A Macro-Prudential Policy Framework for Ireland

The Central Bank has published its framework here.

See also the new Economic Letters:

Macro-prudential tools and credit risk of property lending at Irish banks’ (Economic Letter Vol. 2014 no. 10) by Niamh Hallissey, Robert Kelly and Terry O’Malley


Housing market developments and household consumption,” by Daragh Clancy, Mary Cussen and Reamonn Lydon

35 replies on “A Macro-Prudential Policy Framework for Ireland”

The assets of Irish-headquartered banks are still falling and are down by €40bn in the first eight months of 2014, while net mortgage lending has fallen by €1.8bn over the same period. Consequently, excessive credit growth may not be an issue in Ireland for some time and the current rise in property prices in Dublin is not being driven by credit, so macro-prudential tools would have little impact if the pace of price appreciation in the capital was seen
as a policy issue.
There is also some inherent tension between macro–prudential issues and monetary policy in the euro area at present, as the ECB is desperate to boost bank lending at any cost it would seem, with the likelihood that interest rates will stay very low for a long time
Finally, a tension may also arise between prudential controls (on LTV’s and LTI’s for example) and Government (and society’s) desire for broader home ownership- is Ireland prepared to move to a housing market which sees far greater numbers renting, and home ownership occurring later in life. I am not suggesting that prudent LTV’s are a bad thing, just that lower LTV’s and lower LTI’s can have significant implications for the housing market as it exists in Ireland.

I suppose if interest rates are going to stay low for a very long time there isn’t much macro pru can do to prevent the emergence of stupid behavior. There are big misinvestment risks .

Gavin Davies had an interesting piece about macro pru a few months ago

” It is now accepted that the behaviour of financial institutions matters more than was understood before. The supply of credit also matters, independently of the cost of credit. The flow of savings in the economy can be seriously misallocated to wasteful investments during the frenzy. Investors, reaching for short-term yield, can leave their balance sheets vulnerable to even a minor rise in interest rates.
All this is valid. But why not deal with the problem simply by raising interest rates to levels higher than would be justified by inflation and unemployment mandates? Here the reasoning becomes more hazy. Proponents claim that higher interest rates might do collateral damage to the rest of the economy (for example by raising the exchange rate), while this might be avoided under macro prudential controls. ”

It’s becoming very clear that the CB toolbox is limited and that asset bubbles are probably the biggest threat to overall financial stability. If Carlsberg were making Central Banks I wonder what they would do.

The logic of Dan’s argument above is that if we were to allow First-time-buyers to borrow at even higher LTVs they could get onto the housing market sooner. Of course, what would actually happen is that house prices would rise even more quickly – with a negligible impact on housign supply.

Clearly, we saw this tactic fail spectacularly during the bubble years when first time buyers were effectively shut out of the market. Implementing LTV limits now will limit future house price rises now – stopping potential FTBs from bidding up prices with more leverage.

Nice to see nothing learned

I would be interesting to read Philip Lane’s views on the Irish implementation of a Fiscal Advisory Council and how it is functioning, and in particular how its position and traction cold be improved.

It seems to me that the FAC is shouting into the void when the opposition will not support or even quote its views because they don’t want to be seen as being spoil-sports. Lest we forget FG and Labour were cheer-leaders for the housing bubble including going so far as to roundly criticise FF for not introducing tax cuts to stimulate the property market when it began to slow.

Re home ownership – perhaps we should be relieved that the Government cannot pump the economy with mortgage debt like they are doing in the UK because the Irish Government surely would do that if they could. Personally, I think it is tragic to see people of my generation pumping hundreds of thousands of savings into a distorted and inflated property market to pay off the debts created by the appalling behaviour of banks and bankers.


I am not suggesting that LTV’s for first time buyers should rise or that prudential regulation is necessarily wrong. Merely that low LTV’s imply longer periods of savings for first-time buyers and so people would acquire property later in life. Yes, house prices may be affected but prices are not solely driven by credit, as currently seen in Dublin or indeed London.

