they are clued into this at all. Let me explain. I understand what the banks have been doing. On a macro level, they have their big customers. They have worked hard going down to the very smallest of loans so they are almost down to that level now where they have a huge number of loans that are in difficulty. They are not applying the same degree of effort in finding a solution for those loans as they did with the bigger loans further up along the chain. As a result, individuals find themselves in court. They are lay litigants defending against solicitors, barristers and so on, and, until now, the banks have pushed these loans to the courts. There is a huge number of cases before the courts and no effort is being made by the banks once they do this to unravel matters and try to find solutions. These are the clients who come to me and, I am sure, other members of the committee. They are fighting for their homes and trying to make some effort. I do not know whether our guests know how difficult it is to get information from the banks. It is absolutely impossible, and I have seen this myself by dealing with individual cases. One individual asked a particular vulture fund for information last Christmas. That information has still not been provided. In the meantime, the client is just left there wondering about his or her business, home or loan or whatever. It is impossible to deal with the banks. I know I am repeating myself because I have said this before at various meetings, but it is the same story I come up against all the time. It can be seen in the language used in that letter from a bank to a customer. One cannot say what is written is a lie, but it verges on being so. It is a play on words to make the customer feel that the banks are not that bad but that those regulators have them under fierce pressure and they have to sell the borrowers' loans on. That is basically what they are saying. Earlier, we dealt with the culture in the bank. That letter speaks loud and clear to a culture that does not give a damn who is regulating or what is being said. That is a view I have and it is one that I know is shared by people across the country.

I then come to the ICB, now that I have gone through the situation of a loan being sold on to a vulture fund, a client trying to buy it back and the bureau flagging the individual's history. The Central Bank controls the ICB now. Is that correct or is it working within the bank?

Professor Philip Lane

No. A new credit register has recently been set up, and information all loans to individuals goes into that. It is an alternative to the traditional credit bureau which was owned by the banks. It is an important new source of information which will allow banks to see the whole profile of an individual's debts, and not just vis-à-vis one bank but with other banks, as well as any history of difficulties. That is starting now and it is a new piece of information. There will soon be a second register called AnaCredit, a European-wide credit register for bigger businesses. There will, therefore, be a similar database of debt for these businesses. This is intended to improve the information available to lenders to assess credit risk more accurately.

Is the ICB finished, in that case?

Professor Philip Lane

It is a decision first of all for those who own the ICB to decide whether it has a business future. The central credit register is only in the start-up phase and, therefore, I do not think there has been any decision yet about the future of the ICB. The central credit register is an important new source of information. The AnaCredit register will be important when it is on stream. The amount of information available to lenders will increase.

On the basic point about whether somebody in this situation is totally stuck because some historical default or non-payment means there is a flag on his or her record, we must make a distinction between households where the consumer protection framework is strongest and treatment of small and medium enterprises and bigger firms where the way in which a loan contract is managed will be different. The level of protection for consumers will naturally be much higher than for business enterprises because of the basic differences in those two types of loan and activity. I am sure the experience is tough for many small business owners, and the question there is how a bank or a non-bank should treat those loans.

Will Professor Lane address the issue of small business owners not being able to get loans, and the credit union option being closed off to them as well? Is there not an argument for easing the regulation of credit unions in this area? They grew small businesses in their day because they knew the individuals and the risk better than most. Now they are virtually the only financial institutions that are represented in the community.

Mr. Ed Sibley

On the specific point about credit unions, as has been reported, we are looking at the lending limits that are in place today and making sure they are fit for purpose. We will consult on that shortly.

Can credit unions do mortgages now?

Mr. Ed Sibley

They can do them today.

With total freedom.

