Dr. Gabriel Fagan:

The Deputy's second question is more straightforward. The countercyclical capital buffer is part of the new macro prudential framework which now exists in Europe and the essential idea is to act against the credit cycle. When credit is booming banks are required to have higher capital ratios and when credit is weak it is possible to lower these ratios. The Central Bank, as the macro prudential authority, is responsible for setting these countercyclical capital buffers for Ireland. On the basis of all of the analysis we have up to now, we have set these capital buffers at zero. We are stating that on the basis of our evidence there is no sign of credit overheating in the Irish economy, which would warrant a requirement for banks to hold much more capital against it.

I do not know whether that explains the question. Of course, all over Europe countries are required to set counter-cyclical capital buffers. Most have set it at zero. I think, prior to Brexit, the UK set its counter-cyclical capital buffer at 0.5, but it has since reduced it to zero. Therefore, this is part of the new European macro-prudential framework which it is hoped aims at least to mitigate the problems that were seen with credit cycles in the past.

On the stress test, it is important to say that there was no pass or fail, in contrast to previous stress tests. The relative performance of the Irish banks in the stress test reflected two or three facts. One was that the shocks implemented in Ireland were higher than elsewhere. That reflects the methodology of calibrating the shocks, which is based on historical performance. Ireland is a volatile economy so one would have larger shocks in Ireland than in other countries.

The second element is that, despite the enormous improvements that have been made in terms of restoring bank profitability and reducing the level of non-performing loans, NPLs, the level of non-performing loans in Irish banks is still high relative to those in other countries. In a stress test that would have the implication that Irish banks would be more severely affected. The last consideration is that technically it is a static balance sheet exercise, based on the balance sheet at the end of December 2015.

Were the banks surprised? Not necessarily because we are all aware of the issues of the very high level of NPLs. In the context of the IMF's financial sector assessment programme, FSAP, we had also carried out a number of stress test exercises which were published. In that sense, we were not surprised or shocked by the results. However, the important point to understand about the stress test is that, as I said, there is no pass or fail. There is no automatic response. The stress test provides information to supervisors who will use that along with a whole pile of other information they use, in the context of what is called the supervisory review and evaluation process, SREP. Basically, it is dealing on a bank-by-bank basis, looking at what actions banks need to take in terms of securing their capital position, capital guidance and so forth. That is the status of the stress test.