@ DMcL: Dan, I’m of the opinion that current Irish residential property ‘prices’ are indeed, in the main, ‘credit driven’. The ‘market’ is quite dysfunctional – one would be well advised to keep clear until the ‘fog of war’ lifts.

I remember when I (and the future Mrs Woods) had to save for at least 3 years, before we were eligible for a mortgage loan. And the lenders were quite strict about the documentation they required to demonstrate our ability to repay. You only got x 2.5 times one salary – and never more than 80% of the purchase price. Economic outcomes: very few defaults – and no neg equity. Mind you, things got a tad rough from 1973 to 1986. But wages and salaries kept pace (almost) with the asset-price inflation bubble. So when mortgage interest rates topped-out at 16%, most borrowers were covered.

Today – we have 20% default rates! Stagnant or declining incomes. And rising property prices! Something is very, very rotten in the Irish private residential mortgage lending sector. Change? None likely. See my comment to zhou below.

@ zhou_enlai: “It seems to me that the FAC is shouting into the void …”

Not quite a void – but very close! Mark Blyth (‘Austerity: the history of a dangerous idea’, 2013) had an earlier publication in 2002, ‘Great Transformations: economic ideas and institutional change in the 20th century’, in which he carefully and accurately describes why some economic ‘ideas’ get very short shrift. He also describes how politicians make catastrophic decisions when they are faced with a situation of “uncertainty”, which is also “in a high degree, unique”. Ring any bells?


Given the high regard with which all those involved in the FAC must be held, it pains me to state that their opinion on the government’s budgetary strategy is largely irrelevant. The reason is that the politicians guiding the destinies of the country have refused to face up to the financial realities confronting the country with, it seems, the acquiescence, if not the positive encouragement, of large sectors of the electorate.


There are zero binding constraints in the legislation that has been adopted.


Leaving aside the current pantomime engrossing the “meedja”, the more worrying aspect is that the leaders of two of the major EU economies, France and Italy, have joined them in this respect.


Off to the races (or whatever the equivalent is in French and Italian).



The outcome of the “dueling banjos” of our two ministers for finance remains to be seen. Are we joining the ranks of the Scandinavian economies to which Minister Noonan adverted some time ago or staying with the Club Méditerranée?


‘… the more worrying aspect is that the leaders of two of the major EU economies, France and Italy, have joined them in this respect.’

The Fiscal Compact is ‘NONSENS€’ …. it has ‘zero’ empirical validity ….. period. Germany will also eventually dump it …. as will we.

France and Italy have ‘Burned Angela’s Corsets’ …. methinks this will catch on ….

‘… the high regard with which “all” those involved in the FAC must be held …

Why? I certainly have very serious reservations about the intellectual make up of the team …. its overall ideological bent … and the lack of a ‘How?’ in its remit.

@ Zhou

Younger people have taken the brunt of the adjustments to date – crap pensions, poorer working conditions, lower starting salaries . There is a huge intergenerational inequality thing going on and access to housing is just the icing on the cake. Meanwhile their parents are doing very well.
And there is the cohort in the middle that is saddled with neg equity.


the fiscal compact is the LAW. There are binding signatures on the treaty.

And everybody violating it, will be not just fined a little bit (0.1%), but publicly scolded, named and shamed,

and will loose his credibility. With the expected consequences.

And when you look at the IMF WEO predictions, GGXWDG_NGDP for the connoiseur, everybody will come in, in 2018, mostly just scraping by, what else would you expect in Europe

just one more of these cases,

you submit a comment, and 10 minutes later you stumble about a link. which is perfect to go with the previous comment


After the affronts from Renzi and Hollande / Valls folks here will now turn up the heat and the volume of the sh*tstorms

lawsuits, insults, requests for temporary injunctions, BVG (german supreme court) rulings, filing for appeals, ECJ requests, Bundestag votes, threats, the whole nine yards, go HongKong.

