Central Bank: Discussion

I welcome the new Governor of the Central Bank, Mr. Gabriel Makhlouf, and wish him well in his new role. I thank his officials for joining him. We look forward to the engagement on various banking matters.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I invite Mr. Makhlouf to make his opening statement.

Mr. Gabriel Makhlouf

I am joined by my executive leadership team, namely, deputy governor Sharon Donnery, deputy governor Ed Sibley, and the director general, Ms Derville Rowland. The other member of our team, our chief operations officer, Mr. Gerry Quinn, could not make it this morning.

I am now three months into my term as Governor. In that period, I have prioritised listening to colleagues in the bank and stakeholders outside it to understand better the issues and challenges as they see them. I have spent time outside Dublin – in Waterford and Dundalk, in Carlow at the National Ploughing Championships and in Frankfurt and Washington DC. I have met members of the public, business owners and business representatives from a range of sectors, governors from other central banks and officials from the IMF and the European Commission, among others. Last week, I hosted a round-table discussion at the Central Bank for 14 organisations representing civil society.

The committee's invitation asked that I address the current principal issues being dealt with by the Central Bank. Therefore, in addition to outlining some of my reflections so far, in my remarks this morning I will outline some of the bank's recent activities, as well as what I see as challenges on the horizon. Of course, it will not cover all the issues that will be of interest to the committee, so I look forward to a wider discussion.

The Central Bank's mandate is to serve the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy. Having spent my entire career in public service, across the areas of macro and microeconomics, public policy and service delivery, I recognise the importance of that mission. To my mind, the wider economy is represented by the community across Ireland.

Over recent years, the Central Bank has grown as its mandate has increased, reflecting both the response to the global financial crisis and the changing world around us. Our responsibilities are heavily intertwined. The breadth of our mandate gives us both strength and insight, enabling the bank to harness its collective, wide-ranging and deep policy and technical expertise to tackle complex issues. Most of the areas we are responsible for – whether consumer protection, prudential regulation, payments, settlements and currency or providing economic analysis and statistics – have complex interactions with one another. I see our job, along with other members of the Central Bank Commission, as ensuring these are all brought together.

I also have personal responsibility to the Eurosystem in terms of our primary mandate of price stability, which, at its heart, is essential to intergenerational well-being, enabling governments, businesses and citizens to plan, invest and make provision for the future. Aligned to that is the Eurosystem's secondary mandate of supporting "the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union". The European and euro area post-crisis institutional architecture for economic policy and financial regulation and supervision has changed and continues to change. The ongoing evolution will continue to require us to be closely engaged and influential in EU and international fora.

I have been struck by how committed the staff in the Central Bank are to working in the public interest. This resonates with my own values and I am confident that we have a strong basis on which to deliver our mission. As well as building on our strengths, however, we also need to maintain a sense of humility and openness to being challenged: the financial system is changing rapidly and future challenges and crises will be different to what went before.

From a delivery perspective, we must ensure we are using our resources effectively and efficiently. As the world around us changes, we need to evolve and strengthen as an organisation, consistently seeking to be best in class. That means regularly assessing and examining our policies, frameworks and approaches to ensure they are fit for purpose. Diversity of thought is a critical component in this regard in order to give us the capacity for deeper insights and make us more resilient.

More generally, from my early engagements with various stakeholders, and in preparing for this hearing, I recognise a desire in some quarters for the Central Bank to move faster on certain issues. I understand that. I certainly want us to be on the front foot in our delivery – proactive, assertive and agile both in what we do and how we do it – but a rigorous evidence-based approach must continue to underpin the delivery of our mission.

As members know, the Central Bank's three-year strategic plan runs to 2021. Its key themes, namely, resilience, consumer protection, engaging and influencing, organisational capability and Brexit, remain valid. As with any strategic plan, however, it is sensible to undertake a mid-point review, and we will do so next year.

Let me now turn to a number of areas of recent activity. Yesterday we published our financial stability review.

It outlines what we see as the main risks to financial stability, the resilience of the financial system to those risks and the Central Bank's policy actions in response. The key risks on our horizon include the consequences of the current low interest rate environment across the globe, the potential for pro-cyclical risk-taking domestically in the context of an economy that is close to capacity, the impact on Ireland of changes in the international trading and tax environment, the lingering issue of high levels of sovereign debt in the euro area and a disorderly Brexit. I mention Brexit because it is important to be clear that it has not gone away. As I said in Waterford recently, if the withdrawal agreement it is ratified by the next UK Parliament, that will merely represent the end of the beginning.

Any form of Brexit will be damaging for Ireland. A no-deal Brexit that involves no withdrawal agreement or no free trade agreement will be especially damaging. We have focused on ensuring the risks to the Irish economy are understood and the risks to financial stability and consumer protection are identified and mitigated to the greatest possible extent. Looking at the picture beyond Brexit, the Central Bank uses evidence-based macroprudential policies to promote financial stability in Ireland and to mitigate the impact of negative shocks on the real economy. The existing mortgage measures are a central component of our macroprudential toolkit. The annual review of these measures allows us to challenge ourselves to ensure they are set in a way that maintains and builds the resilience of borrowers and banks and prevents an unsustainable credit-fuelled housing boom from emerging once more. These measures were first introduced in early 2015, at a time when house prices were still recovering from the financial crisis. Since then, there have been several years in which house prices have grown faster than incomes due to supply constraints.

According to the evidence from the 2019 review, the mortgage measures have been effective in strengthening borrower and lender resilience and in limiting the potential for a pro-cyclical credit house price spiral to emerge. Our models suggest that if the measures had not been introduced in 2015, all else being equal, it is likely that the level of house prices and the proportion of highly indebted mortgage borrowers would be significantly higher than they are at present. While the objective of the mortgage measures is not to target house prices, our analysis suggests that affordability pressures for mortgage borrowers would be even more acute in their absence. As I said yesterday, we see no reason to change the mortgage measures because they are working. We recognise that significant challenges remain for people and families that are looking to purchase homes. Demand continues to outstrip supply. There are issues in the mortgage market, the rental market and the social housing market. However, increasing household debt is not a substitute for increasing the supply of housing.

The decision on the mortgage measures was not the only macroprudential decision to be published yesterday. We also announced further progress on, and plans around, the development of a number of buffers in the capital of banks. Essentially, these buffers are cushions against different types of risk, including an economic downturn. The mortgage measures are an important part of our consumer protection framework. My first few months in this role have shown me that the protection of consumers is embedded in every area of the Central Bank's work. Our statutory codes of conduct, redress powers and enforcement actions are essential to consumer and investor protection, as is our work to ensure firms are well managed and financially sound and to guard against instability in the system as a whole. I have seen at first hand the scale of the work the bank undertook on the tracker mortgage examination, resulting in the payment of hundreds of millions of euro in redress and compensation to more than 40,000 consumers. I have been briefed on our ongoing enforcement investigations. We have had to remind certain lenders of the consequences of failing to co-operate. As set out in our strategic plan, we must strengthen our approach to consumer protection by enhancing our approach to conduct risk, developing our approach to supervision and continuing to focus on the culture of firms and the individual accountability of the people who run them.

We need a financial system that fosters trust and ensures consumers and investors are protected, deposits are safe and insurance reserves are adequate to meet liabilities. We work with the other parts of the State’s consumer protection framework, including the Financial Services and Pensions Ombudsman and the Competition and Consumer Protection Commission, to deliver this. We also need a strong culture of compliance. When it comes to issues like culture, responsibility rests first and foremost with the leadership of firms. Organisations make their own cultures. Boards are responsible for ensuring the development of the consumer-focused and compliance-focused cultures that the Irish public deserves. If the sector wishes to regain trust, it must earn it by demonstrating trustworthiness. That is no easy feat. Rightfully, the public will be the ultimate adjudicators. I welcome the creation of the Irish Banking Culture Board as a positive sign of intent. The individual accountability framework that we have proposed should help to address some of the issues in the banking sector.

I want to speak about an ongoing challenge and an emerging risk. The protection of borrowers in mortgage arrears continues to be a key priority for the Central Bank. The regulatory framework provides a significant number of protections for borrowers in arrears. This is important given the strain, stress and vulnerability of people who are at risk of losing their homes. The Central Bank's approach to resolution has focused on ensuring the fair treatment of borrowers and ensuring lenders have appropriate arrears resolution strategies in place. Significant progress has been made in restructuring mortgage arrears. The implementation of alternative repayment arrangements has been a critical factor in this regard. It is also true to say that a sizeable arrears problem persists. Engagement between lenders and borrowers remains essential if this is to be addressed successfully. Arrangements should be appropriate and sustainable for the borrower, regardless of whether a bank or non-bank holds the loan. It is important that any arrangement addresses the underlying problem for borrowers. As part of our supervisory work, we will continue to focus on ensuring the long-term sustainability of alternative arrangements. We will continue to press all firms to engage and work to find solutions for firms and borrowers which address the underlying issues. We must recognise that there will be cases where this may not possible.

The emerging risk I want to mention is the growing size of the market-based finance sector in Ireland and across the world. The relative size of the sector in Ireland to the domestic economy is among the largest globally. It has a predominantly international focus and is dominated by investment funds and money market funds, which account for approximately two thirds of total assets. Market-based finance provides a valuable alternative to bank financing for many businesses and households, thereby supporting economic activity. These activities may give rise to financial vulnerabilities, which need to be understood, monitored and addressed. For this reason, I announced yesterday that we will build on recent work in this area by conducting a deep dive on property funds to assess the resilience of this growing form of market-based finance. We will consider whether there is a need for macroprudential policies to strengthen the resilience of this growing form of finance to the domestic economy. We will continue to work on these issues with our colleagues in Europe and in global forums.

I have sought to give the committee a whistle-stop tour of the principal issues being dealt with by the Central Bank, together with some of my own reflections. I would like to conclude by saying something about the risks that are currently faced by the global economy and how I believe Ireland should look to manage them. In its latest forecasts, the IMF signalled a slowdown in global growth, driven by "Rising trade and geopolitical tensions [that] have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade". This uncertainty comes at a time when economies have started to enter significant transitions, driven by developments in technology, demography and the environment, to name just three factors. A particular characteristic of these transitions is the pace of change. We need to meet these challenges by building resilience across the economy, in the financial services sector and, most importantly, in households across the country. We should continue to focus on the fundamentals. We must manage the short term while planning for the medium term. We should ensure our frameworks are fit for purpose. We must learn the lessons of the past while preparing for the future.

Successful economies need stable and sustainable macroeconomic frameworks and sound monetary policy that delivers predictable prices. They also need stable and well-regulated financial systems and well-functioning markets. The Central Bank will continue to focus on its core mandate of price stability, a stable financial system and the protection of consumers. We will also continue to challenge ourselves. As I said earlier, as the world around us changes, we need to evolve and strengthen as an organisation, learning from experience and regularly assessing our policies and approaches.

Finally, our freedom to make independent decisions will not mean that we will be isolated. We will be transparent in the exercise of our responsibilities, accountable for our activities and engaged and connected with those we serve.

I welcome the opportunity to appear before you today.

I thank the Governor. I would remind members that we hope to conclude by 12.30 p.m.

I thank the Cathaoirleach and the Governor who I welcome to the committee. This is the Governor's first opportunity to come before the committee and I welcome it. I know we have had an opportunity to meet prior, so I welcome that also. I look forward to the engagement as we had with the Governor's predecessors, some of what may be robust and helpful and from the Governor's point of view may be not too helpful. That is what it is all about.

Can I ask the Governor to pick up on the last point that he made in terms of the further research that he is going to do in relation to the investment funds, and particularly property investment funds. I did engage with the Governor's predecessor on this issue. I wrote to him at the time outlining my concerns in terms of the highly-leveraged nature of some of these funds and if they were to drop in the market the spillover effects that that would have. The Central Bank on the back of that and some of its own concerns carried out an assessment which I think was published about this time last year and was very thorough. It did identify some of the risks if there was a shock such as Brexit and that there could be spillover effects from these investment funds withdrawing and the impact in terms of property and commercial property in particular.

