Central Bank of Ireland

Not to be confused with Bank of Ireland.
Central Bank of Ireland
Banc Ceannais na hÉireann (Irish)

Logo
Headquarters
Headquarters Dame Street, Dublin, Ireland
Established 1943
Governor Philip R. Lane
Central bank of Ireland
Preceded by Currency Commission (currency control)
Bank of Ireland (Government's banker)1
Succeeded by European Central Bank (1999)2
Website www.centralbank.ie
1 Even after establishment of the Central Bank, Bank of Ireland remained the government's banker for many years.
2 The Central Bank of Ireland still exists but many of its central bank functions have been taken over by the ECB.

The Central Bank of Ireland (Irish: Banc Ceannais na hÉireann) is Ireland's central bank, and as such part of the European System of Central Banks (ESCB). It is also the country's financial services regulator for most categories of financial firms. It was the issuer of Irish pound banknotes and coinage until the introduction of the euro currency, and now provides this service for the European Central Bank.

The Central Bank was founded in 1943 and since 1 January 1972 has been the banker of the Government of Ireland in accordance with the Central Bank Act 1971,[1] which can be seen in legislative terms as completing the long transition from a currency board to a fully functional central bank.[2]

Its head office is located on Dame Street, Dublin, where the public may exchange non-current Irish coinage and currency (both pre- and post-decimalization) for euros.[3] It also operates from premises in Spencer Dock, Iveagh Court and College Green. The Currency Centre at Sandyford is the currency manufacture, warehouse and distribution site of the bank.

In late 2016 its city centre staff will move to a new building at North Wall Quay.[4]

Functions and objectives

The Central Bank of Ireland’s mandate calls on it to contribute to the well being of the people of Ireland and more widely in Europe by performing statutory responsibilities which cover a wide range, including :

History

From Currency Commission to Central Bank (1920-1942)

On the independence of the Irish Free State in 1922, the new state's trade was overwhelmingly with the United Kingdom (98% of Irish exports and 80% of imports in 1924), so the introduction of an independent currency was a low priority. British banknotes (British Treasury notes, Bank of England notes), and notes issued by Irish banks circulated (but only the first were legal tender) and coins remained in circulation.

Under the terms of the Coinage Act 1926, the Finance Minister was authorised to issue coins of silver, nickel, and bronze of the same denominations as the British coins already in circulation – however the Irish silver coins were to contain 75% silver as compared to the 50% silver coins issued by Britain at the time. These coins entered circulation on 12 December 1928.

Under the terms of the Currency Act 1927, a new unit of currency, the Saorstát Pound (Free State Pound) was created, which was to be maintained at parity with the British Pound Sterling by a Currency Commission which would keep British government securities, sterling cash, and gold to keep a 1–1 relationship.

Foundation of the Central Bank to decimalization (1942 -1971)

The Central Bank Act 1942 which came into effect on 1 February 1943 renamed the Currency Commission the Central Bank of Ireland, although the organisation did not at that time acquire many of the characteristics of a central bank:

The mid-1960s saw the Bank take over the normal day-to-day operations of exchange control from the Department of Finance. The Central Bank broadened its activities over the decades, but it remained in effect a currency board until the 1970s. Economist Patrick Honohan evaluates the success of the movement from currency board to central bank as follows: 'in contrast to many other post-colonial cases, (the currency board's) demise was not followed by a rapid depreciation and slide into semi-permanent high inflation and lack of convertibility.[6]

Such was the proliferation of small industrial banks and hire purchase firms in the late 1960s, the 1971 Central Bank Act introduced significantly enhanced authorisation and supervision standards. In the inevitable consolidation in the marketplace, in 1976 a liquidator was appointed to Irish Trust Bank Ltd after Central Bank investigations and in 1982 Merchant Banking Ltd also collapsed.

