Pat Breen (Clare, Fine Gael)
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Question 160: To ask the Minister for Finance if he has assessed the implication of the Central Bank's Financial Stability Report for Government policy; and if he will make a statement on the matter. [4126/07]

Martin Ferris (Kerry North, Sinn Fein)
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Question 204: To ask the Minister for Finance his views on the fact that according to the Central Bank, in its Financial Stability Report 2006, personal indebtedness has reached record levels; and if he will make a statement on the matter. [4052/07]

Brian Cowen (Laois-Offaly, Fianna Fail)
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I propose to take Questions Nos. 160 and 204 together.

I welcome the publication by the Central Bank of its Financial Stability Report 2006 which reflects the Bank's mandate to contribute to the stability of the financial system in Ireland. I note the Report's main conclusion that Ireland's financial system continues to be in a good state of health. The Bank's central expectation, based on an assessment of the risks facing borrowers, the financial position of the banking sector as well as the results of recent stress testing of the system, is that the current shock-absorption capacity of the banking system leaves it well placed to withstand possible pressures.

The Bank's Report identifies vulnerabilities facing the financial system, including those arising from credit growth and house price inflation. As the Deputy will be aware, within the implementation of the overall legislative framework, private sector credit growth and debt levels are, in the first instance, a matter for the Central Bank and Financial Services Authority of Ireland. While the strong increase in borrowing is a sign of a healthy economy and a positive economic outlook on the part of borrowers, I fully support the vigilance of the Central Bank and the Financial Regulator on the issue of personal credit and mortgage debt and in reminding both borrowers and lenders of the need for responsible behaviour. Recent indicators point to continued moderation in house price inflation in line with increased housing supply and higher ECB interest rates. The consensus among commentators is for this trend to continue, resulting in a gradual cooling and soft landing for property prices in Ireland. The Central Bank's report shares the view that this is the most likely outcome.

The Government, for its part, will continue to contribute to economic and financial stability by pursuing a prudent fiscal policy. In terms of the general economic implications of the rise in house prices and the associated increase in indebtedness in recent years highlighted in the Report, both borrowers and lenders need to be aware that interest rates are currently still low by historic standards. The Central Bank has highlighted the need for borrowers and lenders to factor into their financial decision-making the prospective impact of potential changes in the future economic and financial environment, including the impact of higher interest rates.

Moreover, the Report makes the point that a shock to the economy which affected employment and earnings growth could affect the ability of borrowers to service their debt. As Ireland is a small and very open economy, and hence vulnerable to changes in the global environment, this highlights the need to retain and indeed improve our international cost competitiveness. It also illustrates the need for responsible budgetary policy in order to provide room for manoeuvre in the event of any sharp slowdown in economic growth.

As far as safeguarding the interests of the individual borrower is concerned, the role of Government is to provide an appropriate legislative framework for the regulation of the financial sector — one that is both comprehensive and robust. With the establishment of the Financial Regulator and the Financial Services Ombudsman, such a framework is now in place. Under the Financial Regulator's Consumer Protection Codes, mortgage lending institutions are obliged to act in their customers' best interests. The Financial Regulator has launched a number of specific initiatives to inform consumers in making the best choice of mortgage product for their needs. There are also specific legal obligations under the Consumer Credit Act regarding the information that must be provided to borrowers about their housing loans. The Financial Regulator earlier in the year introduced a technical prudential measure requiring financial institutions to put more capital aside for certain categories of loans. This reinforces the message consistently conveyed to lending institutions by the Financial Regulator that mortgage lending policies and practices should be prudent and responsible. My overall view is that the Report, with its main conclusion and its assessment of risks, makes a valuable contribution to the assessment and maintenance of financial stability in our economy.