Central Bank: Macro-Financial Review

The staff of Financial Stability Division of the Central Bank has put together a review of the macro-financial risks facing Ireland – it is available here.

The Macro-Financial Review provides a systematic overview of macro-financial conditions in Ireland and forms part of the Bank’s internal discussions about financial stability.

It is clear that, despite the exceptional scale of policy interventions domestically and significant progress in the stabilisation and restructuring of the financial system, its transition to a fully normal mode of functioning is not yet complete.   In addition, there are risks which remain.   This Review assembles some of the material which is kept under surveillance by the Financial Stability Division of the Central Bank.   Naturally, the downside risks are focussed upon, but it is worth recalling that better-than-expected outcomes are also possible.

Policymakers are, of course, aware of these risks and, in addition to the extensive measures already taken, will continue to address and respond to the challenges posed by them on an on-going basis.  The Review does not attempt to discuss or evaluate the overall policy measures that are in effect and currently under review to mitigate known risks.

While the document has been reviewed by the Bank’s Financial Stability Committee, the views expressed are those of the staff of the Financial Stability Division, which is responsible for its preparation.

It is made available to the public to heighten awareness of the current condition of the financial sector.   It is hoped that by publishing it, the Central Bank will help decision-makers in the financial sector correctly evaluate risks and ensure that the risk management tools are appropriate and adequate.

42 replies on “Central Bank: Macro-Financial Review”

Irish Times Sinn_opsis

In a new report, the Central Bank identified risks around continued economic weakness, over-indebted private and public sectors and warned that mortgage stress, poor profit outlooks and funding pressures could see the fresh capital put into the country’s banks erode quicker than expected.

“It is clear that, despite the exceptional scale of policy interventions domestically and significant progress in the stabilisation and restructuring of the financial system, its transition to a fully normal mode of functioning is not yet complete,” the report said.

Benchmark bond yields have more than halved to 6.9 per cent during the most recent period of progress since the cost of official funding was cut last summer but the Central Bank said the market’s views of Irish debt remained at a level incompatible with access to long-term funding.


No Comment!

Plenty of data here, unfortunately, cutting across official spin that everything is greening up in household gardens. The picture painted of household and non-financial sector liabilities and capacity to service them with the knock-on for bank balance sheets should surely now prompt a rethink on debt write-down in some form.

From p. 10 “The combination of low investment and high debt limits output growth, employment and debt servicing capacity. For small and medium enterprises (SMEs), this link to employment is critical, as Irish-owned, non-exporting SMEs employ over half of the private- sector manufacturing and non-financial, non- construction services workforce.11 NFC deleveraging therefore affects households through employment and disposable income.
Furthermore, if heavily-indebted households cut spending to repay debt, weak domestic demand for NFC output can result in a self-reinforcing cycle, further raising unemployment and ultimately increasing the credit risk from both sectors”

Interesting and discomforting to look at the charts where Ireland stacks up in the vicinity of Greece, Portugal, Italy and Spain. Hmm…

The language in this report bears all the hallmarks of something to be used in the future as an “I told you so/you were warned” instrument.

I am intrigued.

@PR Guy

Indeed. I wonder if the argument is being made that we can’t support the current situation and we need to do a Greece. The hope being that it will give us leverage with regards the PNs?

@Do’D, Alchemist, PR Guy,

It looks like there’s a bit of dissension in the Official Ireland camp. DO’D’s IT link attributes the report to Reuters so many other eyes are looking at this. The data-rich and warning-rich text was completed on 14 Mar, so the Board had ample time to peruse this ‘sensitive’ document. Also remember that the Board contains John FitzGerald and Alan Ahearne who might be constrained, but aren’t totally enchained to the official optical illusion. And there is no doubt that there are numerous middle-ranking officials and analysts – who do almost all of the heavy-lifting – who have a very good idea of the real state of things and the likely prospects, but who can’t shout it from the rooftops. They have to write in code, but rely on the Board to provide them with the cover when there is a need to sound the alarm.