Mr. Ed Sibley

In the case of many of them. There are two limits in place for lending of more than five years and more than ten years. I appreciate there are a smaller number of credit unions that are already close to these limits, but they are lending approximately one third of what in aggregate they could lend relative to those limits. There are a handful of credit unions that are bumping up against those limits. Credit unions can lend from a mortgage perspective today, as many are doing, but we are looking at the approach to how those limits are calculated. The limits are currently based on the lender's total loan book. As the committee will be well aware, the number of loans in credit unions has been flat to falling. A better answer to that is to focus on the reserves they have and to put the limits in place around the reserves on the credit unions' capacity to lend, but we will consult on that shortly.

On the earlier question, what did Mr. Sibley say about credit unions' ability to lend to someone who they know went through a bad time but is now less risk?

Mr. Ed Sibley

The credit register gives information that allows the lender to make a choice.

Is it still the case that the lender, whether a credit union or not, makes the choice?

Mr. Ed Sibley

Yes.

It is not penalised in any way should the choice be to support the particular business or individual.

Mr. Ed Sibley

As long as the lender understands the facts on the ground, which includes looking at the credit register for loans of up to €1,000, it can make a choice.

It will look at the register and see that. It understands the difference in the current state of play and, on the basis of that, it will give the loan.

Mr. Ed Sibley

Exactly.

I call Deputy Michael McGrath.

I would like to return to the Professor Lane's exchange with Deputy Doherty on the mortgage interest rates issue, about which we have had a number of discussions over a long period of time. We do not hear enough from the Central Bank or the Governor on that issue. When he was pushed, Professor Lane indicated there was scope for further reductions in the margins. In effect, he is signalling that he expects reductions to be of a modest variety. I have repeated the point a number of times about what I would regard as anomalies that the Central Bank is standing over. In the case of Permanent TSB, a bank with significant challenges, nobody is questioning that. It announced a cut in fixed rates for new customers but its existing customers will not benefit from those rate cuts, which is completely unfair. As the consumer protection watchdog, the Central Bank should say it is not acceptable.

Professor Lane has nothing really to say about the whole cashback incentive, which I regard as a gimmick in which a number of banks continue to engage to confuse and dazzle customers by giving them a few thousand euro to camouflage higher rates.

Professor Lane does not want any powers to deal with high interest rates. As Deputy Doherty said, the most recent retail interest rate statistics from July showed they averaged 3.21% on a new mortgage in Ireland compared with 1.77% on average in the eurozone. We have the highest rates in the eurozone. The only other country with interest rates above 3% is Greece, so we are well and truly the highest. Professor Lane does not want any powers, however, even if they are to be non-discretionary powers or if it means putting methodology or a reference rate into legislation, which a number of countries have done, as he well knows. He does not want to have that stick in place, even as a threat.

While we have the issue of trackers in Ireland and a significant portion of loans on the book are on a tracker rate, these mortgages are no longer loss-making. Let us be honest, tracker mortgages are profitable for banks today. Ulster Bank came out with a two-year fixed rate of 2.3% in June, albeit only for two years, which I thought was a game-changer. It was a significant cut below the rates offered by anybody else, and I thought the others would have to respond. Four months on, however, there has been no real response from the other lenders. They all strike me as being comfortable with what they have and there is no real competitive dynamic in the market on actual rates. All we have are cashback and other dazzling offers of lump sums, the payment of legal fees and so on. While the Central Bank might regard its core priority as being prudential supervision and protecting the stability of the financial system, it is, for now at least, the consumer watchdog as well, but I do not hear it dealing with those issues of interest rates.

Professor Philip Lane

I will turn to Ms Rowland in a moment about some of the ways consumer protection is involved in some of the issues the Deputy raised. To come back to the reality here, what we are seeing is a mix of risk premia and a lack of competition. When reference is made to other countries, which have ceilings and caps, it is not the case that it is at the fine-tuning element of 100 or 150 basis points.