Given that work had been done and those risks had been identified, why is the Governor - and I welcome the fact - carrying out further evaluation and research in relation to this? Is the Governor more concerned now about these investment funds and property investment funds than he or the Central Bank was at that time? Is there something that has led to more concerns within the banks?

Mr. Gabriel Makhlouf

I will ask Ms Donnery to come in in a minute on this, but let me kick off. From a global perspective, what we are seeing is a significant growth in the non-banking sector. My own concern is shared by a number of my colleagues and peers around the world. What we want to make sure, and what I am absolutely determined to make sure, is that we hit on the front foot of understanding the risks that the growth in the sector posed to us in Ireland but also to us in the euro system.

We have been doing more work to understand and map the non-banking sector, and we will be publishing some of that information next week. What I announced yesterday just reflects in part my view that we need to deepen our understanding of what is going on, and we need to do a piece of work which at the moment is going to be focused on property funds, but depending on where we get to may actually also expand. Perhaps Ms Donnery can tell Deputy Doherty a bit more.

Ms Sharon Donnery

I thank the Governor and Deputy Doherty. Deputy Doherty referred already to some of the work that we have been doing in this sector, and maybe I will make some general comments about the sector first before I talk a little bit about what exactly we are going to do. As the Governor mentioned in his opening statement, there has been growth in this market-based financed or non-bank financed sector globally, particularly so in Ireland. It is important to say that this type of financing does have many benefits, and there is a big debate in Europe about the heavy reliance of Europe on banks, for example, and that these types of funds and this type of non-banking sector allows a diversification of funding and investment. That is part of the debate at European level on capital markets union. We also recognise that these types of finance funds and so on offer diversification and therefore can diversify risk.

At the same time, a key issue for us is about resilience, so understanding if there were difficulties in a sector such as this, would risks be amplified or would the funds themselves, the wider sector and the economy be resilient to how those shocks would be handled. That is really what we have been doing. As was mentioned, a lot of the work up until now has been focused on data gathering and understanding what is here, the size of what is here and so on. Some of those funds are very internationally-focused. They do not really interconnect with the Irish economy at all and are really serving businesses outside of Europe and in the rest of the world. In the case of the funds the Governor has mentioned in particular, they are investing in commercial real estate in Ireland, and about 35% of commercial real estate in Ireland is now held by these different types of investment funds. We really want to look at that in more detail, so who are those investors and how would those funds react and behave in times of stress if that were to happen, and do we need to do anything to consider how that might be managed in a better way.

Is that 35% commercial real estate held by funds that Ms Donnery mentioned right across Ireland or is that concentrated in Dublin?

Ms Sharon Donnery

It is across Ireland, but it is predominantly in Dublin and office blocks and so it is to understand that a little better. As the Governor said, one of the key reasons we want to look at this in a bit more detail is it has been growing and it has become a more significant holder of commercial real estate. It means that foreign investment in commercial real estate is a good thing compared with times in the past when the banks obviously were very heavily exposed to commercial real estate. It does also mean that Ireland is more exposed to these kinds of cyclical events globally, if there were risks emerging around the world.

I did a paper a couple of years ago in terms of Ireland being for sale tax-free, which was looking at commercial real estate, fund structures and the tax structure in relation to funds and why we are seeing so many of them move in. I was not aware of the 35% figure, so that is obviously an increase in terms of where we have been. The idea that over one third of commercial real estate right across the State is held by funds should ring alarm bells, because a lot of this is out of our control. The work the Central Bank has done and the work I have done shows that there is an issue in certain funds in terms of leverage and that we would be susceptible to a shock. The concern I have - and I have made the point - is that I believe there is bubble in commercial property. Is the Central Bank aware of any trend of disposal of commercial property or an increase of disposal of commercial property in recent times that are raising any concerns, which would indicate maybe that funds are withdrawing from the market? Obviously, if there was a large-scale fire sale of assets, that would have an impact on property prices and also would spill over into residential and so forth.

Ms Sharon Donnery

We are not aware of that at the moment. The issue is more there is a risk for that to happen, and so it is to understand what could trigger those things to happen. If there was a situation like that, for example, if there was some sort of form of global instability or global concern that led investors to leave Ireland or to leave commercial real estate more broadly, not just in Ireland but globally, how would that feed through. For the funds that we have, for example - hypothetically now because this is what we are going to look at - would the level of leverage amplify that or are there things that need to be done to make sure that amplification would not happen. That is exactly what we are looking at. On the 35%, we published that number yesterday, so I am sure when Deputy Doherty has time, he can have a look at the report that we published yesterday.

In relation to the mortgage market, the Governor has not changed the macroprudential rules. I believe that house prices need to come down, but I do not think that changing the macroprudential rules is the way to solve the pressure that people are under. I have spoken to the Governor about this myself. He makes it clear that the rules have prevented house prices from increasing by 15% to 20%. That is quite a significant amount of money if one was to translate that into hard cash for families. There has been pressure in relation to loosening these rules. The Governor has resisted that pressure from different quarters from certain areas in the political sphere and also within the banking sphere.

How convinced is the Governor that loosening the rules, if he were to do so, would automatically lead to an increase house prices?

One of the arguments I have been making for quite a while is that the banks need to use the exemptions that are available to them. I refer to the 20% that allows people to be catered for when they do not reach either of the targets. In other words, there is a certain flexibility. There have been changes in how banks are dealing with that on a quarter-by-quarter basis, but is the Governor satisfied that all banks are using the flexibility within the rules to the maximum in order to ensure that their customers' needs are met?

Mr. Gabriel Makhlouf

To answer the first part of the Deputy's question, what we stated yesterday was that our model showed that without the measures, prices could have gone up 26%.

The Deputy asked about the extent to which we concerned that loosening the rules could ignite another credit-house price spiral. We are concerned, which is the main reason we decided to leave the rules unchanged. As I stated yesterday, the rules are doing their job. As a result, we do not propose to change them. Right now, if we had changed them, the community would have taken on unnecessary risk.

On the question of whether the banks are using the allowances to their maximum potential, our analysis shows that the banks have a bit more flexibility which they have not been using.

Ms Sharon Donnery

I will say a few more words in reply to the Deputy's first question on house prices. As the Governor stated, it is exactly because of those concerns that we have not loosened the measures. Yesterday, we published quite a lot of information on the scenario of what house prices would have looked like without those measures.

On the exemptions, we looked at them carefully as part of the review. We looked at the operation in the individual banks. We listened to all kinds of feedback on the exemptions, on how they are operating and on concerns about them being used up at particular points of the year. On the latter point, if people go to their banks during a particular quarter, there are no exemptions left. As the Governor stated, there is some scope for the banks to use the exemptions a bit more. The banks are not using them fully. At the same time, the Central Bank's rules are not the bank's own risk appetite. We expect the banks to also consider their risk appetite and their lending practices in terms of how they are using the rules. It may be the case that banks, for example, in the context of first-time buyers, do not necessarily want to lend over the 90% limit even though there is a small exemption above that. The risk-appetite aspect is very much up to the banks.

On the other practical issues about how the exemptions are being used, their seasonality, etc., we have looked at all that and we do not see particular problems. We would acknowledge that, two years ago, when we made amendments to the rules and they were phased in quickly, it was definitely challenging for the banks to implement those changes. They found it quite difficult to manage the utilisation of the exemptions.

I appreciate that we only published some of the information on the operation of the allowances yesterday.

Unfortunately, I have not had a chance to look at it the detail.

Ms Sharon Donnery

I understand.

Some banks are calling on the Central Bank to relax the rules. Are those same banks using the exemptions to the maximum extent? There may be some banks that will not use them in the context of their risk appetite. When, however, banks call for the Central Bank to change the rules but do not use the flexibilities within those rules to meet their customers' needs, it is questionable behaviour.

Ms Sharon Donnery

The exact use of the exemptions varies across the different banks. Some of them are closer to the limit, others are a little further away from it. Some of the calls for change in the mortgage rules did not only relate to the exemptions; they were to do with the rules themselves, in terms of the multiples, etc. As the Deputy will be aware, we did not change any of that yesterday.

The exemptions allow the Central Bank to bypass the multiples. The exemptions allow the Central Bank to deal with those issues up to a certain level.

Ms Sharon Donnery

Yes. There are many questions about the circumstances of individual borrowers, etc. At the bank, we fully appreciate the challenge for individual borrowers in trying to get a mortgage but the exemptions are exactly designed to allow the banks to consider the circumstances of individuals.

Mr. Sibley made many critical comments on banking culture at a recent Banking and Payments Federation Ireland conference. Mr. Sibley stated that the Central Bank does not have a preference for loan sales, which we have heard previously. He has stated that the banks are not giving enough prominence to the benefits of long-term restructuring in terms of their troubled customers. Mr. Sibley raised questions about whether the banks truly value customer relationships and questioned the type of advertising and the slogans that banks are using compared to what is happening on the ground. Can Mr. Sibley expand on the remarks to which I refer?

Along with many others, I would probably say that the Central Bank has come to this late in the day. The Central Bank remained quiet as banks sold thousands upon thousands of family homes to the vultures and then, when most had been sold and when the figures for non-performing loans in banks are coming down closer to the European average, bank suddenly finds a conscience and starts to say some of what members in this committee have been saying for quite a while. Consumers have been looking for the Central Bank, in the context of its consumer protection role, to protect them or to say something in clear terms, but it stayed out of the debate. Much damage has been done. I welcome Mr. Sibley's comments, but maybe he could expand further because what consumers are saying to me, particularly those who have had their loans sold on, is that they are finding it difficult to deal with vulture funds and wonder why the Central Bank did not say this two years ago.

Mr. Ed Sibley

There is quite a lot in that question. To start with, in dealing with the mortgage arrears, first and foremost, being focused on mortgage arrears for many years and making sure that the challenges for borrowers and for the banks have been dealt with in a sustainable way, the approach the bank has consistently taken is to drive banks to engage with borrowers and to ensure that they have a full suite of options for dealing with borrowers, through forbearance, engagement, restructuring and using their balance sheets. After that, the focus has been on ensuring that are engaged in terms of other parts of the safety net, such as the Insolvency Service of Ireland. Nothing I said a couple of weeks ago that is inconsistent with what we have said or the approach we have taken previously. What we have had to is continue to push banks, this happened from 2012 and 2013 all the way through, to ensure that they are thinking about the full suite of options and really trying to engage with all their customers to make sure that they are taking account of people's needs and addressing their problems so long as the they are willing to engage. That approach has paid dividends. There are a significant number of mortgages that have been restructured from the peak of the mortgage arrears crisis in 2013. In terms of the level, there would be more than 100,000 mortgage accounts restructured, mostly in the banking system.

What I have also consistently said is that loan sales may be part of the solution in terms of the banks' resilience. That does not stop the Central Bank's work in terms of the protections that are in place for borrowers and the work that we do in terms of engaging with the lender, regardless of whether it is a bank.

What I pushed in my remarks - and what I continue to push, privately as well as publicly - is the need to make sure that the loan sales are not seen as the only way to deal with these problems. In a couple of instances, there are banks that have eased off a little in terms of looking at restructuring or that continue to try to engage and that are more prone to defaulting to thinking about loan sales.

It is wholly appropriate that we would continue to push banks to be engaged or for us to be looking to restructure as required, as well as potentially thinking about loan sales. We will continue to engage on this point. I am very happy to deal with the other points Deputy Doherty makes around the customer relationships and culture, if he wants, but I think the thrust was more on loan sales.