It’s damnable that we have to rely on this loyal, but enchained, ‘opposition’ within the government-machine to try and force the ‘illusion-spinners’ to confront reality. It is oh so easy for the big swinging dicks to over-ride them – as happened so frequently during the bubble era.

We really do need another centre of power in the Oireachtas to contest and restrain this illusion-spinning.

Let’s hope these coded and not-so-coded messages will be heeded, but, more importantly, let’s push for a functioning parliament to keep the machine honest.

@PR Guy
Looks like a wake up call more than a future weapon.
It’s depressing.

Don’t get it…. they state Credit is needed for growth yet accept deleveraging……..
I am for deleveraging as well – but not by reducing the medium of exchange velocity to absurd levels.
We need much more good & service substitution in Ireland.

The Import figures are screaming this fact.
Maybe another year of this might be worth it if we import the correct capital goods but if not whats the point ?

PS the Bulgaria business credit thingies were interesting – the dramatic 2010 collapse of oil consumption in that country illustrates how tightly oil & credit truly are.

Not very encouraging, is it. Depressing in fact. I do hope we are not being softened up for another bout of bank ‘recapitalization’.
Not another red cent this time as far as I would be concerned, even if they have to burn every bondholder, depositor and official lender from here to Frankfurt and back.

One wonders if the ‘policy makers’ are looking at all this the wrong way round.
Perhaps the financial sector will achieve stability only when the rest of the economy achieves stability and not before. Therefore all efforts and resources should have been directed at the real economy and not at the banks.
The mantra that ‘we need a vibrant banking sector’ was a fantastic line in propaganda and it works. It was good for a €65 billion bank heist so far.
PS Did anybody see a ‘vibrant banking sector’ yet?

Yes, this does come across as a Central Bank CYA warning piece. It is however only stating what the dogs in the street already know. Puts Seamus Coffey’s optimism on the other related thread into perspective though. There are huge, as yet unresolved, further provisions and writedowns required by the banks, and the problems (capital gaps) are getting worse, not better. The need for further massive capitalisation of the banks is undeniable. The banks’ provisioning levels are totally inadequate. Plus the amounts are simply too big for Sovereign Ireland….but how do you stop the falling dagger? Again puts a big question mark over current Govt strategy.

While no one knows exactly when the tipping point will occur, that point feels too close for comfort.

@ Joseph Ryan

“Perhaps the financial sector will achieve stability only when the rest of the economy achieves stability and not before. Therefore all efforts and resources should have been directed at the real economy and not at the banks.”

Very good post. That is exactly the point. There is a horse and there is a cart. Only ver system demands that the horse does the pushing.

Mirabile Dictu, we have a financial stability division- no doubt massively overstaffed with ex bankers and refugees from other bureaucracies. Where we these guys 5 Years ago. Can the mods provide links to the 2007 report.

Bit of a nightmare document…

Banks are in terrible shape, “As previously mentioned, new liquidity requirements under Basel III and the FMP will have significant implications for their future funding strategy.” Huge risks to uncertainty re commercial/residential property exposure still remain. Surprised they havn’t carried out more in depth surveys they hope to carry out:

“Conduct a survey of households to determine
the characteristics of a sample of households
including those in or potentially at risk of
distress. Further analyse the impact of
aggregate household saving and investment

Interbank connectedness between our banking system and other banking systems is also earmarked for investigation. I would have liked to have more data on that.

We’re running on empty at the moment !

A useful document, by any standards.

@ Paul Hunt

‘It’s damnable that we have to rely on this loyal, but enchained, ‘opposition’ within the government-machine to try and force the ‘illusion-spinners’ to confront reality….let’s push for a functioning parliament to keep the machine honest’
+ 1
That’s the process that needs to be encouraged. We would be snookered if we had no Deep Throats. The citizens may not hear what they would like to hear, but they will thank people for it afterwards, maybe quite a bit afterwards 🙂

@ Tull
We didn’t need a financial stability division in 2007, because we didn’t need a regulator, because we were led to believe that the banks and the professionals could be trusted…

I agree that the CB is good place to be when the waves of default come rolling in…that’s the last place the lights will go out….someone has to be there to send the SOS…

Can people not do some BASIC factual research? There are reports there from 04-07
And interesting “don’t do this it will end in tears” reading they are.But I suppose it’s easier to assume that it’s all a conspiracy of dunces than to lift your finger s and type centralbank.ie into the address bar and there notice the second tab called financial stability.