It is through really high interest rates, way above what we are seeing here. It is not the case that we or anyone else can draw the line between saying this is what is reasonable on a risk premium basis and no more than that. By their nature, laws are hard to undo. If there is a law which pitches it at the wrong level, there is a serious barrier to entry. That is the problem in trying to find a legislative solution. The other approach about which we have talked is promoting entry, keeping barriers to it low, keeping the system stable to reduce risk premia and then watching as entry or the threat of it does its work. That is the way I see it going. We do a lot of work on some of the particular issues related to switching, front book, back book, cashback and so on. Ms Rowland can elaborate on the matter.

Ms Derville Rowland

On the narrow issue, we have done work on the advertisements for initial discounts or cashback offers. There is a place for such offers, but it is important only to know that they are appropriate for some customers but not all, about which we have been very clear with lenders. For people to get the best value they can for themselves, we have tried to be very public and clear that there is a lot of benefit for many mortgage holders in shopping around and buying different mortgage products. They could save themselves a lot of money over the lifetime of a mortgage. Because of this, already in the consumer protection code we require lenders to communicate with their customers regularly on what other offers they have available that could save them money. We see some evidence that switching is increasing. Because we know that even more work needs to be done to help people who already have mortgages to get better value for themselves, we consulted last year and into this year on strengthening the code in the future in order that people who came off a fixed mortgage rate would have 60 days. I know that the Deputy responded in advance of that consultation on the options they would have when they came off a fixed rate in order that they could make sure they would look around to see what the best deal was. If they have a variable rate mortgage now, lenders will have to communicate with customers if it is available at a cheaper rate in a new loan to value statement. We are inserting a lot of requirements into the regulatory framework in order that the information will be delivered to the customers' door to make sure they will have the information to help them to look around to see if they can get a cheaper and better product. They are some of the improvements we think will help people. There is some evidence that they are increasingly taking to switching.

Is it the case that the Central Bank would not support the removal of the cashback incentives as a means of trying to drive down rates?

Professor Philip Lane

I know that is the inference the Deputy draws from what would happen if there was a ban, but we have studied this issue and they do have a role. Consumer protection rests on whether people fully understand and they can see through the dazzle. It is not the case that we just looked at the advertisements-----

Ms Derville Rowland

We effected many changes as a result. I am saying it is a question of the right product being sold in the correct way to the right customer to meet his or her needs. It would be no good if cashback, as happened in the bad old days, pre-crisis, was putting cars outside the front door, but there may be an argument that people understand it is for essential necessities such as a washing machine or some of the very basic items. The cost of that credit must be clear and it should not be mis-sold. Sometimes it is not a question of the product being sold but making sure it is sold properly to confer a benefit on the right customer, which is just as important. Eradicating that product may not necessarily result in cheaper mortgages across the board for all.

The Chairman can tell me if my questions have been answered. Has the Central Bank quantified the impact of a hard and a soft Brexit or a no deal Brexit on gross domestic product?

That issue was generally dealt with, unless the Deputy wants-----

Did we ask for specifics? I am looking for the numerical impact on growth, GDP, employment and consumer spending in those three scenarios.

Professor Philip Lane

Our next quarterly bulletin which is being finalised will include material on that issue. Many people are running the models for it. When I was responding a while ago to Deputy Pearse Doherty on it, I said it delivered an answer; it was negative. Ireland will be affected, not only if the United Kingdom goes into recession but if any of these severe scenarios leads to significant depreciation in sterling which will hit Irish exporters. I am emphasising the fact that the models will typically understate because on top of them there will be the turmoil. The financial markets will be rocky; there will possibly be movements in stock markets, exchange rates and so on. I would not take excessive comfort from quantitative numbers we may put out in the next couple of weeks because on top of them there could be turmoil in the financial sector which could have its own dynamics. No matter how hard Brexit is, it remains the case that rich countries have different trading arrangements. It is negative and will lead to lower living standards here and in the United Kingdom, but it is not the case that the United Kingdom will suddenly fall off the map or become a zero trading partner. It is regrettable and negative, but we should be contained in the amount-----

In other words, all scenarios - a hard, soft or no deal Brexit - will be negative for Ireland.