Decimalization to European integration (1971-1978)

The 1970s was a decade of change, which began with the decimalisation of the currency which came into effect on 15 February 1971, when the decimal coinage was released into circulation (although 5p, 10p, and 50p coins were released a few years earlier, as they had exact equivalents in old currency units). Decimalisation would have provided an ideal opportunity to break the link with Sterling, but there was not much demand for this at that time. In 1972 however, the Bretton Woods system of fixed exchange rates broke down, and in the wake of the 1973 oil crisis inflation in Britain increased dramatically, and economic theory would suggest that a smaller economy whose currency is pegged to a larger one will suffer the larger economy's inflation rate. At the same time moves to create a money market in Dublin and the transfer in 1968 of the commercial banks' sterling assets to the Central Bank made it possible to contemplate a break in the link. In the mid to late 1970s, opinion within the bank was moving toward breaking the link with sterling and devaluing the Irish currency in order to limit inflationary effects from abroad.

The European Monetary System and movement toward a single currency

At this time, however, an alternative option became available. In April 1978, the European Council meeting in Copenhagen decided to create a "zone of monetary stability" in Europe, and European Economic Community institutions were invited to consider how to create such a zone. At the following Council meeting in Bremen, Germany in June 1978 the basic features of the European Monetary System were outlined, including the creation of the ECU – European Currency Unit, a basket of the Community's currencies used to determine exchange rates, and the forerunner of the euro.

The Irish government had to decide whether or not to participate in the EMS. If the EMS had included all the European Community's currencies, it would have provided stability for 75% of Ireland's external trade, but in the event Britain, which still accounted for 50% of Ireland's external trade, decided to stay out of the EMS. Despite this, on 15 December 1978 it was announced that Ireland would participate in the EMS. Countries were given the option of either a 2.25% or 6% margin of fluctuation within the EMS' Exchange Rate Mechanism (ERM), and Ireland took the narrower margin. The EMS started on 13 March 1979, and towards the end of the month Sterling started to gain in value against the EMS currencies because of rising oil prices, and by 30 March Sterling breached the upper fluctuation band limit of the Belgian franc and the Irish currency could no longer track Sterling. After over 50 years, the parity of the Irish and British currencies was broken, and the Irish currency became known as the Irish pound (or Punt).

The initial experience of the EMS was disappointing. It had been expected that the Irish Pound would appreciate in value against Sterling, and hence reduce inflation in Ireland, but in practice Sterling appreciated considerably in value thanks to its status as a petrocurrency and to the tight monetary policies of the new British government of Margaret Thatcher. By late 1980 the Irish Pound had fallen in value to less than 80 British pence, and Irish inflation was higher than British. Economic policy in Ireland was inconsistent with a "hard currency" policy, and the Irish Pound also failed to hold its value against the central rate of the Deutschmark, although it did appreciate in value against some of the other EMS currencies.

Eventually the EMS settled down (notwithstanding a crisis in 1992 when the Irish Pound was devalued by 10%), and Irish inflation was consistently the same or lower than Britain's inflation rate from 1987 onwards.

Towards the Euro

The idea of a single European currency goes back to the Schumann Plan of 1950. The first blueprint for how to go about implementing the currency, the Werner Report of 1970 was not proceeded with, but the ultimate aim was always kept in mind. The Delors Report endorsed by the Madrid Summit of June 1989 envisaged a three-stage process to monetary union, and this was given legal authority by the Maastricht Treaty of 1992 (enacted into Irish law as the Eleventh Amendment to the Constitution of Ireland by 70% of those voting in a referendum on 18 June 1992). This envisaged the start of monetary union on 1 January 1999 and the introduction of notes and coins on 1 January 2002.

The Central Bank began production of euro coins in September 1999, producing over a billion coins, weighing about 5,000 tons, with a value of €230 million before the introduction into circulation of the euro coins in January 2002. Production of euro banknotes began in June 2000, with 300 million notes worth €4 billion being produced in denominations of 5, 10, 20, 50, and 100 euros. Euro banknotes produced for the Central Bank are identified by having the serial number begin with the letter T. The Bank did not initially issue €200 or €500 notes, but has since begun to do so.[7]