Mr. Sibley said that the banks were beginning to display pre-crisis levels of arrogance. Can Mr. Sibley explain to the committee, from his experience, what displays of arrogance he is experiencing from the banks?

Mr. Ed Sibley

What I talked about was a previous "Reeling in the Years", which is a programme I am sure the committee is well aware of, which focused on 2007, and I was really struck by the hubris in the comments that were made by bank CEOs in that programme. It was a reference just to beware of hubris. There have been isolated instances, not just in banking, where it seems to be that the memories of the crisis, and how deep it has been and how hurtful it has been for people for Ireland, are starting to fade a little. It was picked up as a relatively gentle reminder to make sure that we should beware of that, and we should make sure that we do remember the costs and damage of the crisis.

Just days after the Governor's deputy made those remarks, the CEO of KBC displayed probably the best levels of crisis arrogance that we had, when he called on the Governor to turn the page in relation to the "nitty-gritty", as he described those tracker mortgage holders that his own bank wrongly took millions of euro from for years. What is the Governor's response to the call from the CEO of KBC for him to turn the page, to move on and allow the banks to get on with their work?

Mr. Gabriel Makhlouf

If I recall correctly, that particular gentleman described our work as "annoying". One of the things I can tell Deputy Doherty is he may regret the fact that we may continue to be annoying. The point which I think is important and upon which I want to build is what Mr. Sibley just said, which is certainly under my leadership I am absolutely determined to make sure that the practices and the culture, the behaviours of the past, are not repeated. In the work that the Central Bank has done, which it should be extremely proud of, and the work that we are doing and the work that we will do, we are going to make sure that banks are held to account for their actions. In particular, it is their responsibility - as I said earlier - to restore trust in themselves. Banks are an important part of the financial system. They are an important part of the community. We want the community as a whole to trust them.

At the Central Bank, we are going to make sure that we continue to pursue this agenda, but I will also continue to call on the banks to show that they are taking it seriously and for them to prove to the community as a whole that they are changing. That is why I welcomed the setting up of the culture board, and I look forward to the culture board. I like to give people the benefit of the doubt. I like to see that as a statement of intent, that they want to change, and at the end of the day, it will be their actions that will determine the extent to which they are changing. We are going to continue to do our job.

We have proposed, as the committee will know, a senior accountability regime which will be an important part of the infrastructure and the framework that we need. I look forward to the introduction of the legislation and I look forward to cross-party support for that legislation when it comes into place. I can assure Deputy Doherty we are going to take this issue seriously. It is important for the community. Let me make a particular point, because the other day, when I was talking to a stakeholder from outside the bank, he said to me that I have to protect bank profits. I could not let that statement just lie there. My response to him was that my job and our job is not to protect bank profits. Our job is to protect financial stability. Obviously, the profitability of banks is related to financial stability. We are absolutely focused on our mandate. We are not in the business of promoting the financial services industry as may have been the case in the past. That is not our job. Our job is to protect the financial stability of the country, the wider economy, consumers' interests and the interests of citizens in Ireland. That is the job we are going to focus on.

My final question is on insurance. Before I ask this, I wish the Governor well. With a new chief comes possibly a new direction. Let me say this, banks need to fear the Central Bank. The CEO does not fear the Central Bank, because he would not have made those recorded comments, and he would not have discussed openly the fine that the Central Bank is about to impose on them when its investigation is completed. There needs to be an element of fear of the Central Bank that is not there at this point in time. There also needs to be a working relationship, but there needs to be that element of fear. I do not believe it is there.

On the insurance issue, we have discussed the dual pricing and welcome the investigation that is under way with the Central Bank. The Central Bank has written to the insurance companies in a "Dear CEO" letter a fortnight ago in relation to their consumer protection roles and price optimisation or dual pricing. Did any of the insurance companies respond to the Central Bank, positively or negatively, either confirming that they are operating dual pricing or otherwise? This next question has nothing to do with the personalities involved. Is there any concern within the Central Bank of that kind of revolving door within the insurance sector of the Central Bank and the insurance industry? I understand that a previous, very competent person who was the head of insurance within the Central Bank is now going onto the board of FBD. It is not the first person from the Central Bank. We have had a very senior person in the Central Bank who has taken up a very senior position in FBD. It is a small country and one needs the knowledge, but are there concerns in relation to this head of insurance moving into the head of an insurance company? They are under investigation. There is an examination ongoing and so on and so forth. Has the Governor any concerns or is there anything that can be done in relation to this issue?

Mr. Gabriel Makhlouf

I will ask Mr. Sibley to answer the second question, and then Ms Rowland can answer directly Deputy Doherty's question as to the response to her "Dear CEO" letter.

Ms Derville Rowland

In respect to the price differentiation, before we sent out that letter we had already had meetings with the different businesses to establish what they tell us their practices are. We wrote the letter to be clear and specific about our high-level intent, and we have been told by some that they are not operating any price differentiation. We have been told by others that they actually charge existing customers less than new customers, and we have been told by others that new customers get discounts. That is only from our point of view the tip of the iceberg, because that is at a preliminary level. Precisely because we need to establish in a great degree of granularity - because of the new innovations - what is going on, we are doing this deeper investigation as we discussed at the specific hearing addressing that. I hope that answers Deputy Doherty's question.

Mr. Ed Sibley

On the second question, we are very mindful of that risk. There are benefits to having industry experience come into the bank. There are also benefits of regulatory and supervisory experience going into industry.

As the Deputy points out, however, there are also risks.

The more senior one is in the Central Bank, the longer the notice period one has to give. Typically, when someone at a senior level gives notice of his or her intention to leave, he or she will be taken off any work that would in any way give rise to a conflict of interests. He or she must also work out his or her notice in other areas of the business. We try to guard against the risk the Deputy spoke about while recognising that there are some benefits. As he stated, Ireland is a small country and it is likely that people will move from-----

Would six months be the-----

Mr. Ed Sibley

It depends on the level-----

This was the head of insurance supervision. I know that is the most senior-----

Mr. Ed Sibley

Six months, yes. That is about right. That would be at a point of known departure, either not working in the bank but also potentially on gardening leave, as was the case with Mr. Rowland's predecessor, or working on areas unrelated with the industry that they have been regulating.

Mr. Gabriel Makhlouf

Can I add something to that for the sake of making it clear, although I hope it is understood? Irrespective of the seniority of the individual, I expect the highest ethical standards to operate in the bank. I have got no reason to doubt that in the particular case the Deputy is talking about that does not apply, but those are my expectations.

I welcome Governor Makhlouf and wish him well in his role. I also wish his colleagues well. I want to touch on a few themes. To go back to the market-based finance sector, Mr. Makhlouf stated that it is dominated by investment funds and money market funds, which account for approximately two thirds of total assets. To what assets is he referring in that regard?

Ms Sharon Donnery

It is the total assets of the market-based finance sector in Ireland. That is all of the different types of entities - investment funds, money market funds, etc. Of those assets, two thirds are either investment funds or money market funds. The remainder are other types of funds and so on.

What would be the total amount involved? Can Ms Donnery put a value on the two thirds?

Mr. Ed Sibley

It is two thirds of €4.4 trillion. I cannot-----

So the total amount is €4.4 trillion.

Mr. Ed Sibley

Yes.

Ms Donnery stated that 35% of commercial real estate in Ireland is now controlled by investment funds. Is that correct?

Ms Sharon Donnery

Of real estate, yes.

If we extrapolate out from that, how much of residential real estate do the investment funds control?

Ms Sharon Donnery

In terms of the total, I will revert to the Senator in a moment. I may have the figure here, which I will look for, but in terms of housing, currently, approximately 20% of the residential housing market is non-individual purchasers. That is a combination of funds but also local authorities, care homes and so on that are also purchasing residential property. In terms of the stock, I will check that and come back to the Senator in a moment.

The main reason I ask is because we are seeing that at the moment. In the context of the figure for commercial residential real estate, is that dominated properties by Dublin?

Ms Sharon Donnery

Some of it would be dominated by apartment blocks in Dublin, but not all.

How much of that 35% relates to loans that were sold from the mainstream banks to investment vehicles?

Ms Sharon Donnery

To be clear, when we talk about the investment funds in commercial real estate, it is not directly connected with the banks that have sold portfolios of loans, a matter about which I spoke to Deputy Pearse Doherty. It is where foreign investors have purchased or invested in commercial real estate, primarily office blocks and so on, in Dublin.

Has Ms Donnery quantified the loans that have been sold to investment funds from banks? What percentage of the real estate, both residential and commercial, do they control? Ms Donnery is saying that this is separate from the banks that have sold portfolios of loans-----

Ms Sharon Donnery

Yes.

If she were to quantify the total number of the commercial and residential real estate under the control of investment funds in Ireland, be it where they have bought directly or loan portfolios, what percentage of that do they control? Mr. Sibley made reference to it in terms of the Central Bank having issues with the banks and that they could deal with the loans in different ways from selling them on. There has been a significant sale of loans. An issue is manifesting itself whereby funds are coming in and buying large swathes of property. I want to get a holistic view. Has the Central Bank quantified the position in that regard? That is where I see the main exposure. They are coming in from abroad and buying commercial and residential real estate. I see significant exposure in the level of loans. Has the Central Bank looked at the type of investment vehicles that are purchasing these loans? There is anecdotal evidence to the effect that many of them are 100% geared for that. They are vehicles that purchased loans with borrowed moneys. Has the Central Bank looked under the floorboards, so to speak, at that level? If it is looking at the entire area, I would like it to expand that and examine the purchase of loans from the mainstream banks and the level of overall property, be it outright purchase or purchase of loans, the investment funds now control in Ireland.

Mr. Ed Sibley

There are a number of aspects to that question.

The matter was raised and I am following up on it.

Mr. Ed Sibley

As the Governor and Ms Donnery stated, we are very keen to continue to progress our work in this area but there are a number of different lenses to it. If we think about it from a financial stability perspective, we are looking at interconnectedness and the risks, as we discussed with Deputy Pearse Doherty, relating to leverage, which the Senator is talking about, and other issues in terms of potential hard stops. I would make the point that having diverse funding and investment into commercial real estate is a positive, relative to where we were in, say, 2007 and 2008 when it was primarily driven out of the banking system, and we know what happened with that.

The sale of mortgage loans is clearly relevant to our wider work when we think about financial stability but our focus in that area is to look at it from a consumer protection perspective. It is relatively small, albeit we are talking about very large numbers, and it clearly matters to the people involved, but our focus is very much from a consumer protection lens. It is about engaging with the credit servicing firms and the retail credit firms and asking about the approach they are taking to-----

My concern is simple. It is whether many of these funds that are purchasing mortgages are structured in a way that they can deal with the long-term requirements of the mortgage holders whose loans they purchased or if they are effectively asset disposal agencies in a different form. My concern is that they are 100% geared for this, as I said earlier. There is a stability aspect to that. Has the Central Bank looked to that area to ensure that the funds that are purchasing these mortgages are sufficiently resourced with expertise and long-term financial structures to be able to deal with the mortgages they have purchased? Does that have any implications for financial stability, which is the primary remit of the Central Bank?

Mr. Ed Sibley

There are two aspects to the Senator's question. There is the finance stability angle but, importantly from our perspective in this area, what is happening for the borrowers.

Regardless of whether the firm is a bank or non-bank, we would expect it to have appropriate strategies in place for dealing with people in distress, the operational capability to deal with it and a range of solutions that are sufficiently tailored to the individuals. Obviously, we take information from this committee as well but when we are in these firms, we see that they are maintaining the arrangements that are in play as they are sold - the restructuring that is in place - and that they are trying to stabilise the situation with their distressed borrowers for those who are not in arrangements. We will continue to challenge them, as we do with the banks, to see whether they are doing enough in terms of providing long-term solutions and securing a long-term path for these loans. As part of the relatively recent legislation in terms of loan owners, we are going through an authorisation process for all of these that will look to some of the points raised but Ms Rowland can talk more about that.