About 3 million AfD voters live within a few hours of travel distance to organize some “Occupy ECB” in Frankfurt, about half of them having plenty of time AND prior experience toppling an oppressive regime peacefully : – )

@ZHou/ Seafoid
“Re home ownership – perhaps we should be relieved that the Government cannot pump the economy with mortgage debt like they are doing in the UK because the Irish Government surely would do that if they could. Personally, I think it is tragic to see people of my generation pumping hundreds of thousands of savings into a distorted and inflated property market to pay off the debts created by the appalling behaviour of banks and bankers.”

While it is natural to feel concern for anybody that is being duped by a rigged property market, Seafoid is correct. The people at the receiving end are the younger generation. They have no protection whatever from rent rises and have to compete with REITs and tax incentivised (CAT relief) landlords for a home.

They do so out of, in the main, poorly paid temporary or contract. Jobs are in short supply because private sector workers cannot afford to retire.
The great “surge” in employment numbers is driven by older people clinging onto jobs with their fingernails. I know of one company with <50 employees where three are now over 70.
Meantime official policy is to hype prices through restricted supply of serviced land and holding onto property revenue (NAMA) to pay back bonds early.

In recent times we have had a plethora of official reports "explaining" that property prices are fine and that we are a long way off the "peak" of 2007. Utter bulls$it, most of these.

As for the "wealth effect" potential to increase prices further, as outlined in the CB report, is this really true and if so is it desirable?

In the final analysis rents or mortgage payments, must be paid out of net after tax income (except for tax incentivised landlords) and are a drag on the Irish economy, the lower they are kept the better for everybody.
But that is not the agenda. The agenda to rise the prices to 'save' bank balance sheets and a coterie of powerful of vested interests.


Currently desparate first-time-buyers unable to get on the housing market will increasingly demand more highly leveraged loans – an ultimately futile exercise in the context of supply constraints. Hence, the LTV limits will cool future house price inflation – which is welcome.

So in the future they will need to save 20%, but 20% of a lower house price. So the LTV limit does not necessarily mean they will have to wait longer! This is called general equilibrium economics – not the partial kind so beloved of the kind of people who believe house prices should be endlessly inflated.

On my daily commute in this morning on the 46-a, I heard the same radio presenters who last week were complaining about a credit fueled boom in house prices in Dublin now muse that these new rules would stop people getting a foot on the “housing ladder” whatever that is.

did you ever think that the reason that “people of our generation” are pumping money etc is due to the fact that they borowed the money in the first place. I am not aware of many cases where the banks forced them to take the money under gun point. Usually, that transaction takes place the other way around.

According to the Central Bank’s research paper:
‘these policy measures increase the resilience of the financial system and are generally not targeted at house price growth,although there is some evidence of a modest and lagged effect on the latter’.

oh dear Dan. my argument isn’t inconsistent with what the Central Bank is saying

what they’re saying is that implementing LTI & LTV controls don’t in themselves have a marked negative on house prices, especially in the long-run. So given CURRENT strict and reasonable lending standards, implementing LTI & LTV limit’s now won’t push down on house prices

The counter-factual I was referring too is that if LTVs and LTIs are allowed to rise aggressively, as in the 2000s, there will clearly be an acceleration in house price inflation in the future. I don’t think the Central Bank, or anyone else would deny that. In fact, its exactly this scenario that the LTI & LTV controls are intended to guard against.

this should be reasonably obvious. But then again……….

“the fiscal compact is the LAW. There ae binding signatures on the treaty”.

Deflation is a different animal.
As Dan said a while back whenever the markets figure out that deflation is in the piggy zone those those yields are going up.
And there is only so long the people in the periphery can stomach stupid economic policies that lead inexorably to deflation.
You might remember what happened in Germany in previous eras.

Re: Central Bank research paper

The graphs showing default rates by Originating LTV & LTI are interesting but was the underlying historic data truly accurate?

Given its access to a cross section of data from the various banks perhaps the Central Bank could undertake some reserach on default rates by origination channel

@ brog: ” …was the underlying historic data truly accurate?” Hmmmm?

