Professor Philip Lane:

That is the key to my job - the reason I volunteered, if one likes, to move from my position in Trinity College to join the Central Bank. I believe it is essential that the bank is proactive. Looking back over time, one view of what was going on in the mid-2000s is that, very rapidly, in 2004, 2005 and 2006 there was this incredible credit boom, not just here in Ireland but internationally. Therefore, it is not the case one can take years to decide what should be done. One has to have the toolbox to hand and be willing to use it.

As I mentioned earlier, one element is the mortgage rules. A second element which we now have, although it did not get huge publicity, is that across Europe every country now has a system of counter-cyclical capital buffers. This system is reviewed every quarter under European law, so it is not something we say we will do in December every year. Every quarter we look at this and ask whether we are concerned that a credit boom is starting to happen or whether we should insist the banks raise more capital because the risks are increasing. Around Europe most countries, including here, have it set at zero because the market for credit is not booming. Some countries outside the eurozone are also using this method. Therefore, we now have the toolbox in the sense that we have a process of review.

Deputy Michael McGrath raised the issue of the mortgage rules. The reason I am committing to a review of the mortgage rules is that we should have a system where we take a look at the rules every year in order to avoid a situation where we simply watch a major development in the financial system and do nothing. The challenge for me going forward is that, as the crisis recedes, one can imagine there might be forces towards complacency which take the view this will never happen again. For the bank to have those tools, and to have a method by which we are not just talking about financial stability but also asking what we can do about it in terms of capital buffers, mortgage rules and the supervision of individual banks means I am much more confident going forward that we will be able to proactively intervene.

The possible cost of that, and everyone has to get used to this, is that we will get the counter-argument that there is no need to intervene because there is no current evidence that the country is melting down. This goes back to the independence of the Central Bank. I anticipate there will be quite a bit of chatter about why the Central Bank is intervening now - if there is no crisis, why intervene? Of course, the issue is to pre-emptively intervene to minimise the risk of a crisis developing.