Ms Derville Rowland

From a consumer protection point of view, when we look at the regulation and the framework of regulation for the loan owners about whom the Senator is talking, they do not have the same regulatory framework as a bank. There are no capital requirements in the regulatory framework. That is not part of it. We have developed and published regulatory requirements they must meet before they can get a full authorisation from the Central Bank. These include fitness and probity of the individuals leading the organisations. Very importantly from our point of view, they must demonstrate mind of management in this jurisdiction. They must demonstrate a structure that we are capable of supervising. It cannot be so complex that one cannot follow where decision making is happening and they must demonstrate the resources, governance and structures to be able to discharge the high standard of regulatory requirements we would expect of them. As such, they must show us that they have a competent and well-developed compliance function that is embedded and have risk management frameworks in place. There is a whole flotilla of regulatory frameworks they must demonstrate before they will get the authorisation. They must show us that they can hit the ground running for the interaction and standards we expect when dealing with their customers. We are conscious that many of these customers are in a vulnerable position and it is very important that the loan owners have the proper standards. This is the close look at the regulatory framework in respect of the standards they must meet.

Mr. Makhlouf, in his presentation, referred to plans regarding the development of a number of buffers regarding the capital of banks, particularly cushions against different types of risk, including an economic downturn. What is his view on the financial well-being of the mainstream banking system, that is, the pillar banks? How does he see the Irish, European and world economies developing over the next short period?

Mr. Gabriel Makhlouf

The most important thing to say about the banks is probably that they are much more resilient than they were ten years ago. This is a combination of the work the Central Bank and the individual banks have been doing and the fact that the world has looked to change rules and regulations to strengthen the financial system. They are, therefore, in a better place. On the other hand, it is absolutely the case that we need to build more resilience. We were just talking about one particular issue. Our banks are still holding greater levels of non-performing loans than many other banks internationally. We want to build the buffers about which I spoke, namely, the counter-cyclical buffer about which I made an announcement yesterday, the other systemically important institution buffer and, in time, once the legislation is introduced and available, the systemic risk buffer. We think all those buffers will be required to ensure that the banks have enough capital to be adequately capitalised and to be as resilient as possible. We are in a much better place than we were but we need to do more to make sure that we are protected from future shocks.

In terms of the Irish, European and world economies, what I see over the next few years are risks - probably more risks than opportunities, if I can put it that way. The Irish economy is operating at near full capacity. We spoke about that yesterday. The European economy is not operating at the level we would like it to operate. The same applies to the world as a whole. Ireland is operating better relatively speaking than the rest of Europe and the world. We know that one of the reasons for the slowdown in global growth is the uncertainty created by the trade wars. There is a big risk, which people have been talking about, that will start to manifest itself next week. This is the gradual breakdown in the international rules-based order. I am referring specifically to the fact that next week, the disputes resolution panel in the World Trade Organization will cease to be able to function because it will no longer have any judges to be able to make decisions. This is a very unwelcome development. Ireland and most countries in the world rely on a rules-based order to work so I see that as a big risk. We are all hoping that the trade wars, particularly the one between China and the United States, are resolved.

The message I take from what is happening around the world is that we need to build resilience. The important thing is that the world around us is changing all the time. We are seeing it in demography, technology and in issues like climate change. There are risks around. From my perspective and that of the Central Bank, we need to look very carefully at managing that.

As of yesterday, there have been no changes to the mortgage rules. Not looking at the rights and wrongs of the matter or the Central Bank's independence, Mr. Makhlouf may have been aware that Deputy Micheál Martin said recently that if Fianna Fáil was in government, it would ensure that the Central Bank recognised rental payments to open up the mortgage market. How would Mr. Makhlouf view an effort by the Government to ensure the Central Bank changed matters? What would be the view of the European Central Bank and the Central Bank in respect of a policy direction from a Government? How would the Central Bank view a Government interfering in policies on mortgage rules, particularly relaxing the rules on mortgage lending?

Mr. Gabriel Makhlouf

I would not want to be drawn into hypotheticals, as the Senator can imagine.

I made a statement of fact.

Mr. Gabriel Makhlouf

If some of the emails I received since yesterday are reflective of the wider community, the world, the world's regulators and the wider community expect us to do our job to make sure that the financial system in Ireland is resilient. They want us to make sure that financial stability is maintained and that we are not making decisions that impact on what is an integrated market in Europe, in particular the euro area. We are an important financial market in the world.

So the globe, or let me not over-exaggerate-----

Is Mr. Makhlouf independent of Government? Where does he see his role?

Mr. Gabriel Makhlouf

Yes, I am independent of Government. As I said, I have had lots of suggestions and advice on all sorts of issues and I am very happy to receive the widest set of views, comments and recommendations from people but, at the end of the day, we have to make our judgement based on delivering our mandate. That can sometimes be quite hard to do but it is always pretty clear as to what it is we need to do.

I thank Mr. Makhlouf for his opening statement and I wish him well in his new position. I want to hone in on interest rates. We have a situation where mortgage interest rates for new customers are between 2.25% and 3% but for existing customers they are in the region of 4.5%. We see all of the time that our mortgage interest rates, particularly for existing customers, are higher than anywhere else in Europe and they are certainly higher than what is needed to maintain the profitability of the banks. What does the Central Bank intend to do about that and what scope does it have to try to address that problem? That as being one of the greatest problems at the moment in respect of the affordability of mortgages. I refer to the statistics in regard to mortgage holders aged over 60 who still owe more than €150,000 and the 15,000 mortgage holders aged over 50 who are on interest-only mortgage rates. The witnesses can see where the problem is in this regard. In the context of the Central Bank's consumer protection role, what scope and intention does it have to address some of that?

Mr. Gabriel Makhlouf

I will ask Mr. Sibley, who has been looking at this issue, to comment shortly. I want to make a couple of points. I have heard a number of people point out that mortgage rates are higher in Ireland than they are in Europe. All I want to signal is a bit of caution that sometimes we are not comparing exactly like with like because the terms under which mortgages are provided in Europe can vary. For example, in some countries borrowers need to pay up-front fees which may not exist here. I would just signal a caution around that. On the other hand, the reality is-----

To clarify, because it forms the basis of everything we are discussing, is Mr. Makhlouf saying it is wrong to say mortgage interest rates in the Irish market are twice the average level within the eurozone?

Mr. Gabriel Makhlouf

I was just going to address that question. Mortgage rates in Ireland are higher than in some countries in the eurozone. That reflects a number of factors. It reflects the legacy of the crisis, the risk appetite of the banks and the different types of collateral and security arrangements that exist here compared to the ones that exist in Europe. The issues of differential prices in mortgages, which the Senator mentioned, in our view, are different from the ones which we were talking about earlier in the insurance industry. I will ask Mr. Sibley to comment on this.

Mr. Ed Sibley

It is important to distinguish between the two points the Senator makes. Overall, with regard to mortgage interest rates in Ireland relative to the eurozone, as the Governor has touched on, lending in Ireland has been demonstrably riskier, from an average perspective - and we must be wary of averages - than in other parts of the eurozone. Banks here have to hold more capital for the mortgage loans they are making than in most other jurisdictions, so that necessarily feeds through into pricing. It is entirely understandable that mortgages are more expensive here than in the eurozone.

Is it riskier now, in the current climate, than in, say, Germany or Italy?

Mr. Ed Sibley

There is work that we have done, in terms of macroprudential mortgage measures, to improve the quality and safety of mortgage lending today. Four out of five mortgages that are in the system today were lent before the mortgage measures came into force, so the vast majority of mortgage books today were formed before those measures. There are other issues within the Irish system that are not the same as other parts of the eurozone, for example, the use of insurance and how security works in other jurisdictions, and so on, so it is not just purely on loan to value and loan to income. Clearly, there are improvements in the safety of mortgages.

Does Mr. Sibley think that is reflected in interest rates? I am trying to make sense of this in terms of being able to make proper comparisons. Given the work the Central Bank has done with the banks since the crash on stability, and the growing profitability of these banks, should that not be reflected in the interest rates they charge their customers?

Mr. Ed Sibley

The mortgage interest rates put on new loans are ticking down somewhat. However, there is still a sizeable difference between what is happening in new lending rates and the eurozone average for the reasons I have outlined. Some of the underlying issues are changing a little so the amount of capital that banks have to hold relative to loans is nudging down a little, and while it is relatively small at this stage, we expect that to continue to play out. One of the things we have been very focused on for a number of years is how the mortgage market functions in terms of contract clarity and disclosures, and whether people understand what they are getting into. I am thinking about some of the problems we have had in the market, including in respect of mortgage arrears and some of those issues related to switching and disclosure. What we can see is that there has been some improvement in how the market is functioning but they are still pretty significant issues. Overall, to come back to the Senator's first point, it is not inappropriate that mortgage rates in Ireland are higher than the eurozone average because of the underlying risk. There is also-----

Does Mr. Sibley think they are justified?

Mr. Ed Sibley

It is not for me to justify as such; I am just trying to explain it. There is also a factor of competition. Many other eurozone countries have a more competitive banking market, with more players in the market than is the case in Ireland. What we can see, as some of those fundamentals have improved, is that the mortgage market is becoming more competitive in Ireland than it was two, three or four years ago. There are positives in that we can see that mortgage rates for new loans are coming down and there is definitely more competition than there was two, three and four years ago, as the Senator will know. However, to respond to her second point, there are also risks around that in that we are seeing differentiation for different products between the rates new borrowers are on for shortish-term fixed rate mortgages relative to existing customers who are typically on variable rate products.

That was one of the issues I was pointing out regarding the culture in banks. We need to make sure they are not just doing what is legal but that they are also being consistent and trustworthy in how they are treating their customers over the long term. I am not sure that is necessarily consistent with what they have been saying, so there is further work to be done in that area.

We have been pushing hard to improve and to make sure that people are aware as possible of the benefits that may accrue from switching from an old variable rate to a new product. Clearly, a borrower has to decide that he or she wants to move from a variable rate to a fixed-rate product but thousands of people could make significant savings by switching.

To get back to my question, Mr. Sibley says the Central Bank is dealing with some of the underlying issues causing Irish mortgage holders to pay higher rates than mortgage holders elsewhere. At the same time, banks are making massive and ever-increasing profits. It is very difficult for mortgage holders to understand why they are not feeling the benefits some of the banks which they bailed out are experiencing. Is there scope for the Central Bank to do more to address the interest rates for existing mortgage holders?

Mr. Ed Sibley

We are very focused on addressing those underlying issues in the mortgage market. Doing so may make the market somewhat more attractive to new entrants. We will continue to reduce risks within the mortgage market itself. I am wary of talking too much about bank profitability. The net interest margin is higher in Ireland than the typical eurozone average but we still have a significantly higher cost-to-income ratio in Ireland than in many other jurisdictions. In terms of cold hard cash, overall levels of profitability are significant but, from an investor profile perspective, they are less attractive. That comes back to the Senator's earlier question about resilience. We are very focused on addressing the fundamentals. We see the functioning of the market improving but there is clearly still work to be done, including the work on culture I have mentioned.

The Senator touched on a couple of other issues with regard to older borrowers and interest-only borrowers. They are subject to the same protections. We have clearly articulated our expectations with regard to how lenders engage with borrowers on interest-only products. We have very clear expectations and we will continue to push for sustainable solutions for those who are in arrears. We see the problems there and we will continue to push on them. Ms Rowland may wish to contribute on that point.