Domestic banking crisis

The Central Bank admitted in November 2005 that estimates of overvaluation of 40% to 60% in the Irish residential property market existed. Minutes of a meeting with the OECD indicated that while the Central Bank agreed that Irish property was overvalued it was fearful of precipitating a crash by "putting a number on it". Senior Allied Irish Bank officials expressed concerns in 2006 that Central Bank stress tests were "not stressful enough" — two years before the collapse of the Irish banking system.[8] The management continually ignored warnings from its own financial stability unit, according to one former staff member, whose evidence to the parliamentary inquiry was questioned by a number of other staff members,[9] and from the Economic and Social Research Institute about the dangerous scale of bank loans to property speculators and developers[10] leading to key information being suppressed. It was reported that it sought to gag one of the country’s most prominent economists from talking about the fragile state of the nation’s banks in relation the Irish branch of Northern Rock. .[11] The Central Bank deliberately "watered down" economic warnings about the property bubble in the run-up to the crash, blocked internal communication reaching board level due to the political and property interests of the Directors and "rigorously" concealed data from the relevant supervisors on the large exposures of the banks to individual developers.[12][13]

10 months before the crash they made a statement saying- "The Irish banking system continues to be well-placed to withstand adverse economic and sectoral developments in the short to medium term. The underlying fundamentals of the residential market continue to appear strong and the current trend in monthly price developments does not imply a sharp correction. The central scenario therefore is for a soft landing"[14]

After the bubble burst, Irish banks faced mounting losses which exposed them to a collapse of confidence following the Lehman Brothers bankruptcy in September 2008; they then suffered acute liquidity pressures which had to be met by Central Bank support, including emergency lending. Management abuses, were also revealed at Anglo Irish Bank, which had to be nationalised in January 2009.

Their Annual Report, which was published just three months before the Government was forced to unconditionally guarantee the deposits of the Irish-owned banks,said: "The banks have negligible exposure to the sub-prime sector and they remain relatively healthy by the standard measures of capital, profitability and asset quality. This has been confirmed by the stress testing exercises we have carried out with the banks".[15][16]

The next Annual Report had virtually nothing to say about how and why the Irish banking system collapsed.[17] Although there were four Central Bank directors on the board of the Financial Regulator, the Central Bank maintained it had no powers to intervene in the market. Yet, the Central Bank had the power to issue directives to the Financial Regulator if it thought it was conducting its business in a way that was contrary to overall Central Bank policy aims. None were issued.[18][19]

The regulator’s processes and reports, and the findings of external scrutineers, any of which should have raised red flags, failed to do so. As a result, they did not see the enormity of the risks being taken by the banks and the calamity that was to overwhelm them.[20]

The European Commission in a November 2010 review of the financial crisis said "Some national supervisory authorities failed dramatically. We know that in Ireland there was almost no supervision of the large banks."[21] Two months later, the President of the EU Commission in an angry exchange in the European Parliament, with a vehemence that shocked his audience, said that "the problems of Ireland were created by the irresponsible financial behaviour of some Irish institutions, and by the lack of supervision in the Irish market."[22]

A report by Dáil Éireann appointed barrister Senan Allen SC found that there was "no basis for the allegations" that the Central Bank had withheld documents from the parliamentary inquiry into the banking crisis[23][24]

Separation of regulation - The Financial Regulator

Main article: Financial Regulator

In 2003 a new separate division of the Central Bank, with its own Chairman, Chief Executive, and board, was established as the Irish Financial Services Regulatory Authority. This was as a compromise between those who favoured a fully independent regulator and those who believed the Central Bank should maintain full control of regulation of the financial services industry. This division of the Bank authorised and regulated all financial institutions (including insurance undertakings, collective investment funds and credit unions) in Ireland.[25][26]

Under the 2003 arrangements the Central Bank provided the Financial Regulator with services. The Regulator’s industry panel, which provided the Regulator with feedback on its charges and policies said in April 2007 that they had ‘‘major concerns with the quality and cost of the services’’ provided to the Regulator by the Central Bank.[27]

The operations of the Financial Regulator were severely criticised in a report marked "strictly confidential and not for publication", as being poor value for money. The report stated that there were too few specialist staff, compared with its peers.[28] There were also serious shortcomings in the crucial supervisory area.[29][30] and the report was particularly critical of the regulator’s senior management structure, concluding that a clear management and oversight framework, which ensures that issues are escalated through the organisation, was "not fully in place".[31]

Former Taoiseach Bertie Ahern, said that his decision in 2001 to create a new financial regulator was one of the main reasons for the collapse of the Irish banking sector and "if I had a chance again I wouldn’t do it".[32] "The banks were irresponsible," he admitted "But the Central Bank and the Financial Regulator seemed happy. They were never into us saying – ever – 'Listen, we must put legislation and control on the banks'. That never happened."[33]