Professor Philip Lane

Absolutely.

When we met the European Central Bank, we discussed the issue of sustainable mortgages. When we defined a sustainable mortgage, we found that the ECB in Frankfurt had taken severe umbrage that all and sundry were blaming it for the need to sell non-performing loans to funds and deleverage at a rapid rate. It took it quite personally and was forthright in saying so. For the first time ever, it gave us what I would regard as a common-sense, definitive version of what was a sustainable loan. It stated a sustainable loan was one that the customer could afford. The rest should be warehoused. There is senior debt which the customer can afford to repay, like any normal mortgage. Someone with a mortgage of €200,000 could technically afford to pay €150,000 of that amount. As far as the person is concerned, the sustainable part is within their age profile. If it could be restructured as a 20 year mortgage, he or she could repay the €150,000 and the balance would be warehoused. The ECB did not regard it as a non-performing loan. What is the Central Bank's perspective because we had a lengthy discussion on it and the ECB was quite forthright about it? That was the first time I had heard a definition of what was a sustainable loan. At the same time it meets the criteria not to be regarded as and deemed to be a non-performing loan.

Mr. Ed Sibley

We touched on this issue a little earlier, but I will address it again. The Deputy asked two questions, one of which was about pressure from the regulator to drive down the number of non-performing loans. It is undoubtedly there, but what has never come from us or the ECB is a specific target, methodology or approach to drive banks towards selling loans.

That has never been the case. We have never instructed that, nor has the ECB, but there is significant pressure and, for the reason we discussed, pressure will remain on the banks to bring down-----

The banks are putting that out in the ether, as it were, in a big way.

Mr. Ed Sibley

I understand that. I have had many conversations with the chairs, chief executive officers, CEOs, other board members and other members of the banks about this issue and I am very clear about it. There is not a target. That is the first point.

We expect the loans to be addressed through various mechanisms, including restructuring, which was the second point on which the Deputy touched. We have been very clear throughout on what we have described as sustainable. We put out sustainability guidelines in 2013 when we issued targets in terms of mortgage arrears reduction. That drove change in terms of the banks' approach to dealing with mortgage arrears at that point, which had been very much short-term forbearance rather than dealing with the underlining issues. That has resulted in a very high number of restructures being used to address the issue. There is a specific point around split mortgages, which I think was the germination of the discussion the Senator had in Frankfurt.

Mr. Ed Sibley

We have been clear with all the banks that these loans can cure, so to speak. We engaged with our ECB colleagues to add further clarity because this product or a variant of it is used in other eurozone countries. These loans can be treated as performing and would no longer be non-performing. What it requires in this or in any other jurisdiction is that the warehouse element is fully provisioned. In the example the Deputy gave, he took a provision of €50,000 for the loan he cited, and if the bank does that, and subject to the borrower repaying €150,000 of that loan in respect of the new term, over a period of probation of about a year that loan could return to a performing status and no longer be non-performing.

The final issue we discussed was the Anglo promissory notes. Is the ECB in Frankfurt putting the Irish Central Bank under increasing pressure to unravel the Anglo promissory notes quicker than the schedule established at the time the restructuring took place?

Professor Philip Lane

Back in 2013 when this was set up, there was minimum schedule. It is very important that the minimum schedule was very minimum. It was small numbers, far less than what we are actually doing. The way to think about this is that if what happened in the world had turned out worse than was experienced, if the recovery here had been weaker and if the interest rate environment in Europe was higher, the scale of the disposals could have been done at a super slow pace, which is the minimum schedule. The fact that what happened in the world has not turned out like that, that the interest rate environment in Europe is quite low, that the Irish economy is growing quickly and that the fiscal position of Ireland has improved means that, in line with the second part of that agreement, we would sell as soon as possible, subject to financial stability considerations. That was the minimum schedule and the expectation is that we would sell more quickly, which is something that was always agreed to, subject to maintaining the financial stability. That is why we are selling at the pace we are selling but that minimum remains. If there were a severe change in circumstances, the minimum would become more relevant, but under current conditions the NTMA can borrow quite cheaply, and this is why we are selling at a pace.