@paul w
Current govt policy is shorthand dictation. Economic autism from an mor roinn . It looks like risk off is back too. You would feel sorry for whoever put nama together. There was still a belief in good faith in 2009. And cop on. August is going to be worse this year.


You may be unaware of the pedigree of the previous incumbents of the CB/FR – but this gives a great flavour:



The directors discussed whether a public statement from the State’s top banking authorities about “the robustness of the Irish banks” would allay fears. The board felt this was a good idea, and agreed that the bank should ask to meet the governor of the Central Bank of Ireland, John Hurley, and the head of the Irish Financial Services Regulatory Authority, Patrick Neary.


After the St Patrick’s Day Massacre, Drury thought it might be worthwhile for FitzPatrick to talk to Cowen. Drury rang Cowen to ask whether he would take a call from the Anglo chairman. Cowen called John Hurley, the governor of the Central Bank, to see whether Hurley had any objections. Hurley didn’t, so FitzPatrick phoned Cowen on his mobile. He told him about the collapse of the bank’s shares and said he believed it was connected to the shareholding Quinn had built up.


Drumm told the board about a meeting he had had with John Hurley and Pat Neary that day. (The bank was in contact with the Central Bank and Financial Regulator by phone every day, sometimes several times, after the share-price collapse.) They had discussed the board’s concerns about short selling in the bank’s stock, he said. The board agreed to ask the investment bank Morgan Stanley to see whether there was enough appetite in the market to find a long-term investor to take Seán Quinn out of the picture.

Anglo was concerned that every share a broker-dealer held to back Quinn’s contracts for difference could be lent to short sellers looking for a quick profit. Quinn’s 215 million CFDs made the bank highly vulnerable. At one point in 2008, at Anglo’s urging, Quinn asked his CFD broker-dealers not to lend out the underlying shares on his CFDs. His requests were ignored: his brokers could do as they liked with the stock; they were in business to make money, not to protect Quinn’s position.

On Thursday, March 20th, Anglo’s board met again by conference call at 2pm. The directors agreed that they needed to push the Financial Regulator to protect the bank from what they believed were speculators making big money betting against it. Later that afternoon Drumm called Hurley and pleaded with him to release a statement on the health of the banking system, to avoid a run on Anglo’s deposits. Hurley told Drumm that the Central Bank was considering all options.

The following day was Good Friday, the start of the four-day Easter-holiday weekend. Drumm told Hurley that if the Financial Regulator didn’t do something at once then there could be a major run on deposits when the bank reopened the following Tuesday. Unusually, Hurley agreed to run past Drumm a draft statement the Central Bank was going to issue. Happy with it, the Anglo chief executive asked the Central Bank governor to release the statement as quickly as possible.


Then Hurley issued his own statement, in which he “strongly” supported the Financial Regulator’s actions in relation to “investigations into trading in financial shares over recent days”. He also said, “The Irish banking sector remains robust and has no material exposures to the sub-prime market.”

The interaction between Drumm and Hurley shows how close the relationship was between the bank and the State. Drumm had pleaded with the governor for a statement to protect the bank’s share price; he’d got two.

The strong statements from Dame Street hit the mark: Anglo’s share price jumped 14 per cent, to €7.85, on the Thursday. Short sellers in the bank rushed to buy long in the stock, in a move known as short covering, to protect themselves. All told, Anglo lost €1 billion in deposits over the week of the St Patrick’s Day Massacre, but the two statements stopped a further haemorrhage of funding from the bank – for the time being.

On Good Friday, March 21st, with the stock markets closed, FitzPatrick and Drumm went to the Central Bank to meet Hurley, Neary and Con Horan, the prudential director at the Financial Regulator, to discuss the flow of deposits out of Anglo. Hurley was particularly concerned about what the bank was going to do the following Tuesday, when it reopened its doors. Drumm assured him that senior staff would be in the branches at 6am, to watch for any sign of a line forming and to bring people inside if necessary to prevent images of queuing depositors appearing in the media.