The April 2009, the new Financial Regulator, outlined his shock at the poor level of financial regulation he discovered when he started his job the previous January and "it is clear to me we need to undertake a fundamental overhaul of the regulatory model for financial services in Ireland."[34] He also said that there was a "critical absence of intellectual firepower within his staff"[35]

Following the banking collapse of 2008–9, the Government[36] re-unified the organisation under a Central Bank of Ireland Commission to replace the board structures of the Central Bank and the Financial Services Regulatory Authority which became effective on 1 October 2010. A July 2009 editorial, in the respected, Sunday Business Post, said "returning the key powers of regulation to the Central Bank will be useless unless there is a fundamental change in the culture of the organisation. This does not require a complete change of personnel, but a change of key personnel."[37] There can be no denying that the spinning off of the Financial Regulator from the functions of the Central Bank in 2003, was an outright failure.[38][39]

Post crisis reforms

On 4 November 2014 the European Central Bank formally took supervisory control over the biggest banks in Europe, including those in Ireland. While banking supervision staff in the Central Bank of Ireland remained, a pan-European approach to how banks were supervised was introduced, the Single Supervisory Mechanism.[40]

Subsequent to the parliamentary inquiry into the domestic banking crisis the organization said that the actions taken by the Central Bank combined with legislative reform and an overhaul of international regulation has enabled the organisation to deliver effective supervision and financial stability measures since the crisis. Governor Philip Lane said, ‘The report describes a failure to identify risks to financial stability and recognises the lack of an overall European framework to deal with the financial and fiscal crises. Many of the issues identified by the Inquiry relating to the Central Bank have been substantially addressed or continue to be addressed through measures including significant institutional reform, additional powers, the promotion of a culture of challenge and the implementation of the model of assertive risk-based supervision underpinned by a credible threat of enforcement.' [41]

In early 2015 the Central Bank introduced macro-prudential mortgage regulations to increase the resilience of the banking and household sectors to the property market and to reduce the risk of bank credit and house price spirals from developing in the future.[42][43] These measures are to be reviewed annually, with a report to be published in November 2016.[44]

List of Governors of the Bank

The main entrance to the Central Bank of Ireland head office

The Governor of the Bank is appointed by the President of Ireland on advice of the Irish government.

Name
(Birth–Death)		 Term of office
Joseph Brennan
(1887–1963)		 1943–1953
James J. McElligott
(1890–1974)		 1953–1960
Maurice Moynihan
(1902–1999)		 1960–1969
T. K. Whitaker
(1916–)		 1969–1976
Charles Henry Murray
(1917–2008)		 1976–1981
Tomás F. Ó Cofaigh
(1921–2015)		 1981–1987
Maurice F. Doyle
(1932–2009)		 1987–1994
Maurice O'Connell[45]
(1936–)		 1994–2002
John Hurley
(1945–)		 2002–2009
Patrick Honohan
(1949–)		 2009–2015
Philip R. Lane
(1969–)		 2015–present