At what stage is that? Was the original figure approximately €27 billion?

Professor Philip Lane

I do not have the number in front of me, but we sold €4 billion last year and we have sold €3 billion in the first three quarters of this year, so we are down to €11 billion or €12 billion in that context. I can get the Deputy the exact number.

That means that of the €27 billion, €16 billion has been sold. Is that correct?

Professor Philip Lane

In or around that neighbourhood.

Was that over a three-year period?

Professor Philip Lane

Perhaps a bit longer than that, but over three or four years.

The impression at the time was that it could be spread over up to 40 years.

Professor Philip Lane

These are very long-term bonds. That is true.

We suddenly find this is now coming back within three years. The ECB told us that as Ireland refinanced its debt in terms of the IMF programme or any of the other bailout programmes, it would put pressure on the Irish Central Bank to, for want of a better term, tear up the promissory notes. It regarded it as quantitative easing but the ordinary taxpayer is still left with the burden of the €30 billion.

Professor Philip Lane

The way to think about this is that regardless of our commitment as a Central Bank to sell these down at a reasonable speed, subject to financial stability, if one takes it from the fiscal point of view, the question is when we sell these to the NTMA. Currently it can refinance it at super low interest rates. The NTMA is selling that at a very low interest rate. Imagine a scenario where some of this had been delayed for five years and when that transaction took place, the refinancing cost potentially was more expensive than now. The pros and cons on the other side of this transaction-----

It is fair to say the current construct that was set up is still costing less than where we are effectively financing it to third party Government debt.

Professor Philip Lane

That calculation depends on the future of interest rates. If it turns out that interest rates go up in the future, that may not be true.

Will Professor Lane give me any financial reason the Irish Central Bank should speed up the disposal of the promissory notes?

Professor Philip Lane

Any emergency funding from the Central Bank is intrinsically temporary in nature. This has been a very drawn-out process. As the Senator indicated, we had a different type of temporary funding from the IMF which we have paid off. The commitment was always that this would be temporary in nature.

Based on the trajectory here, we have suddenly gone from this potentially spanning up to 40 years to this possibly being refinanced into third-party government debt within five years in total.

Professor Philip Lane

Again, in a situation where Government debt can be issued very cheaply at the moment, the long-term pros and cons of that from a fiscal point of view, which is not part of the way the Central Bank can think about it given the separation between the fiscal and the monetary, is an open question. The minimum schedule at that time was very important insurance, as in early 2013 it was not obvious how the Irish economy would recover. The fact that at that point an assurance was given that there would be no inevitable acceleration or graph of disposal was very important in terms of providing a fail-safe for the situation. The fact that it turns out that the recovery has been better and the financial conditions are easier has allowed a more normal speed of disposal to take place. That is what we are doing.

We still bear in mind that we do not want to overburden the sovereign debt market, so it is not instantaneous. That is a path we are treading. We want to respect the temporary nature of this funding but we do not want to go too quickly where that would overburden the sovereign debt market and cause financial instability. From the Oireachtas point of view and a fiscal point of view, it is very important to recognise that this was always going to be refunded or refinanced at some point, and given the low interest rates available now, maybe that would not be true in the future.

Professor Lane is probably aware that we also visited the German Sparkasse bank to see its public banking model. My question is not on the Sparkasse model but on the public banking model.