The reporting of the St Patrick’s Day Massacre and the bank’s difficulties over the previous months was a source of much frustration to the bank. Drumm believed that media reports were encouraging depositors to withdraw their money; he even suggested to Hurley that he should call the editors of the national newspapers to explain the gravity of the situation facing the banks and the country at large, though Hurley never did so.


Neary’s staff also looked into the activities of Seamus Murphy and Ronan Hurley, traders at Davy whom Anglo had targeted the previous autumn for advising clients to sell its stock. The Financial Regulator asked for e-mails and other communications from Murphy and Hurley. Davy handed over everything. It had nothing to hide. The firm gave the investigators details of the investors who had bought and sold the stock and showed that no brokers were doing their own dealing. The evidence proved that there was no conspiracy against Anglo.

There was a sense among stockbrokers that Anglo and the Financial Regulator were too close. A letter that Drumm told Anglo’s lawyers Matheson Ormsby Prentice to send Merrion, threatening it with legal action over Costello’s comments to Mulryan, and demanding a retraction, was copied to the Financial Regulator. Neary insisted that his investigation was separate from Anglo’s representations, but Conroy was unconvinced.



“You would feel sorry for whoever put nama together. ”

I see bloomberg reporting a story today that Morgan Stanley bought up English NAMA loan assets at a discount of 70%.
I thought that the English stuff was the good part…

If in a parallel universe 2 brians were called by a seanie on a saturday night and they could see into the future and were fadbhraithnitheach ar nos m asal beag dubh and they knew it would turn all beggar my neighbour would they have chosen differently or would it have been deja banjaxed regardless? The night before poor larry was stretched is a song about a 19th century execution in dublin. Martin hayes has a beautiful version. Larry kicked defiantly for some moments before he succumbed. 4 years is just a different scale.

It is awful. The tribunal stuff is sickening but it is peanuts compared to the scale of the venality and the ineptitude exposed by the financial meltdown. And there is nobody looking out for the ordinary person. It really looks like it is time to dump the old republic and start again. Multiple
organ failure.

The quality of the reports is hardly the issue when people assume, lazily, that there was none . Basic simple fact checking.

Does the absence of reports in the teeth of the crisis not surprise. Or were the lads busy bolting the stable door.

“I see bloomberg reporting a story today that Morgan Stanley bought up English NAMA loan assets at a discount of 70%.
I thought that the English stuff was the good part…”

I hope its not true. I don’t think I will read it.
Namawinelake does indices of UK property. From memory they are up on 2009. But NAMA lets stuff go at a 70% discount??

No fire sales, eh!
Ireland and every asset she has is being fire-sold to pay down debt to ECB and others.

Check out the 2007 link provided above. The analysis therein does not bear the light of hindsight particularly well. Professional delusion in a few cases. No boat rocking. who was to know the credit sea would vanish? How robust were domestic property prices in the end anyway? I wonder what became of the models.

@ Bundesboy

OK mate. You are entitled to relief on the narrow procedural grounds. We didn’t bother to check. On the substantive matter, however, things are not looking good for you. The 2007 report includes this gem:

‘However, the central expectation, based on an assessment of the risks facing both the household and non-financial corporate sectors, the health of the banking sector and the results of recent in-house stress testing is that, notwithstanding the international financial market turbulence, the Irish banking system continues to be well placed to withstand adverse economic and sectoral developments in the short to medium term’

These folk are supposed to know about finance, which has always been plagued by boom and bust. Had they never heard of the South Sea Bubble, or were they just following the crowd ? I have to say the current CBI products are more credible, as well as depressing.

Interesting figures from Eurostat
Rail passenger numbers – millions passenger KM
Spain – Years 2004 to Years 2010

20238 21047 21519 21236 23336 22742 22044
notice the peak in 2008 despite continued massive investment in railway length and speed including the Madrid Barcelona high speed link in Feb 2008.