It would be a lot more ‘interesting’ to go back to 1955. What were the LTV and LTI values then? And over the next 40 years, did those values alter in some fashion? And what were the historic levels of mortgage defaults?

Using data from 1996/7 on, is practically useless. That was when the Irish private residential housing bubble had already started – it took a pause 2000 – 2002, then resumed in earnest. Hence, the Research Technical Papers are descriptive for a specific time period when residential property prices were very volatile, rather than comparative with other time periods – especially the period before ‘financialization’; ie. up to 1973, when residential property prices were more stable.

There is no mystery here. Just a lack of knowledge and understanding on the part of the loan originators as to how to minimize (<1%) defaults and reduce the probabilistic risk of negative equity. It so simple even a pigeon would understand it. What's going on? Or should I bother to inquire?

And implementing lending protocols that guarantee very low defaults will most certainly force residential property prices down. This is known and understood, but is politically unpalatable. For the moment, anyhow.

“According to the Central Bank’s research paper:
‘these policy measures increase the resilience of the financial system and are generally not targeted at house price growth,although there is some evidence of a modest and lagged effect on the latter’.”

“..nor generally targeted at house price growth…

In other words, the ICB sees no problem with a 25% annual house price increase in Dublin, with all of the consequences it entails; but is presumably concerned to save the banks (and the rest of) from themselves yet again, as a consequence of rising house prices??.

Lacks a bit of logic as far as I am concerned.

It should also be remembered that Mr Noonan came out a few months ago encouraging banks to give out more than 80% of purchase price, and bemoaning the plight of those people who could not afford the 20% deposit; could not afford the 20% deposit working in the State under the economic policies he has put into effect, and in an economy where he wants ‘house prices to increase another little bit’

Some economic policy!


Great post.

how would you model the switchover from conservative Protestant managers to Richie Bouchers whose idea of risk management was to sell more loans,
the heads I win tails you lose attitude of late financialisation, the imbalances that continue until they are no longer possible, the flightiness of international capital, the religious faith in the Fed and the enduring delusion that mean reversion is just around the corner ?

Ah yes! Its come to me now. Actually it was a certain Mr Randal McMurphy that was appointed as CEO and Ms Nurse Ratched as his COO. I think they had a Chief in charge of large loans. Things never looked back from then on – apparently. I have got it right – haven’t I?

Now where’s me pills?

It is still all to play for! I do not often agree with the editorials of the IT, but this one hits the mark in terms of concentrating on the conclusion rather than what gave rise to it.


The hope must be that there is, in fact, a sea change in the attitude of the Irish electorate; not so much a question of the worm turning but of it waking up to reality. That reality is dictated by (i) the harsh financial data and (ii) the constraints of continuing with euro membership under the new more stringent budgetary rules. The series by Patrick Kinsella in the IT is a pointer to the future (and, incidentally, underlines the fact that the serried ranks of economic academia across Europe – Ireland being no exception – have been unable to agree a coherent or persuasive narrative of what has happened or how to escape from it).



The Great depression was characterized by 2 things:

a) breakdown of global trade
A very suitable reference for this is Figure 16.9 on page 265 in Reinhart&Rogoff “this time is different”, showing global trade shrinking from 5352 to 1756 (I assume in units of million $ per month) between January 1929 and June 1933

with the interesting source: Monatsberichte des Österreichischen Institutes für Konjunkturforschung 4(1933):63 Hint : Hayek was there : – )

The US wiki/Smoot–Hawley_Tariff_Act with its vicious tariffs destroyed international collaboration. Nothing like that happened in 2008.

b) The United States engineered a cumulative deflation of whooping 31% between 1929 and 1933. Together with some sticky wages, interesting features like penny auctions http://www.livinghistoryfarm.org/farminginthe30s/money_10.html

that clearly scared folks a lot.

That some tiny 0.5% deflation should leave only a fraction of that impact on the psyche of people used to 2-3% fees on their credit card, that I doubt very much.