Ms Derville Rowland

I will make two additional points. Right across our work, we seek to improve the context for consumers in the mortgage market. Part of the work we did, based on consultations we undertook last year and the year before, was to bring really helpful information directly to the notice of customers so that they would have a very directional prompt to act. We see that varying prices are being charged in the mortgage markets. This occurs in many markets, not just those in financial services. It is a feature of competition. We can see that many customers could make savings for themselves if they were prompted to act so we strengthened the regulatory framework to ensure that people coming to the end of a fixed rate product are given more time and given information about cheaper products available to them from their own lenders. That is a new strengthening of the framework which we hope will prompt people to move to cheaper products. At least once a year, and whenever there is a change in a variable interest rate, information is sent directly to customers about cheaper products available to them. That measure came into force at the beginning of 2019. We hope to see dividends arising from that. Even without switching between lenders, people can make savings by switching between products offered by their own lender. We see that having an impact on the behaviour of lenders as well because they have to communicate this pricing to their customers directly. We will be keeping a watch on that.

There is value on the table for people who take these steps. We want to see them take these steps so that they can get cheaper prices. Another part of that relates to people being able to get a cheaper product because the loan-to-value ratio changes. We are demanding that lenders give customers that specific information. All of those very directional prompts have been introduced to the system to help people make the changes open to them. We have also strengthened measures related to switching. We really want people to know this is possible and that there are significant savings to be made. We have done a lot with regard to strengthening the regulatory framework. We would like more people to utilise the switching process. Mr. Sibley may be able to say something about the percentage savings that can be made. These are things that have already been done this year.

Switching is very important. I am glad to see that the Central Bank is taking its role seriously in this regard. How is the effectiveness of the measures introduced to encourage switching measured?

Ms Derville Rowland

We have some behavioural economic studies under way across different parts of our work. One of them aims to examine the effect of information on customers with respect to switching. It is a real study on the presentation of information. We expect the results of this detailed piece of work next year. We are also looking at the customer journey and mortgage experience from its inception. That is real consumer work we are carrying out to determine the factors in people's mindset, the impacts on them, and their perceived barriers to the market. It is very important that the effectiveness of the rules and the framework we have put in place is tested through these in situ methods to provide us with real feedback as to how best to help people take up the action points we want them to take up and to see if they are working. Two very separate pieces of work are under way for next year. We are also doing something in the area of insurance pricing, which I discussed at another hearing. This aims to see what is happening with customers and will feed into the way we frame our work and inform any policy interventions we believe will be effective and how we might intervene.

Mr. Ed Sibley

With regard to the work we are now doing and what we are seeing today, the level of switching in the market has increased significantly. It is not quite at the same level as before the crisis but it has increased from approximately 2% of mortgage drawdowns five or six years ago to approximately 12% in 2018. I do not have the 2019 figures to hand.

How does that compare with switching behaviour in the eurozone as a whole?

Mr. Ed Sibley

I do not know. We can try to find some information on that. There are two different lenses through which to look at this. One is the percentage of mortgage drawdowns, that is, how many people are drawing down mortgages and how many are switchers. This percentage has increased significantly. At its pre-crisis peak, it was in and around 19%. There is also another way of looking at it which is to ask how many people could save by switching either product or provider. Only a relatively small fraction of that number are doing so. There are many opportunities for people to switch and save. Tens of thousands of people could save money by moving product or provider. I appreciate that it is not totally easy to do but it is perfectly possible. We have had plenty of discussion on this topic in the past and a lot of discussion with Deputy Michael McGrath with regard to his Bill on mortgage rates. We recognise that there are challenges here. We are driving forward and trying to address the underlying fundamentals to make sure that the market will function better over the long term. We see some improvements but there is clearly more to be done both. We will continue to drive to improve the rate of switching but there is also the issue of culture and behaviour in some institutions.

A rate of 4.5% for customers is just too high. I ask the Governor to continue to look at that in his new role and to see how it can be addressed to give a break to customers and mortgage holders. I have several questions but one leads on from my earlier points. With regard to those interest-only products and non-performing loans, I am concerned about the number of mortgages classed as non-performing loans that are sold on and then sold on again.

Apart from the criteria of the non-performing loans, does the Central Bank measure the journey of a loan in how many times loans are bundled and sold on from one vulture fund to another?

Mr. Ed Sibley

Our focus is very much on what is happening for the borrower around engagement with the lender, whoever the lender may be, and that the lender is dealing with the borrower through the retail credit firm or the credit servicing firm in a way that is consistent with our expectations around the code of conduct on mortgage arrears so there are solutions available to those borrowers that would potentially bring them to a sustainable path to curing the underlying problem. That is very much our focus.

I am stuck for time. Customers are telling me that one day the loan leaves the bank and then he or she is dealing with one vulture fund while the next day it is somebody else, and the next day it could be another fund. Are we monitoring how these loans are being bundled and sold on? This is going back to the original crash. This is an important question.

Ms Sharon Donnery

We can come back to the committee with a fuller answer on that. We are monitoring the agreements that have been made for the customers, and ensuring that they follow-----

That is a different question.

Ms Sharon Donnery

I accept that. Where there are changes in the market with regard to participants - there have been some and it may be that different service providers take over servicing different books - we have sight on who is in the market and their role at a certain level. Significantly, we are looking at the treatment around the outcomes for the customer. We can come back to the Senator with a written response about the way we do that.

The witnesses are missing the point I made about measuring the loans being bundled, sold on, and then being sold on again. The funds get enormous discounts from the banks in the first place and the consumer is in the middle of all of this. The loan is sold to one vulture fund that makes a certain amount and the loan is then sold on again and the new owner makes a certain amount. Lots of money is being made on the back of the original mortgage holder. On a macro-economic level I am also concerned about the impact this will have with regard to the loans being sold on.

Mr. Gabriel Makhlouf

On that specific point we will write to the committee. The Senator has brought a number of things together and it is probably worth our while to set these out in writing.

I welcome the Governor. I will start with questions on market-based finance, popularly referred to as shadow banking. I welcome the Central Bank turning its attention to it. Arguably this is late, but it is better than never. I understand that Mr. Makhlouf is just commencing his work on this and that his answers might be provisional - or he might prefer to not answer - but I will ask the questions anyway. In his opinion, what accounts for the very outsized nature of the sector in Ireland, which is reported as 13 times GDP and the fourth biggest shadow banking sector in the world? Mr. Makhlouf may have read the paper by Professor Jim Stewart and Cillian Doyle that says a reason for the size of the shadow banking sector here is the nature of Ireland's corporate tax laws, which ensure the profits of special purpose entities are zero or close to zero.

Mr. Gabriel Makhlouf

There are a number of reasons the sector is growing - as mentioned earlier - some of which reflect the fact that they offer greater flexibility and diversification from traditional sources. The growth also reflects the fact that the banks are, in many ways, also recovering from the financial crisis. The legacy of that is still playing out. Other entrants are also entering the market. Another reason for the growth is what we term "the search for yield". In a low interest rate environment funds are looking for vehicles to identify new sources of yield. Tax regime always plays a role, and not simply the tax regime in Ireland; it is also the tax regimes relative to each other. It means the rate of tax but also the rules and compliance around those. There is a whole series of factors that explain why the sector has grown.

Is Mr. Makhlouf aware of the case of the Russian MDM bank that has merged with B&N, another Russian bank? The new entity is also called B&N. Shortly after the merger it had to have a massive bailout because MDM had significantly overstated its financial situation and had used the IFSC to do so. Again, this is something that Professor Jim Stewart and Cillian Doyle have written about. MDM had provided loans to off-balance sheet vehicles located in the IFSC, which then used the proceeds to purchase some of the bank stock of non-performing loans in order to improve the appearance of its balance sheet before the merger. Is Mr. Makhlouf aware of that and does he believe it is an isolated case? Is there at least the possibility of other financial entities, in Russia or elsewhere, using Ireland's shadow banking sector for such activities?

Mr. Gabriel Makhlouf

I am not aware of that. Is any of my colleagues aware of this? Everyone is puzzled.

Ms Sharon Donnery

I have an awareness on some of the matters Deputy Murphy has touched on. It is very important that we are clear that some of these entities are beyond the touch points of the Central Bank in terms of regulation. We have some information collecting powers with respect to other areas, and it is important that we are vigilant at a national level about the integrity of the system. It is something we look at but I do not want to be drawn specifically on particular matters.

Does the Central Bank believe there is a danger or possibility that Ireland's shadow banking sector is used, effectively, for the laundering of dirty money? It happens in the shadow banking sector around the world. Would the witnesses say that illegal funds are being laundered through shadow banking in Ireland?

Mr. Gabriel Makhlouf

I have not seen any evidence of that happening.

Ms Derville Rowland

On the matter of money laundering and the proceeds from crime, we have very specific responsibilities, of which I am sure the committee is aware, in large part for the regulated financial service providers to ensure they have effective systems of control in place to make sure the financial system is strong and cannot be used as the weak point for the proceeds of laundering money from crime. We also play a very important part in the national framework. We are part of the anti-money laundering, AML, steering committee chaired by the Department of Finance where we work with the national framework to participate in the national risk assessment in money laundering and where the integrity of the State's response to money laundering is solidified and comes together. We work with An Garda Síochána, the Department of Justice and Equality, the Central Bank and all the relevant agencies. The responsibilities at national level lie slightly elsewhere, but we are a contributor to the dialogue on making sure we play our part in contributing to a strong money laundering framework in this jurisdiction.

We have strengthened it significantly over time but every country needs to be very vigilant and needs to continue to make efforts at national level to co-ordinate well and to make sure we continue to strengthen the system.

Mr. Gabriel Makhlouf

It is crystal clear that there are sizeable money-laundering risks in Europe and in the financial system within Europe. We have seen that crystallise in some very large cases, including in some large banks. I do not think it is limited to the banks themselves. This is recognised at European level and there is a reasonably high degree of consensus at that level that something needs to be done to improve anti-money laundering throughout Europe from both regulation and supervision perspectives. It is very important that this is thought about in an international way because of the nature of international monetary flows. Earlier this week, I was at a meeting of the supervisory board of the ECB for banking union. The Commissioner was there and we had a long discussion on money-laundering risk and the need for us not just to think about it in the banking system but to look at it throughout the financial services system. There is absolutely a need for us to play our part locally and domestically, as Ms Rowland has outlined, and at European level to improve how the system works because there is undoubtedly a risk.

Ms Derville Rowland

New responsibilities to strengthen this have been given to the European Banking Authority, where a very senior committee is being formed to strengthen this. The responsibilities are going beyond banking because there is recognition that we cannot address this in one sector but we must address it throughout the system.

The financial crisis inquiry report concluded that one of the causes of the financial crisis was not just the deregulation that took place but the failure to adopt new regulations or challenge industry on the risk of innovations. We have new things developing and regulations not keeping up with them. Do the witnesses think there is a risk that shadow banking is one of those areas where regulations have not kept pace with the speed of the development of the sector in Ireland? Is this something the Central Bank will be looking at?

Mr. Gabriel Makhlouf

One of the things I spoke about yesterday was that the macroprudential framework we have for the banking sector is not replicated in the non-bank sector. Some of the work we will do will ask the question as to whether we need that type of system to be replicated in the non-bank sector. More generally, it is the nature of regulation that it is always trying to catch up. An enormous amount of work has been done throughout Europe and internationally that, in my view, has caught up but the industry is always developing and changing. It is the challenge for all regulators everywhere to make sure they have the agility and ability to keep pace with developments. Certainly within this Central Bank, I am keen that we keep up with those developments. One of the reasons, as I said yesterday, we want to do this work on the non-bank sector is because I want to make sure we keep up.

One of the things that is advocated as a way of minimising the capacity for exploitation of shadow banking is public registries of beneficial ownership so we get to see who benefits from whatever financial set-up exists. There is now a public registry of beneficial ownership in Ireland. It was set up some time this year. However, I understand that only 12% of companies have registered who is their beneficial owner at this point in time. Is this something that concerns the Central Bank? Is it something on which action needs to be taken to ensure we know 100% where beneficial ownership resides?