Length of railways km – Years 2004 to 2010
12837 12839 13008 13368 13353 13354 13853

Now lets look at a country with much less investment in railways but operating with a sovergin currency – The UK
Rail passenger numbers – millions passenger KM
Years 2004 to 2010.

43474 44642 47297 50474 53002 52765 55831

a slight decline during the Y2009 shock to 52765m but a continual upward trend and indeed a huge increase from Y2004.
Yet there are no high speed lines in the UK………. and line length (km) has decreased from Y2004
16458 15810 15795 15814b 15814 15754 15884

So you are getting effective good / service substitution in the UK because the money supply has not declined as dramatically.

The Euro is not working ……… sensible Spanish capital investments in a +$100 oil world would be running to capacity if they were inside a national currency.

Methinks you doth protest too much. So there was a report in 2007. Was it any good?
There is an old gah joke

Bainisteoir to corner forward: Patsy- we’re taking you off
Patsy: but boss we only have 13 togged
Bainisteoir: come off anyway

Ireland qualify for Twenty20 World Cup this Sept in Sri Lanka; Job done

Defeated Namibia by 9 wickets –

Qualifier Final at 2.00pm this aftnoon on Setanta for BarmyArmy fans …..



This ICB report should probably be supplemented by this latest offering in the Indo from Alan Ahearne:

Though I’m sure this contribution was written entirely in a personal capacity, it is interesting that the brief bio-note tacked on at the end doesn’t mention his membership of the CB Board.

He comes up with an interesting menu that includes (1) requiring lower-indebted households to bear more of the burden than higher-indebted ones, (2) improvements in competitiveness via increased productivity and reductions in non-labour costs, (3) the possibility of an EU-wide FTT to leverage fiscal transfers and (4) the use of ‘unconventional monetary policy tools’ by the ESCB.

(3) and (4) are matters for the Government and Governor Honohan, respectively, to exercise whatever influence they have in the relevant corridors of power. (1) will prove very difficult because it will require shifting the burden of adjustment from those who were imprudent, poorly advised and misfortunate to those who were prudent and fortunate. Politically this will be possible only at the margins. The pressure will have to come from bank supervision and regulation.

But on (4) I never thought I would see the day when a leading Irish economist would home in on increases in productivity and the reduction of non-labour costs. The devil, of course, is in the detail. And, being a macroeconomist, like most of our economists with a public profile, he’ll be able to claim, quite rightly, that it’s not in his bailwick and be able to wash his hands of any further involvement in this area.

All very convenient and comforting for the gougers and rent-seekers with their snouts in the trough.

@ Paul

I would read this as an SOS.

Alan knows that the FDI dominated export sector isn’t going to make significant increased employment contribution, even if exports contine to grow, but I assume that’s the mantra that gets you a seat on the Board. We are a developed economy and all that.

Not a word about the credit constraints that the domestic SME sector faces, or the relationship between non-labour costs and the way we ‘regulate’ our public and private stakeholders. As you say, that’s all categorised as micro stuff.

He may have seen enough figures to convince him that mortgage defaults are going to sink the banks for the second time. The recent ‘financial (in)stability’ paper from the CBI chimes, so the bells are ringing in Dame St. As our state is skint, the only hope is that there will be enough funny money from Mario to float us all off the rocks.

Its hard to escape the conclusion that there was this huge force of deflation withen the core of Europe since the early / mid 1980s – this exported a inflation outwards to the Spains & Irelands of this world but also eventually to Brazil & China.
For every action theres a equal & opposite reaction and all that.
This movement of inflation outward has hit a sort of boundary wall now and is rebounding in on itself.

We are swimming in dangerous waters now.


The mortgage arrears forecast for ‘buy to let’ for 2012 in the paper with a 95% conf interval has an upper limit of 26%. I presume buy to let is a misnomer. Were many of the properties ever let?


It gives me no great pleasure today to say ‘I told you so’ – but I did.

Many, many times over the past year I have repeatedly made a couple of points which are now being noted as potentially worrisome by the CBI.Wow.