The deflation scare is just the latest version of those who want to break the treaties. Half a year ago it was the alleged SME credit crunch, before that the high national interest rates, etc. etc.

I am sure, in half a year they have some new ideas, why to commit crimes.

What is different now, is that folks in Germany and other countries are sick and tired of this. Together with the Cameron tantrums, people feel increasingly,

just let go of the stupid, criminal, liars

there will be some short term rumblings, sure

That is why the vote for the anti-Euro AfD has grown from 2% 2 years ago, 4.7 % one year ago to over 10% now


the rules are not new, Ireland signed the dotted line on 6/27/2012

and that the rules are now written down so detailed is the consequence of so many violating the general targets 3% deficit short term , 60 % debt target all the times

@ francis

Tell that to the French and the Italians!


Tony Barber of FT has a very good overview of the situation.


The Irish government has to make up its mind as to which side of the argument it is on. My own view is that it must side with the Northern fiscal conservatives. If left to their own devices, the Irish political class would never do so. A bizarre coincidence of recent events suggest that they may actually find that they have to. The electorate is simply no longer gullible enough to believe in rabbits emerging from budgetary hats.

Schaeuble, unfortunately, risks going down in history as the politician who insisted on closing off the water from the fire hydrant at the precise moment that the conflagration could have been nipped in the bud.

@ Francis

“The deflation scare is just the latest version of those who want to break the treaties. ”

It would be great if that were true.
Bond yields say there will be no growth for a very long time. Equity prices say the opposite. I think the bondwallahs are on the ball.


1.20 would not be a big currency move – though it would generate excitement in the press. Parity would be a proper FX move.

There is a rendition of “Reach for the Stars” in the popular comedy broadcast Phoenix Nights which I think might have been the theme song intro for the Talent Treck competition. If you haven’t heard it it would be worth a spot of googling.

The reason I bring this up is that the original announcement of, and enthralled press coverage of Abenomics, made me think of that dismal, delusional performance.

Remember all the excitement as they got the Yen down…


Two items to gladden the hearts of those expert in the matter.



The layman’s conclusion is that the level of the euro matters much less to Germany than to France or Italy but that a weak euro is not something any sensible German can welcome. If the French and the Italians had any sense they would also realise that compensating for a lack of competitiveness in this way – devaluation – has only temporary effects and they would have the same view. (Shopping in New York – and getting there – becoming more expensive may also bring the point home in Ireland).

However, political needs must! The reaction from Berlin and Frankfurt to the fall in the value of the euro has been muted.

Speaking about little macro prudential housekeeping here we go again with SEPA delays not still resolved, a full 9 months after the SEPA introduction date.

“With regards to the month of September, tax revenues were €268million (6.3%) below the monthly target .A significant portion of the shortfall for the month, c. €220 million,was in respect of SEPA delayed monies in relation to the levy on pension funds”

In this case it is the pension funds, mostly large companies and bank subsidiaries, that have messed up.

Why did the Central Bank agree or insist on the introduction of a deadline for SEPA, where even the big players did not have their system ready? And still do not have them ready.
Was it so important that ‘Ireland’ be seen to a good, enthusiastic European, rather than concentrate on getting their systems in order.

One can be sure that the pension funds deducted the money on time, they simply didn’t manage to part with it on time.
Any consequences, I wonder?

@ unfeaasiblycharming: Hi, good morning.

“1.20 would not be a big currency move – though it would generate excitement in the press. Parity would be a proper FX move.”

Nice one. But if oily goes back to $115 – $120 bbl range – where it should be (but low prob of, for a while yet) then we be screwed! Parity with $US would be , sorry about this, ‘charming’ – if you get my ironic drift.

The ‘low’ $US cost of a bbl is deeply worrying – from an economic ‘growth’ perspective. Does it indicate lower overall or regional demand? Or what?

Big, like big cost differentials between legacy land-based crude production, and the new-fangled deep-water and sandy stuff. At $90 bbl someones are not making an economic surplus. This bears close attention.

Cheers, Brian.

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