Mr. Gabriel Makhlouf

The rules of the new regimes should be complied with.

Ms Derville Rowland

In recognition that underlying ownership of assets is a very important transparency provision to support and strengthen the effectiveness of the anti-money laundering regimes, the successive directives have strengthened the approach in this area. The approach in Ireland is that the registration requirements are being set up in different entities and it will be of national level importance that the actual registrants comply with their obligation. I am sure the relevant agencies will make sure that if there is a risk or if the standard required is not being adhered to, we will work together to make sure the registrants are brought up to standard. For sure, it is a key way to address concerns about money laundering.

I agree that the idea of loosening the rules for mortgages would simply mean more price inflation, people going into debt and more money going into the construction companies and developers. This is not the answer. At the same time, there obviously is a huge problem in our housing sector. If the answer is not to get the banks to throw money at people again, as we did before with the consequences we know, what is the answer to deal with the housing crisis? In the opinion of the witnesses what actions need to be taken?

Mr. Gabriel Makhlouf

The one thing that is clear is there is not a simple answer. If there were it would have been done. It requires a range of things to be looked at. Certainly from my experience elsewhere in the world, and from research we have done, some of which has been published, the issues that impact on the housing market and its effectiveness include planning regulations, incentives on the use of land, in particular taxation of land, the capacity of the industry to mobilise, the availability of underlying infrastructure to facilitate development, the productivity of the construction industry and the ability of the financial system to respond appropriately. There is a range of issues, some of which depend on Government action and others absolutely depend on the private sector working well and having a competitive market that makes all of these things function properly. I cannot tell the Deputy one thing that needs to happen. I can tell him what I think are a number of things that should be looked at and thought carefully about.

I welcome Governor Makhlouf and his colleagues, all of whom are regular visitors here. I am delighted have an opportunity to engage with them. I had a private meeting with Mr. Makhlouf recently and I thank him for that engagement. Will the Governor set out from his perspective what is the hierarchy of priorities for the Central Bank in terms of its functions?

Mr. Gabriel Makhlouf

I mentioned our mission earlier, which is to maintain monetary and financial stability, to look after the interests of consumers and to make sure the financial system works for the wider economy. All of these interact and interlock. They are intertwined. Describing one as being more important than another might lead people to come to the wrong conclusion.

However, everything we do is in the public interest. The hierarchy of our responsibilities starts with delivering in the public interest and ends with delivering in the public interest. That is sometimes reflected in the actions we take on consumer protection and sometimes it is reflected in the actions we take on prudential regulation but those actions are all centred on protecting the public interest.

Would it be fair to say the overarching objective and the number one priority is to protect the financial stability of the system?

Mr. Gabriel Makhlouf

Yes, but to do so in the public interest. It is important not to downplay the importance of monetary and financial stability, not to underplay our consumer protection role and not to underplay the fact that all these matters combine and have an impact on the wider economy, which, as I said in my opening statement, is represented by the wider community for me.

Mr. Makhlouf has a broader perspective than most of us, given his international experience so in that context, is it appropriate that the consumer protection mandate would sit within the Central Bank or would it be more appropriate to have it within another external independent body? What is Mr. Makhlouf's view on that?

Mr. Gabriel Makhlouf

There are different models around the world. My view is the smaller the size of the country and economy, the stronger the case for coalescing those functions in a smaller number of entities. Specifically in the case of Ireland and the Central Bank, my view is consumer protection is strengthened by bringing it alongside prudential regulation. If one takes banks as an example, the leadership of a bank is responsible for maintaining the efficiency of the bank itself and making sure it is adequately capitalised etc. That same leadership is responsible for setting the culture and behaviour in its interactions with its customers and with consumers in general. The same leadership looks at both components. It makes sense, therefore, for the Central Bank, which deals with that leadership, to also have both of those functions together because it enables us to deal with one group of people because we understand the way they work on their prudential regulation and we understand the way they think about consumers. It is probably better for consumers in Ireland that these matters are brought together but I completely accept there are different models around the world. Whether those models work or not is a question the Deputy can ask the-----

Is the Central Bank not conflicted in its functions? It seems to me the Central Bank's number one priority is to uphold financial stability and that is for good reasons. Mr. Makhlouf added the rider that it is in the public interest and for the common good to do so but where there is a conflict between protecting the interests of consumers and upholding financial stability, financial stability will always win out for obvious reasons. To whom does the director of consumer protection report to in the Central Bank?

Mr. Gabriel Makhlouf

To Ms Rowland, who reports to me.

There are four people involved and the consumer protection person is not here.

Mr. Gabriel Makhlouf

Ms Rowland is the consumer protection person and she is here.

She reports to Mr. Makhlouf but Mr. Makhlouf has a much wider mandate.

Mr. Gabriel Makhlouf

I want to come back to the Deputy's point about the conflict in our mandate because I am not sure if he was in the room earlier when I commented on this. I want to make something clear. I do not see a conflict between financial stability and consumer protection. The reason we look to ensure financial stability is to protect consumers. I apologise to the rest of the members who heard what I said earlier but I was told last week that all the Central Bank was interested in was protecting bank profits.

I was here for that.

Mr. Gabriel Makhlouf

I want to emphasise that is not our job. Our job is to safeguard financial stability and the reason that is our job is because safeguarding financial stability is ultimately in the public interest and ultimately protects consumers. I do not see a conflict in that. As I said, the different regimes exist in other parts of the world. The country I have just come from and worked in, namely, New Zealand, had a different organisation that was responsible for consumer protection. The governor of the Reserve Bank of New Zealand, who is my opposite number there, was also focused on consumer protection even though it was not in his mandate. Yesterday, similarly to us, he made an announcement about the macroprudential framework in New Zealand. I read his statement and he spoke about protecting consumers. There is no conflict in this. The leadership of the Central Bank, as represented by the four of us here, does not see a conflict. We put consumer protection at the heart of everything we do, whether we are responsible for prudential regulation, as Mr. Sibley is, or whether we are directly responsible for consumer protection, as Ms Rowland is.

Mr. Makhlouf had a discussion with Senator Conway-Walsh on mortgages but I have repeatedly made the point at this committee and I have made the point directly to the Central Bank about the different treatment of existing customers versus new customers. Most banks have addressed that, although not all banks have. Some continue to charge existing customers higher interest rates. There is the continuation, for example, of the practice of providing cashback incentives for new customers that are not available for an existing mortgage customer. It is blatant discrimination and dual pricing. The Central Bank is investigating this in the insurance sector but it is presiding over it in the mortgage market and I do not see any action being taken to deal with that.

Mr. Gabriel Makhlouf

Would Mr. Sibley like to comment on that?

I would like to hear the Governor address this issue.

Mr. Gabriel Makhlouf

For me, the reason the mortgage sector is different to the insurance sector is the mortgage sector has greater transparency and a greater ability for customers to switch providers. To specifically pick up on the issue of cashback and to park our ability to intervene in pricing, the most important matter is to make sure the terms on which cashback is offered are clear and transparent because consumers rarely get anything for free. That is important for me. On insurance, the reason we are doing a study on dual pricing is we want to understand that issue because it is less clear. There is less transparency and less ability to switch so we want to understand exactly what is happening in the industry to satisfy ourselves the industry is in compliance with the code. The challenge with mortgages that we discussed earlier with Senator Conway-Walsh is the question of how we can facilitate and encourage a greater take up of the option of switching mortgages because there are products and opportunities out there for people to take out cheaper mortgages. That is the challenge.

Yes, it is, and there should be much more switching. Equally, the Central Bank tolerates certain banks charging their existing, loyal customers more than they charge a new customer. One might say that is common in business, as it is in the case of electricity and other utility services, but it is the largest transaction that most people will ever enter into. While one can blame the consumer's inertia, we have to regulate in the round for the public good. Consumers are being exploited and taken advantage of. It is not something that the Central Bank, as the regulator and the consumer protection watchdog in the current architecture, should preside over. Do our guests wish to comment on that? I have repeated this view time and again.

Mr. Ed Sibley

I appreciate that and the Deputy has been consistent in his view for a period. In short, I do not disagree with much of what he stated. In respect of providing decent customer service and long-term sustainability for the business models and strategy of the banks, it is problematic that they rely on inertia to offer different products to new and existing customers. Our view is that it is not against the regulations. It is a question of whether the firms look beyond mere compliance with regulation and think about the longer-term engagement and relationship they have with their customers, whether they are consistent with what they say they aspire to and whether they are trustworthy. We will continue to push them hard and seek to improve the fundamentals I spoke about earlier. There is differential pricing in many markets, as the Deputy described, including the mortgage market and other jurisdictions with other regulatory arrangements.

I accept that the issue of mortgage pricing and risk-weighted assets is technical and do not propose we go into it in detail. Is there ongoing engagement between the Central Bank and the SSM on the detail of the regulations and on whether they are proportional? The amount of capital that must be put aside for a mortgage issued today has been heavily influenced by what happened ten years ago, when there were not macroprudential rules and much more risky lending was happening in the market. It seems current home buyers and mortgage holders pay the price for that to a large extent.

To what degree will that eventually wash its way through the system? Our guests mentioned earlier that it is slowly coming through the system. The issue is an important influencer of mortgage pricing, although it is not widely understood because it is technical in nature. How quickly will it wash through? What engagement has the Central Bank with the SSM to ensure that the amount of capital that has to be put aside now is commensurate with the risk of mortgages currently being written?

Mr. Ed Sibley

We are very much part of the SSM and the work being done in that area. Central Bank staff are involved in, or have led, the reviews in the Irish banks and elsewhere. I am entirely comfortable that the approach taken throughout Europe is consistent, and much more so than it was before the creation of the SSM. Although it is small, in decimal points in overall percentages, the modelled risk weights have started to tick down a little, as the risk profile of the mortgage books has improved. Fundamentally, it is driven by loss given default and the probability of default. There is an historical element to that. It is clear there have been significant historical losses and that arrears remain in the system. There is still a higher probability of default for performing mortgages in the system in Ireland today than there is from a eurozone average perspective. Tangibly and concretely, mortgage lending in Ireland is riskier than in most other European jurisdictions, which is reflected in the risk weights. Nevertheless, as I stated, we will continue examining what is within our gift to address and improve the fundamentals.

I turn to investment by banks in technology. There have been a number of outages or glitches in bank systems in recent months, and they have happened frequently in recent years. It causes severe disruption to the system and to individual consumers, and there can be reputational damage to the banks and the system. It can also have an economic impact, depending on how long it lasts. Do the banks invest enough money in their systems and technology to prevent such scenarios from recurring?

Mr. Ed Sibley

We spoke earlier about financial resilience. Operational resilience, including in ICT, continues to increase in importance. It is probably the area I worry about most because of its nature. It can happen quickly and, suddenly, there can be problems with the payment system, as happened recently. We focus on it in a number of ways. From a consumer-user perspective, we ensure that anybody involved in the payment system, not least the banks, will work on resilience and invest in and address problems where they exist. Problems are inevitable-----

They happen an awful lot, and my question is whether the banks do enough to deal with them.

Mr. Ed Sibley

We focus on ensuring that as problems arise, consumers will be contacted and the problems will be put right, and that the customers will not suffer losses as a result of an ICT outage. We then ensure that the root causes will be addressed. The banks have had to catch up because there was a period of underinvestment. A great deal of money is being spent, especially by the larger banks, on ICT, partly to improve their infrastructure but also to improve functionality and meet their customers' expectations in that regard. On whether it is enough, we examine the wider European system and how much of their revenue base banks spend on ICT, and the Irish banks are approximately in the middle of the pack, although that might be not enough to catch up.

We are heavily focused on the issue and undertake numerous inspections as part of our ongoing engagement with firms. We have an auditor-assurance power, which we have used to give us assurance in the area, and have brought in skilled persons. We have done an enormous amount of work, representative of the risk, and will continue to do more because it is a growing issue.