Exactly a year ago when the PCAR document was launched I was one of very very few who questioned the house price PTT assumptions particularly and many other assumptions within the PCAR – which from day 1 looked ‘wrong’ and importantly the colossal stupidity which is the Basel III capital rules which the FR has insisted the covered banks implement in the middle of a depression. Jesus wept.

He, along with Geithner, is begining to realise that proper Regulation is nothing at all to do with ‘Capital, capital and more capital’ as Geithner has been quoted as saying.

We now know that the CB is shitting itself (after spending €30m on advice last March) because the debt situation within households is significantly worse than imagined and their own Alan Aherne now calling for ‘radical’ solutions. Why he couldn’t have dreamed up some when he had the opportunity is beyond me.

I suggested on this site shortly after the PCAR document was published, what we required was in fact some of the following:

1. RoI declares itself a Basel III free zone for at least the next 5 years.
2. Realise that the single biggest issue in restoration of the economy is writing down mortgage debt, beyond all others.
3. The actual problem is a property PRICING problem – as indicated here many times by John Corcoran and others.
4. Fix the real problem which is a massive MIS PRICING of property assets by way of marking property to a long run net yield metric valuation model. And in tandem ALL mortgages in the country priced to this proper valuation model.
5. Utilise the excess capital in the banks to fix this problem – any shortfall to be provided by the ECB – which will alleviate the need for any more assistance programs as the economy will exhibit growth thereafter – in spades.
6. Tier 1 capital ratios after taking these losses between 2% to 4% for the next 5 years.
7. Fixes are not, nor will ever be ‘fair’ – get over it.
8. PNotes are NOT paid i.e. NIL. ECB takes a loss – sorry.
9. Remaining bank bondholders take a hike.
10. Imposing a property tax makes sense but AFTER the above programme is completed and values with some sort of basis have been established.
11. Reduce DIRT to Nil and provide an incentive for deposits to return.
12. Continue to reduce at a significant pace the day to day influence of the Govt and its various arms on the economy insofar as is possible.
13. Allow a Financial Regulator staff member attend all Board Meetings and Division Meetings of all banks and financial instiutions Regulated in the country. After the fact Regulation is a relic that fails to work – try some real time.

When completed watch the economy ‘take off’ as per Mr. Noonan.

Now the above represent a taste of some short term radical solutions – Alan Ahernes ‘radical’ solutions I believe fall well short of what’s actually required.

An asset/property has two values, the price you can get for it,or the net present value of it’s future cash flows. If somebody auctioneed a 5 euro note on Grafton Street and an unwise person bidded it up to 20 euro, then a surveyor would value all 5 euro notes as 20 euro notes. Now we know the net present value of a 5 euro note is 5 euro. Likewise if an unwise person paid 2 million euro for a house whose net present value was 0.5 million euro ,then a surveyor would value all other similar houses in that housing estate at 2 million euro.

The commercial property market was similar. If an unwise tenant on Grafton Street paid a world record rent for a shop, then all the other shops on the street would be obliged to pay this rent, and surveyors would value all shops on Grafton Street accordingly.

Almost all of the Irish banks reckless lending was done using surveyors/auctioneers valuations. These valuations were as good as money. This is the valuation error that created the property bubble and bankrupted the country.
John Corcoran
M.Sc. Economics London School of Economics and Political Science

Professor Neil Crosby’s online response to this Irish Independent letter “Bubble values” 29th February 2012

“The analysis may be simplistic but unfortunately it is not flawed. Banks ask valuers to tell them what the market value/exchange price is at a point in time and then lend vast amounts over time based on that simple number. The surveyor gives them that simple number and do not think it is their job to tell the banks that the question they have been asked is stupid on its own and what they should have asked for is the underlying value. It was obvious in 2005 and 2006 that prices in the property market were higher than could be sustained by any rational cash flow analysis. But in a culture that rewards individuals for short term performance rather than longer term perspective, it was in neither the bankers’ nor the valuers’ interests to stop it. I cannot see anything in what the UK regulatory authorities have proposed that makes me think they understand the role of property valuation in driving asset bubbles and will prevent it all happening again sometime in the 2020s.”

Neil Crosby
Professor of Real Estate and Planning
University of Reading

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