Professor Patrick Honohan:

I thank the committee for inviting me back to bring it up to date. It laid out a number of issues. There have been quite a few significant developments since I last addressed members, too many to summarise fully in a short introductory statement. As such, I will concentrate on a select few.

The reduction of two further steps in the European Central Bank's main policy interest rate has had a complicating influence on financing conditions in Ireland. On balance, the positives for Ireland clearly outweigh the negatives, not least to the extent that the ECB expansionary policy will help boost economic demand in the euro area as a whole in the course of bringing inflation back to the bank's target. Irish borrowers on tracker mortgages have seen these further interest rate reductions fully passed on to them, continuing and reinforcing an exceptionally lengthy period of ultra-low interest rates that has helped these borrowers. However, because of the impact on tracker mortgages, the lower ECB rates have not directly improved the banks' profitability, because the average and marginal cost of bank funds has not fallen as much. The banks' drive to restore their profitability combined with a lack of sufficient new competition has meant that, far from lowering their standard variable rates in the past three years as ECB rates have fallen, they have, as is well known, increased their standard variable rates somewhat.

I have distributed to the committee members figures and data which show a simple bank-by-bank average of the advertised standard variable rates for an 80% loan-to-value mortgage. I am distributing these numbers because this trend is not evident from the traditional interest rate series as published by the Central Bank in line with international standards. We have been working on the assembly of additional statistical series on mortgage interest rates on a rigorous basis. They are relevant to the question of how much it costs someone on a standard variable rate. We expect to publish these data from January 2015. The data indicate that the standard variable rates borrowers are paying are still less than they were before the crisis but not by all that much. A widening of mortgage interest rate spreads over policy rates also occurred in the United Kingdom and in many euro area countries after the crisis but spreads have begun to narrow in the UK and elsewhere. Until recently, bank competition has been too weak in Ireland to result in any substantial inroads on rates.

What is the role of the Central Bank in the area of mortgage interest rates? From a prudential point of view, we could have a role in seeking to ensure that banks set rates on new business sufficiently high to cover the risks of future default. While the current spreads would not have been sufficient to compensate the banks for the risks they actually took during the boom - much of this risk is still embedded in the existing stock of mortgages - it would be hard to argue that mortgage underwriting today is so bad as to require such a high margin on new business. However, that is not the way standard variable rates work. They work out more or less the same for new and existing arrangements. Constrained by their inability to restore spreads on tracker mortgages - they are negative in many cases - the banks have sought all means to restore their profitability, including the widening of standard variable rate spreads. As I have said, these typically apply to old as well as new business.

As in all advanced economies, in Ireland it has long been understood that tight administrative control over the rates charged by banks would be counter-productive in ensuring a sufficient flow of property price credit on a lasting basis. For one thing, such control would strongly discourage new entrants. Therefore, while interest rate spreads are now high I need not remind the committee that since national credit policy is crafted with the welfare of the people as a whole as the constant and predominant aim, I see no sufficient basis for altering this view. Of course, the Central Bank does not have the power to set those rates, but that is a policy view.

There has been much discussion of the Central Bank's consultation paper on macro prudential instruments and the limits proposed on high loan-to-value and loan-to-income mortgages. The consultation period ends on 8 December and we hope to be able to announce a finalised set of regulations soon after that date, depending on the complexity of the responses received. It may be asked whether the Central Bank believes that recent property market developments represent a bubble. That is not specifically the driver of these proposals. Instead, through these measures we want to have in place a standing regime which ensures that a credit-driven bubble does not take hold and that a new generation does not become over-indebted. We should consider what would happen in the absence of such a regime. There have been sharp price rises in Dublin. According to the figures published today by the Central Statistics Office, they jumped by 42% in only 18 months. This is a thin market and the rises have not yet elicited a sufficient supply response. It could sow the seeds of trouble for the future. Our approach seeks to draw on ongoing research being carried out at the Central Bank along with international experience and any matters which may emerge in the consultation. We are keen to shorten the period of uncertainty as much as possible. Accordingly, after making any appropriate refinements, for example, I already mentioned in public in respect of first-time buyers the potential future use of private mortgage insurance - this was floated in the consultation paper - we will move quickly to confirm the parameters of the new standing regime.

Almost all of the discussions in which I have participated at this committee in recent years have, naturally, focused on the banks and, in particular, mortgage arrears related to the banks. This is only one element of the Central Bank's mandate. I remind the committee that almost nine out of ten staff of the Central Bank are actually engaged in numerous tasks other than the prudential supervision of banks. The staff deal with other aspects of banking oversight, such as the consumer protection and conduct of business aspects of bank regulation. However, micro prudential banking supervisory decision-making is now largely passed to the control of the European Union Single Supervisory Mechanism, SSM, which came into operation on 4 November. The SSM does not, however, mean less work for those of us in Dublin, rather it means more work inasmuch as the procedures of the SSM require further expansion of our bank supervisory staff as well as a reorganisation of that function.

After three years during which staffing levels of the Central Bank have not risen, the bank now needs to increase staff numbers again not only because of the SSM, but also because of the additional complexity of new international regulations covering non-bank financial services. These are at the heart of the IFSC, an area to which we devote many resources to supervising, albeit this is invisible to the public. There are new rules on bank resolution as well and other new mandates which we have been given.

By the way, much of the cost is recovered from the regulated industry. The industry pays many of the costs and indeed all regulatory costs could be so recovered, instead of eating into the Central Bank's surplus income, which is to be transferred to the Exchequer. The Central Bank has suggested this to successive Governments. I believe it would be a good idea if the industry paid all of the regulatory costs.

Having already absorbed a sizeable increase in staffing during the period 2010-11 when we worked to upscale our operations in response to the crisis, we are currently engaged in an extensive review of our internal organisation to ensure the conditions for steady improvement in the effectiveness of our work. This work relates to essential matters which, especially when they are proceeding well, are not obviously visible to the public. The review is examining a range of issues including internal structures, career paths and internal processes. I expect significant beneficial changes to both organisational structures and practices within the Central Bank as a result of the review. Our effectiveness will be enhanced by our carefully designed and efficient headquarters building at North Wall Quay, the main building contract for which is now out to tender. This will result in bringing together all our non-currency staff, that is to say, all bar the Sandyford staff, into a single location. There are strong financial and practical benefits to the move.

I will not add anything to the lengthy letter on mortgage arrears which I sent to the committee in September providing commentary and responses to the committee's recent report on the mortgage arrears situation. The situation has continued to evolve in line with the indications in that letter. The committee's invitation indicated a wide range of potential topics for discussion today. A wide range of issues come under our remit and I am happy to take any questions and to try to answer them.