The Central Bank regularly issues statements and warnings about unauthorised firms. What is the work out from them, that is, the end product and sanctions? Such firms can cause great harm to the consumer if they are not regulated or do not conduct their business properly. I have struggled to learn, either through the Courts Service or the Central Bank, the outcome of these warnings. Are the firms shut down? What sanctions are issued and what powers has the Central Bank to issue them against such firms?

Ms Derville Rowland

A variety of outcomes flow from what the Deputy outlined. The growth of the Internet has made websites that, in effect, scam customers more prevalent. There has been an increase in reports to us of websites that can clone or nearly clone the identity of regulated firms, and we have a duty to take action against what we call unauthorised providers. We call it our work on policing the perimeter.

These are firms that are pretending to be authorised when they are not. Sometimes the firms are not in Ireland so we cannot take action against them. They are not in this jurisdiction and may be half way across the world. The actions, therefore, we can take-----

What big stick has the Central Bank?

Ms Derville Rowland

We can take a number of actions depending on the circumstances. The normal course of action is to warn consumers about the firms, publish the warning notices and require that the websites be taken down where we can act on them. The other thing we do very effectively, and which we have done a lot this year, is work with An Garda Síochána. We are talking about fraud whereby people are asked to pay money for things that are not going to happen. There is an uptake in advance-fee fraud whereby people are told that if, for example, they pay €250 now, they will be pre-approved for a loan and get a loan of a much larger amount. Where we see such activity, which is fraud, we report it.

Are there convictions?

Ms Derville Rowland

Yes, there have been. We supported the Garda earlier this year in an action. The Garda led out at national level. It is the right agency to lead on fraud. We have worked with, and supported, the Garda in that regard. It has been talking about this area. Members will have seen the Garda do a Black Friday scam-smart promotion to warn consumers about being scammed on the Internet. We have done significant work with the Garda on the matters that fall within its remit and jurisdiction.

When we find that people are abusing the regulatory perimeter, we have the power to go to court in Ireland for an enforcement order if they do not obey our direction to cease and desist from what they are doing. We have had cause to do that in the past. There is a variety of big sticks. The serious issue of pure fraud is a matter for An Garda Síochána. We work very effectively with it to support it in its work.

On the issue of the portfolio loan sales, is the Central Bank supportive of ethical funds buying the portfolios? I refer to funds that specialise in mortgage-to-rent arrangements that would allow the current homeowner to stay in the home as a tenant as opposed to a mortgage holder. What is the Central Bank's view on loans being sold to such funds as opposed to so-called vulture funds?

On vulture funds, as we call them, what handle does the Central Bank have on the suite of options available? This was raised earlier by Senator Conway-Walsh. Under the CCMA, there is a requirement to consider the forbearance measures offered, not the full suite. For each fund that has bought these loans and is continuing to buy them, does the Central Bank have a list of the forbearance measures it considers? I refer to Cerberus and Lone Star. Do the officials know precisely what they are offering consumers by way of restructuring and forbearance options ?

Mr. Gabriel Makhlouf

I will answer the first and final questions and then ask Mr. Sibley to comment. We are neutral as to the nature of the funds as long as they are fit and proper. All funds will have slightly different characteristics. We are neutral on them in the detail of what they are offering.

Mr. Ed Sibley

To supplement the response of the Governor, there is still a large number of borrowers in deep distress, whether their lenders are banks or non-banks. For those who are willing and able to engage with the lender, there is not necessarily a path to curing their loans as they may be so deep under water. Solutions such as mortgage-to-rent arrangements and the insolvency service are critical in that context. To date, the take-up of mortgage-to-rent arrangements, relative to the initial aspirations and certainly in terms of the need, has been relatively low. We would certainly welcome anything that would enhance the take-up and use of mortgage-to-rent arrangements in those circumstances.

On the options or offerings, we have details not only on the suite but also on the reality on the ground in terms of the treatments borrowers are on. This was touched on earlier. With a sale from a bank to a non-bank, or even from a non-bank to a non-bank, as the Senator touched on, the arrangements in place and agreed are being maintained for their lifetime. We are also seeing that the firms, the non-banks, are trying to stabilise the situation somewhat, essentially with some short-term measures. We want to see more in terms of sustainably looking for the path to cure and more use of options that would drive the curing of the underlying problem. I pushed the banks on this. More needs to be done on this area in both the banks and non-banks.

Has Mr. Sibley data he could share with the committee on the curing mechanisms of non-bank lenders that have acquired the loans? We have seen some data but they do not distinguish between arrangements that have been inherited by the funds, or entered into by the bank before the loan was sold. I am most interested in what happens when those arrangements expire. Is there any data on new arrangements entered into by the funds that own the loans? If so, could that be shared with the committee?

Mr. Ed Sibley

Sure. We have published a lot of information on the arrangements in place. Maybe we could come back to the Deputy on the question of how far we can go relative to the information we have. We are committed to being as transparent as we can be.

Could the committee be sent a note on the data and consequences following the issuing of a public notice by the Central Bank of a warning about an unauthorised firm?

I want to ask about repossessions and the information held on these various issues. Does the Central Bank have up-to-date information relative to each of the banks on the number of repossessions?

Mr. Ed Sibley

We have information on repossessions and other losses of ownership, including voluntary surrender and sale.

Is it up-to-date? From when does it date?

Mr. Ed Sibley

The latest numbers we have are from the first half of this year. The data are reasonably up to date.

The officials can provide that to us. They know the number of repossessions of each bank. He knows how many-----

Mr. Ed Sibley

I believe we publish that in aggregate form. I do not know whether we could provide information on individual banks. We could certainly provide aggregate data

Without naming the banks, figures could be given by way of stating bank A had so many, bank B had so many and bank C had so many.

Mr. Ed Sibley

I suspect the banks would likely be identifiable in that case. We publish information on repossessions so we can-----

No, I am asking about each bank. I do not want Mr. Sibley to name the banks. I just want to find out how many banks or vulture funds have repossessed homes. If Mr. Sibley has that information, could he break it down without identifying the banks or vulture funds so we can have an idea of the numbers?

Mr. Ed Sibley

I will certainly be happy to consider it. There will be some challenges. Maybe a way of doing it is not to provide absolute numbers but numbers relative to levels of arrears.

Mr. Sibley will be able to give numbers relative to each bank because he has the information. Looking at that information, can he identify customers who have engaged but whose arrangements did not work out, resulting in a repossession? Can he gauge the number of customers whose loans were simply unsustainable?

Mr. Gabriel Makhlouf

In aggregate form we have that information. The vast majority of those that have gone through the courts are-----

Does the Central Bank know the number of non-engagers?

Mr. Gabriel Makhlouf

Yes. The vast majority are those that have not engaged. We do have that information but I do not know whether we published it previously.

Ms Sharon Donnery

We certainly publish repossessions by those that are done by agreement with the party through voluntary surrender, for example, versus those that are done by court order. We do have that.

A voluntary surrender is a polite description for repossession.

Ms Sharon Donnery

That is what I mean. We-----

I do not think there is any such thing as voluntary surrender.

Ms Sharon Donnery

No, but in terms of whether borrowers have co-operated or not and have come to an agreement with the bank, we do have some analysis of that.

In the past various banks sold their portfolio of loans that included loans on homes or principal residences of persons or families. Does the Central Bank have figures on the type of loans that are still within the banks whereby legal action has not been taken, as yet, but are at an advanced stage of legal action?

Mr. Ed Sibley

Yes, we have details of those borrowers that are in the legal process but have not yet reached the court decision or been repossessed. Is that the question?

Yes. Does the Central Bank have those figures?

Mr. Ed Sibley

We have that. We can provide that, yes.

Do the witnesses get a sense from engaging with the banks that they are stockpiling bad loans like that for sale very shortly? They have loans that are being restructured and failed, loans that are unsustainable or loans that have non-engagers but they have not done anything because they have decided to save themselves the cost of legal fees and are just going to stockpile the loans and now release them to the market to be purchased by vulture funds. Does the Central Bank have any oversight or sight of those type of figures?

Mr. Ed Sibley

Without trying to guess the motivations, what we have required all of the banks to have is strategies for how they are going to continue to address non-performing loans, including mortgage arrears. I touched on this a little earlier. There are a couple of instances where we were dissatisfied with the strategy that was being pursued or articulated, in that it was overly focused on sales and did not include continuing to try to work these things out within the banks. An enormous amount of work has been done within the banking system by the banks, by borrowers, by us and by other entities, including this committee to try to ensure, as much as possible, that the mortgage arrears crisis is being addressed through keeping people in their homes. There is a lot of work that has been done.

Does Mr. Sibley get a sense that the banks are stockpiling bad loans?

Mr. Ed Sibley

I do not get a sense that they are stockpiling. My sense would be that in a couple, but not all, instances they have been a little bit too fixated on sale rather than continuing to try to work things out. We have pushed them hard on that.

I will outline some numbers from a recent sale in July 2019 where 79% of private dwelling house or PDH loans are not in the litigation process. I refer to a loan portfolio that is being sold. It was out there and has probably been sold by now. In addition, 69% of the loans being offered were at an advanced stage of litigation. In other words, the next step was court. In terms of analysing a portfolio being sold, I will outline the actual figures. In terms of borrowers of just under €250,000, and I mean various levels of loans under that figure, there were 2,098 of them and these loans have gone for sale. If one were to relate that to every bank because they are all doing the same thing, it would appear that the banks are stockpiling these loans to save money on their legal fees and leaving it to the vulture funds to do as they wish with that number of loans relative to homes. I would take from that that the banks are not using their full suite of options to assist the borrower and have made a conscious decision to dump these loans on the market. That would seem to be the case for all of the borrowers and that brings me back to the question asked by Deputy McGrath. Due to the fact that the banks are so willing, and connive so much with their figures relative to bad debt, there is a need to prioritise the not-for-profits and encourage the banks to use them. I mean that if the banks are conniving so much with the figures to at least give a not-for-profit the option to save some of these individuals and families and keep them in their own homes. Definitely, from this portfolio, the figures in the banks are being manipulated.

Mr. Ed Sibley

Clearly, anything that helps to keep people in their homes is to be encouraged. As I have touched on, for those who are willing and able to engage we are and will continue to push for solutions to be there for them. There is still a large number, and according to the half-year, 27,000 owner-occupier accounts that are greater than two years past due. So there is still a large number of accounts in the system that are very significantly behind on payments. Some of those will be engaged, some of those will be making some payments and some of them will not. Just over half of those are with the banks currently and the rest are in the non-bank retail credit firms and credit servicing firms.

We will continue to push, regardless of who owns the loan and who the lender is, that those entities are continuing to strive to engage. We would also encourage borrowers who are in distress to engage with the lender or use the supports that are available to them.

Some banks are selling loans that are in the legal process, and the legal process takes a long time in Ireland. We are continuing to drive the banks to try to fix the things on their books as well as not being overly-----

Honestly, Mr. Sibley.

We are going to have to face this. They are not doing that. The banks are pulling the wool over the eyes of the Central Bank.

This committee has asked the Central Bank about repossessions and the attitude of banks. The evidence that is contained in the various loan portfolio sales proves that the banks must have obviously stockpiled the bad loans, not spent money on their legal fees, not offered the full suite of options and been willing to go to the sale and allow the vultures to deal with it. I want to follow through on this matter. I am quite annoyed by the Central Bank because I do not believe it has done half enough against the banks and it certainly is not doing enough against the vulture funds. Let us say a loan goes to a vulture fund. I cannot get in touch with a vulture fund on behalf of a client who might come to me for help; it is impossible to speak to one person and it is impossible to get them to focus on the actual loan that one is representing because they just do not care.