Does Mr. Sibley believe there is a need for an expanded public banking model in Ireland as an additional pillar to the mainstream banks? An Post and the credit unions have recently stated that they are considering providing low interest rate mortgages, as mentioned by the Chair. The An Post proposal is very similar to the low-rate Sparkasse model, while the credit unions state they would offer a competitive rate. Is there a fit for a public banking model involving both institutions whereby the Central Bank would bring in further regulation to allow them to lend to the SME sector in a structured manner, outlawing any form of speculative lending? The credit union movement in particular has a phenomenal network, as does An Post. Their levels of SME and home loan lending would be limited. There may be need for consideration of a central bureau in terms of assessment of SME loans.

I have often stated that if credit unions were not operating in the 1990s, many SMEs would have gone under. Mainstream banks were not extending credit. I was in practice at the time and many of my smaller clients would get a bank draft from their credit union on a Monday morning to lodge to their mainstream bank 100 yards up the road. The credit unions were providing an overdraft facility. I have great affection for the credit union movement, as Mr. Sibley is aware. I am also pragmatic, however, and wish to see if there are areas which could be improved because my biggest fear is that there will be a lack of structured competition in the market when the banks fully recover. What is Mr. Sibley’s perspective on the issue?

Mr. Ed Sibley

There is a lot in that so I ask the Senator to let me know if I do not cover all of it. In terms of a public bank model or the credit unions coming together and working as one, rather than individual-----

They will maintain their individual identity.

Mr. Ed Sibley

They may operate through a shared services model. We are entirely open-minded about such a proposal. It would bring some benefits because an issue for credit unions is the scale and cost of undertaking mortgage lending or large-scale lending to SMEs on an individual level. I would have a lot of sympathy for their having a degree of shared services, whether in the form of a public bank or through a third party that allows them to do that.

I was referring to public banking rather than a State bank.

We are going to have a forum very shortly into which the Central Bank may also have an input.

Mr. Ed Sibley

We are happy to engage on the issue. We do much work directly with the credit unions and in other forums in terms of supporting them in business model development.

As I discussed with the Chair, we are looking at their current approach and expect to consult on it. The current approach to limits, whereby they are a factor of the rest of the loan book is less preferable than a limit focused on reserves because that gets to the capability and capacity to lend. We will consult on that issue and will welcome views from all stakeholders on how that will look into the future.

We have engaged with the Sparkassen on a couple of occasions. I acknowledge the Deputy did not ask about them directly. There is no restriction on their coming here. The issue they have raised is how they will fund themselves and whether they have sufficient capital to come here. If they can address those issues, then that is absolutely fine, but it is not a matter for the Central Bank to provide them with that funding.

I asked about the Irish Credit Bureau, ICB, and there is a point that I wish to clarify. When banks are asked about loans, they must have regard only to an ICB rating as there is no regulation stating that a person may not be granted a loan if he or she has a poor ICB credit rating. For how long do banks refuse to lend to a person who had a poor ICB rating? I have been told it lasts for two to three years.

Mr. Ed Sibley

Banks must consult the credit register for loans in excess of €2,000 but there is no strict rule and the decision on lending remains with the lender.

For how long does a refusal to lend to a person who had a poor rating last?

Mr. Ed Sibley

A negative credit history is cleared at some point. I ask to be permitted to revert to the Chair on that issue.

That is one aspect of the matter. A negative credit history is on record and will remain there until it is cleared by the banks. However, a person may still be considered a credit risk three years after their negative rating is cleared. What regulation is in place in that respect?

Professor Philip Lane

We will revert with detail on the matter but, fundamentally, the decision is up to the lender. In the crisis, many people went into arrears because of bad loans. It was not a sign of their future potential as a business or individual. Banks may maintain an open mind on lending and there is nothing to stop them looking into a person's credit history. In some circumstances they may decide not to go beyond checking the central credit register. As a regulator, I point out that there may be good business opportunities in lending to people who have a record of distress but who may be a good risk into the future. That is a commercial opportunity for banks who decide they can take that on.

