Professor Philip Lane:

I do not have any direct knowledge of that relationship beyond reading the Honohan and Regling-Watson reports and so on. The issue here is that the role of the Central Bank is quite distinct from the individual banks in the sense that the Central Bank is there to be at arm's length so that it is not bound up with the banks and it has a good deal of knowledge.

It is not bound up with the banks. It has a lot of knowledge. The individual banks might be concerned with market share. They only see an incomplete picture of what is going on, whereas the regulator's office, in principle, should see everything because it has the books of all the banks. It can look at the aggregate data. It can take a systemic view. The regulator and the Central Bank really have the core responsibility here. Individual banks might decide to take certain risks. It is up to the regulator to say "Listen, you cannot all do this - if you all make the same lending decisions, if you all lend into property, if you all lend to the same guys, clearly there is going to be a collective problem". The solution to that is a regulator who is prepared to prioritise stability and to say "Listen, you may want to lend at that rate, but it is collectively too risky - we need to intervene".