We are constantly told about the legal framework and whatever protection travels with the loan. As I have stated on many occasions, the Central Bank should be on the other side of this. I can name names, but they are all the same. The Central Bank cannot deal with them because they do not have an interest. Having said that, the Central Bank has all the information because it gets it from the relevant bank before it sells to a vulture fund. The Central Bank is aware of a bank's activity in the context of what it offers its customers. Where is its consumer protection hat in this regard? When does the consumer protection aspect within the Central Bank kick in? When does it tell the banks that, on the basis of the information it has, they do not seem to be doing enough for their customers? When does it start protecting customers, families and individuals?

Mr. Ed Sibley

The Chairman asked about a few different matters and I am sure Ms Rowland will want to comment on them as well. An enormous amount of work has been done to restructure loans within the banking system. More than 100,000 loans have been restructured relative to the level currently in the system, although that is decreasing a little as they refinance. There is a track record over a period of time regarding the approach we and the banks have taken to restructuring, as well as the hard decisions borrowers have made.

On the specific points the Chairman made about our engagement on sales, we engage very heavily with the banks when they consider selling. We look at it both from a potential and a consumer protection perspective, in order to understand the risk to the consumer associated with the sale, the characteristics of the loans being sold, and what more could be done with them. In many cases, the number of loans being sold has been reduced because of that interaction. We continue to work with both banks and non-banks to make sure solutions are being put in place. As I touched on earlier, we think more could be done, and needs to be done, by both the banks and non-banks to find longer-term sustainable solutions to address the underlying issues. Borrowers also need to engage. In cases where the hardship is severe and the loan is underwater, other solutions such as mortgage to rent must be considered.

Why would customers engage with the banks when they are constantly being told that there is no fear of vulture funds and that everything is okay? Commentators, some of whom are poorly informed, claim they are easier to deal with than the banks and that they offer solutions. Yet there is no evidence to suggest that vulture funds are nice and cuddly and will do deals with people. They are a vicious financial set-up with nothing in mind except profitability and they do not give a tuppenny damn about the families or individuals concerned. That is why Senator Conway-Walsh and Deputy Michael McGrath asked about proof that vultures are good for Ireland and for the consumer.

Mr. Ed Sibley

I acknowledge that I am repeating myself, but we are focused on ensuring that consumers are protected, regardless of whether they are dealing with banks or non-banks. We want to ensure solutions are in place and that they are stabilising the situation while moving towards a path to a cure. More needs to be done to solve the underlying problem, as I have said previously. We are working on that and pushing lenders to do so as well. Based on the information we have, there is no evidence that non-banks are more aggressive than banks from a repossession perspective.

There is no evidence.

Mr. Ed Sibley

There is no evidence in the aggregate in terms of pursuing repossessions. As with all such things, whenever Members send us information about particular circumstances or constituents with whom they are dealing, we look at it, engage on it and make sure we understand what is happening. We are very happy to continue to do that.

Ms Derville Rowland

To supplement what Mr. Sibley said, a core fundamental expectation of the regulatory framework, for both banks and non-banks, is that as soon as a borrower is at risk or in arrears, their loan owner would communicate with them with a view to sympathetically supporting them to put an arrangement in place that addresses the issue. That is our core expectation. We expect proactive engagement and we want customers to get the message that if they are in arrears or at risk of it, the fundamental first step in addressing this very serious problem is actual engagement. That is our message to lenders, loan owners, and families. The only hope for putting in place a sustainable alternative arrangement is through that effective dialogue. That is a core focus for us, and as Mr. Sibley said, our priority is making sure that all that can be done will be done. While significant progress has been made, this remains an important priority for us to pursue in both the banking and non-banking areas because it is very important for the families who find themselves in these positions.

Since April 2019, the Central Bank has been regulating the vulture funds.

Ms Derville Rowland

Pardon?

The Central Bank assumed responsibility for their regulation last April.

Ms Derville Rowland

That is correct. The transitional arrangements for the new Act came into place for the underlying loan owner.

How many of their offices have the witnesses visited since then?

Ms Derville Rowland

They came in under automatic transitional provisions, and they still have to face the full flotilla of deep authorisation with all requirements. Some 35 have made applications, though some have withdrawn. We have not authorised any of them because their proposals have not satisfied us yet.

Did Ms Rowland say 35?

Ms Derville Rowland

Yes. We have made sure the existing regulatory framework remains in place. As they have been added into an existing regulatory framework, customers are already dealing with credit servicing firms, which will remain in place until the new underlying loan owner is fully authorised. We have already been on site to inspect their loan portfolios and have inspected more than 70% of them, in order to be informed precisely by their activity. We use that to inform our supervisory strategy, as well as our work with them on that deep authorisation.

Is that 70% of the 35?

Ms Derville Rowland

That is 70% of the dwelling home loans.

I am asking if it is 70% of these 35-----

Ms Derville Rowland

It is 70% of the loans.

Mr. Ed Sibley

It is the loans, so-----

Are those the loans of the 35 vulture funds? Ms Rowland said that 35 vulture funds have registered with the Central Bank.

Ms Derville Rowland

Yes.

She has said that the Central Bank oversees or has some oversight of 70% of the loans owned by the 35 vulture funds.

Ms Derville Rowland

It is not distributed in that way, because some of the-----

She is only talking about those 35 entities.

Ms Derville Rowland

Yes, but some of those entities own far more loans than others. Some will have very-----

I understand that.

Mr. Ed Sibley

It is the total.

Ms Derville Rowland

It is the total.

I am even more confused now. There is an address at Victoria Buildings on Haddington Road in Dublin which over 150 vulture funds have registered as their address with the Companies Registration Office. When one turns up to these vulture fund offices, one is meant to be able to access information on the shares register. Some Members of these Houses visited this location at which these 155 vulture funds are registered.

To this day, they have not had sight of the shares register for the companies involved, even though it is meant to be available under company law. How are they operating here with secretarial services and the same directors nominated here and there, yet there is nothing but a nameplate? From a consumer or customer point of view, one will not get a meeting there. One might meet them in the canteen, the local pub or in a hotel, but the point is that they are operating in this country and there is not much transparency in terms of what is happening. I was shocked when Deputies Mattie McGrath, Michael Collins and Nolan told me what was going on there. I just do not think we have a handle on it.

Ms Derville Rowland

Mr. Sibley will respond.

Mr. Ed Sibley

I wish make matters clear in the context of the earlier question, and then Ms Rowland will come back in. There are in or around 90,000 owner-occupier loans where the lender is a retail credit firm or credit servicing firm, as at the half-year point this year. They are serviced in a number of different ways, but potentially by a smaller number than the 35 firms that were mentioned there. What Ms Rowland was describing is the work that we have done in terms of being on site where those loans are being serviced. It relates to in the region of 70% of that 90,000 where they are being serviced.

I understand that.

Mr. Ed Sibley

I just wanted to clarify that.

Mr. Gabriel Makhlouf

We have got a whole series of facts and figures and the Chairman is interested in those. I wonder whether we could submit a paper setting out answers to the many points that have been made, with some additional information.

No, I think we are happy with that.

Mr. Gabriel Makhlouf

We understand from where the Chairman is coming.

I am happy with that. I just wanted to use the opportunity here to raise it. I know we are out of time. It is 1 p.m. and we were meant to finish at 12.30 p.m. Members may each ask one further question.

I have not asked any questions yet. The question I wish to ask relates to the information that came out yesterday concerning the mortgage lending rules. By and large, I think they represent the right approach. That is not everybody's understanding but it is important that they protect the resilience of consumers and of the system generally in terms of the need for society to have a functioning banking system that does not end up costing the State billions and billions, as it did on the previous occasion. However, there is this trap where not everybody has access to funds for a deposit from what is now being called the bank of mum and dad, and people are finding it very difficult to get deposits together. That is especially the case if individuals are not in a position to live at home because they are from the country and are working in Dublin, for example. They are probably paying far more in rent per month than they would be paying in a mortgage for a similar property, but they are not able to get their 10% deposit. Has the Central Bank explored any kind of mechanism that allows people to prove that they have been paying rent every month for however many years of €2,500 per month in many parts of south Dublin, the area with which I am most familiar. The mortgage repayment might be €1,500. Such people could be given some credit against that if the banks could see they are sensible people who have an earning capacity and an ability to pay their rent on time every month and they are able to satisfy a mortgage. At the moment it is very difficult for people to build a deposit. Ten per cent of a house in south Dublin is €50,000, €60,000 or €70,000. For most people, that is an awful lot of money to try to build up while simultaneously paying rent.

From Mr. Makhlouf's experience of looking at public banking models internationally, is he of the view that we can refocus on the need for such a banking model here?

In view of the time constraints, if Mr. Makhlouf wishes to give a more detailed note on either of those questions, he should please do so.

Mr. Gabriel Makhlouf

Let me address Senator Horkan's question. As I said yesterday, we are very conscious that the rules impact on individuals and on families. The issue relating to renters is one that has been raised with me by a number of people. We did look at it, but we could not find a way that dealt with the precise issue Senator Horkan mentioned but also protected the integrity of what the rules are trying to do. There are three interrelated things here. Fundamentally, we are still dealing with a problem of housing supply. Ultimately, until we fix that problem, I am not sure that tinkering with the rules will get us anywhere.

The second point is that it is worth remembering that apart from a two or three-year period in the run-up to the financial crisis, a 10% deposit was an expectation from all banks. It is the biggest investment decision that people make. The third point I would make is that banks do take into account an individual's track record in terms of paying their rent. That is a factor that banks take into account in their decision. However, in terms of the mortgage rules themselves, we could not find a way to relax the rules and keep the integrity of the rules. That is ultimately where we ended up.

In terms of public banking models, I am not absolutely sure what Senator Conway-Walsh means when she refers to public banking.

I mean something like the German Sparkasse model.

Mr. Gabriel Makhlouf

New Zealand has a state-owned bank but it operates like a bank, so it depends on whether one is describing an institution that has a different mandate to a bank, but still provides financial services. Credit unions are an important example of that in Ireland.

Given that we are caught for time, some reports have been done by Irish Rural Link, for example, and perhaps in his new role Mr. Makhlouf could carry out an assessment of those reports and look again at public banking and send a note to the committee on it. We could have a fuller discussion on it then on another day.

We do not have time to do it now but I will flag another issue for Mr. Makhlouf, namely, credit unions and the regulation I believe is strangling them. I will send him a number of questions regarding the information he has on the minimum bid rate and how it was applied in terms of contracts in the banks. I presume that he will have numbers on that type of contract, for example, how many were issued by each bank. I will provide the detail. I do not expect him to answer the question now.

I also wish to get a written response on two other matters. I met with Jonathan Sugarman, as did Governor Lane, during his tenure at the Central Bank. There are still outstanding questions in the context of how he was dealt with. It is a bad reflection on the Central Bank that he was treated in the way he was.

The last issue concerns the EBS tied agents, which is something that will not go away. I want to explore some questions with Mr. Makhlouf on that. I will provide him with all of that information and then I might seek a meeting with him. I was pleased to meet him this morning before this meeting. We will visit the Central Bank and chat to him there. That will give the other members of the committee who have not been there the opportunity to chat with him as well. We want to see where he stores all the cash.

Mr. Gabriel Makhlouf

Sure. I would be delighted.

We might visit the mint on a separate occasion.

In response to what the Governor said, I believe that is something that needs to be kept under review. I appreciate that the resilience and integrity of the system, and of individuals, are very important but particular issues arise in trying to build on that 10% deposit. As house prices rise, that is becoming ever more unattainable.

Mr. Gabriel Makhlouf

I assure the Senator that we keep these rules under review.

That particular aspect should be kept under review.

We will adjourn proceedings for today. We can set a date for a further meeting, perhaps on 17 December, but that might not work out. We can check it. I thank the Governor and the colleagues who accompanied him for their attendance. I wish the Governor well in his role.

The joint committee adjourned at 1 p.m. sine die.