In answer to Deputy Michael McGrath, Professor Lane stated that the fact that there are higher interest rates does not mean that a bank, possibly an outside bank coming into the market, would ignore future potential in favour of what prevails in the marketplace. The same should apply to business people or individuals who went through difficulty. They should not always have to pay for that by being listed as a credit risk for three years even after they are out of the clutches of the banks. I ask that the committee be given a note on that and relating to the earlier question about credit unions, how they operate vis-à-vis the ICB and the views of the Central Bank in that regard.

The new regulation brought in to regulate communities collecting money in a club or piggy bank which is then lodged under one name to a credit union is having a great deal of negative effect on people who want to save small sums of money each week and need the credit union to so do. It was working perfectly for them but now they cannot do it. I ask for a note on the reasoning behind that regulation.

Is the Central Bank conducting an inquiry into GRG? I ask because the committee today received substantial information in that regard which it has not yet gone through.

Ms Derville Rowland

We have oversight of and are in regulatory engagement with Ulster Bank on issues which have arisen in respect of GRG. Members are aware of the history in that regard.

Ms Rowland does not consider it an investigation.

Ms Derville Rowland

An issue has arisen with Ulster Bank in respect of GRG.

Ms Derville Rowland

The origins of the matter were the subject of a public report in the United Kingdom where there was a serious allegation of deliberately distressing businesses and levelling complex fees. There was an investigation, but it was found not to be the case. However, there were concerns about the levelling of complex fees on businesses that were going through difficult times and a process was established to deal with the matter. An identical process was put in place here. We have been involved in regulatory engagement to make sure the process is delivering in accordance with what it ought to deliver. We have been to the United Kingdom to speak to regulators about the common issues which arise. We have also been on site in Ulster Bank to deal with it. We have had external oversight. There is also an external complaints process on top of the normal complaints channels and we require Ulster Bank to write to the affected customers. The process is open and ongoing and available to customers.

Those customers have formed the RBS Ulster Bank GRG Irish business action group which left in a pile of papers for the committee today. I understand they have also provided them for the fraud squad and Ulster Bank and perhaps others outside the jurisdiction. They are ramping up their attempt to get justice as they see it. I am alerting the Central Bank to that fact. We will probably forward the correspondence to it to get some action on it.

Ms Derville Rowland

Papers were delivered to the Central Bank yesterday. In this case, as in all others, we take account of all information and scrutinise it to see if it will yield evidence of breaches or issues regarding the regulatory framework. Where that is the case, we follow through on it.

Will the delegates give me a Ladybird-style note on the Ballyhea Says No campaign? We sent the Central Bank a transcript on 18 July. A submission was made to the committee by the group which outlined specific issues related to its campaign and understanding of the promissory note bonds and their destruction. Will the Central Bank review for members of the committee the reply, dated 3 August 2018, in which it provided information and break it down a little more relative to what was said at that meeting?

Professor Philip Lane

The fundamental issue is that any central bank, including the European Central Bank or the Central Bank of Ireland, commit to any lending provided in the middle of an emergency such as the promissory notes being temporary in nature and, when the recovery sets in, the loans being unwound. My reading of the case of Ballyhea Says No is that it disputes this and states the circumstances are so specific and special in this scenario that an exception should be made to the Central Bank's philosophy that the loans need to be unwound. That is fundamentally it. I can understand the point of view, but it runs against the foundations of how the Central Bank works and especially the 19-country monetary union. Imagine a situation where other countries stated they had specific problems and specific reasons they also needed special central bank funding. One of the foundations of the euro is there not be monetary financing of governments and that when there are emergency loans, like those made to Anglo Irish Bank, with the promissory notes as collateral, eventually they are reversed. What is happening is that the loans are reversing but not at a very quick pace. It is a very gradual reversal process.

Will the Central Bank provide the committee with a note on the matter?

Professor Philip Lane

I struggle because-----

Professor Lane is being more detailed in his response. I want to understand the campaign's argument versus that of the Central Bank. The note with which the committee has been provided is technical, but we can look at it again.

