Mr. Adrian Varley:

The Senator is correct in suggesting that the focus is on avoiding or mitigating the effects of the next crisis. The key point is to recognise the risk earlier, which is similar to the IFRS 9 discussion recently on the new accounting rules, and to transparently differentiate between the activities of banks in order that they recognise the risks in advance and build up appropriate reserves. In that way, they can ensure that resources are available to deal with the initial problem, which can prevent a buildup. If we look back at what happened in Ireland, we had the economic crisis, with people not being able to pay off their loans. The sheer scale of the problem meant that banks were not dealing with it in terms of operations and good due diligence. They did not have processes in place to allow them to intervene early with the borrowers to turn the problem around. The idea of these measures is to make it punitive for the risk to build up. The aim is to change the dynamic of people holding on to problems and hoping the property market turns around or to mitigate that incentive so that banks are clear that the costs must be realised earlier and they need to deal with the problem and engage with borrowers at an early stage. The aim is to ensure lenders engage before borrowers even get into the later stages of arrears.