Professor Philip Lane

That is reasonable. The question is ongoing. I very much respect the people involved for their commitment. Let us see if we can do a better job.

Yes, just have a look at it.

I apologise, but I had arranged several meetings and there was also a vote in the Seanad.

The Senator should have prioritised this one.

I did prioritise it for almost all of the day and was here for much of it, as the Chairman knows. There are only the two of us left. I apologise if I raise anything that has been covered, in which case I can read the transcript.

Last week a report was published on the categorisation of non-performing loans, on which Mr. Charlie Weston wrote a piece. I do not know if anyone else has raised the issue or discussed it.

Professor Philip Lane

I am aware of it. It has nothing to do with how any individual is treated by any bank or investment fund; it is purely a data gathering exercise. The Central Bank has a statistical function and gathers information from all of the entities. It was simply a case of some investment funds having their own calculations which were at odds with how the banks, under regulation, decided these things. It does not change the picture on how anyone is treated.

I apologise for cutting across Professor Lane, but the macro picture where we say the figure for PTSB, or whoever else, is 28%, when it ought to be on 4% or 5%-----

Professor Philip Lane

It is totally unaffected.

Therefore, it purely relates to how individual companies calculate things separately-----

Professor Philip Lane

They are not operating under the same regulations as the banks. We do need to arrive at a more comparable picture of how to report the numbers.

We are talking about credit unions. I was also on the trip to the Sparkassen. Is it correct to say many of the credit union deposits were actually with Anglo Irish Bank at the time of the guarantee? Are there figures for the percentages of credit union deposits that were with Anglo Irish Bank? At the time, I remember hearing that a substantial proportion were with it and that if it had gone - many people would have liked it to go - many credit unions could possibly have gone with it.

Professor Philip Lane

I can provide that information for the Senator, but it is important to make the distinction, regardless of what they might have had on deposit with Anglo Irish Bank, that there is also the issue of credit unions investing in bonds issued by banks. Under the new system, there is a presumption that different bond holders would lose money if a bank were to shut down. There are two parts. There is the narrow issue of bond holdings and how credit unions were exposed by their bond holdings, as well as the larger issue of imagining what would have happened if large depositors had also received a haircut, as happened in Cyprus.

That would be appreciated.

Mr. Ed Sibley

It certainly was the case that they had deposits and some bonds with Anglo Irish Bank. Their deposits remain highly concentrated in the Irish banks. The change we made recently to investment regulations enables and seeks to encourage more diversification in where they invest.

We looked at the behaviour of credit unions and while some had made mistakes and got things wrong, the damage was a fraction of that done by the banks. It is important that people realise that while the credit unions were relatively okay in the end, had the bank guarantee not been put in place, they would have had a much greater problem.

I do not think the Central Bank in its statement referred to matters such as our significant dependence on a very small number of companies for such a large percentage of corporation tax receipts, the common corporate tax base, digital taxation and all of the European ideas that might jeopardise some of that income.

Professor Philip Lane

I do not dwell on it especially. I think there was a line in it about international tax arrangements.

It is obvious to everyone that it is hard to assess the future of our corporation tax revenue. We think it is wiser to assume that some of it might not be in place forever. We might want to save it for a rainy day, or consider it in the context of a build-up of public investment. As we frame the debate about the public finances, it is important to make a distinction between uncertain revenues and revenues on which we can rely. Before we doubled down, we had a construction-driven economy and a reliance on construction-related tax revenue. That link is broken with the global corporations. The economy is growing. The profits of the global corporations more or less depend on their global activity. They could reverse, even if the economy was doing okay. It is a different risk. It is definitely a big risk management issue for everyone to think about. How much of it is potentially at risk? On how much can we rely? Given that we are living in an uncertain world, we do not really know how to balance these risks. It is an obvious challenge for us all.

I thank Professor Lane and his colleagues for attending.

The joint committee adjourned at 3.50 p.m. until 9.30 a.m. on Thursday, 11 October 2018.