See also

References

  1. ↑ "Central Bank Act, 1971". Irishstatutebook.ie. 28 July 1971. Retrieved 21 April 2012.
  2. ↑ Previously the commercial Bank of Ireland, established in 1783, had been the government's banker.
  3. ↑ "1980 – Central Bank of Ireland, Dame Street, Dublin". Archiseek. Archived from the original on 1 December 2010. Retrieved 10 April 2010.
  4. ↑ https://www.centralbank.ie/about-us/newbuilding/Pages/Ournewbuilding.aspx
  5. ↑ https://www.centralbank.ie/publications/Documents/Strategic%20Plan%202016%20-%202018.pdf
  6. ↑ Honohan, Patrick (1994). Currency Board or Central Bank: Lessons from the Irish pound's link with Sterling 1928-79 (PDF). London: Centre for Economic Policy Research. p. 2.
  7. ↑ "More euro in circulation than Irish pounds". RTÉ News. 11 January 2002. Retrieved 1 May 2007.
  8. ↑ "Bank officials in 2006 said stress tests were not stressful enough". Irish Examiner. 12 February 2015.
  9. ↑ "Central Bank aware of property bubble from 2004 - ex-employee". The Irish Times. 23 September 2015.
  10. ↑ "Central Bank 'ignored my warnings' before economic crash - ESRI's FitzGerald". Breaking News.ie. 11 February 2015.
  11. ↑ "Claim that Central Bank sought to gag economist on Northern Rock". The Sunday Business Post. 11 October 2015.
  12. ↑ "Central Bank 'watered down' warnings of property bubble". The Irish Examiner. 11 June 2015.
  13. ↑ Joint Committee of Inquiry into the Banking Crisis. Witness Statement of Frank Browne https://inquiries.oireachtas.ie/banking/wp-content/uploads/2015/10/Frank-Browne-WSW.pdf
  14. ↑ Central Bank of Ireland- Financial Stability Report November 2007
  15. ↑ "John Hurley: Last of the breed". Irish Independent. 3 October 2009. Retrieved 11 April 2010.
  16. ↑ White, Dan (15 July 2009). "I'd rely on astrologer Fergus more than Central Bank chief". Evening Herald. Retrieved 11 April 2010.
  17. ↑ Keenan, Columnists, Brendan (23 July 2009). "Fixing the Government is now more important than fixing our banks". Irish Independent. Retrieved 11 April 2010.
  18. ↑ Curran, Richard (26 July 2009). "The inquisitor". Sunday Business Post. Retrieved 11 April 2010.
  19. ↑ "Ahern admits to part in Irish crisis". Financial Times. 15 October 2009. Retrieved 11 April 2010.
  20. ↑ "Admissions about lack of banking experience in regulator are shocking". The Irish Times. 11 June 2015.
  21. ↑ "Continental shift". The Economist. 4 November 2010.
  22. ↑ "Mad as hell at Ireland". The Irish Independent. 22 January 2011. Retrieved 21 April 2012.
  23. ↑ http://www.oireachtas.ie/parliament/media/main/documentation/Executive-Summary.pdf
  24. ↑ "Cover-up upon cover-up Banking Inquiry to be blown apart". Village Magazine. 1 December 2015.
  25. ↑ Archived 10 January 2011 at the Wayback Machine.
  26. ↑ Archived 4 June 2009 at the Wayback Machine.
  27. ↑ McBride, Louise (1 April 2007). "Financial Regulator is questioned by own advisers". The Sunday Business Post. Retrieved 11 April 2010.
  28. ↑ "Watchdog blasted in its own confidential report". The Irish Independent. 7 October 2009. Retrieved 21 April 2012.
  29. ↑ Brian O’Mahony (8 October 2009). "Report exposes Financial Regulator's 'shortcomings'". Irish Examiner. Retrieved 21 April 2012.
  30. ↑ "Wednesday Newspaper Review – Irish Business News and International Stories – – October 7, 2009". Finfacts.ie. Retrieved 21 April 2012.
  31. ↑ "Report critical of Financial Regulator". The Irish Times. 14 October 2009. Retrieved 21 April 2012.
  32. ↑ Murray, John (15 October 2009). "Ahern admits to part in Irish crisis". Financial Times. Retrieved 21 April 2012.
  33. ↑ "Bertie Ahern: 'I don't consider myself a romantic person, maybe that was the problem'". The Irish Independent. 20 September 2009. Retrieved 21 April 2012.
  34. ↑ "Watchdog tells of shock at lax levels of enforcement – Irish, Business". The Irish Independent. 15 April 2010. Retrieved 2012-04-21.
  35. ↑ "Regulator lacking top-level graduates". The Irish Independent. 18 April 2010. Retrieved 21 April 2012.
  36. ↑ "Minister for Finance Brian Lenihan TD announces major reform of the institutional structures for regulation of financial services in Ireland". Press Releases. Department of Finance. 18 June 2009. Retrieved 11 April 2010.
  37. ↑
  38. ↑ "Move to rules-based system will need a change in culture – Business, Frontpage – Independent.ie". Sbpost.ie. Retrieved 21 April 2012.
  39. ↑ "I'd rely on astrologer Fergus more than Central Bank chief – Dan White, Columnists". Herald.ie. Retrieved 21 April 2012.
  40. ↑ "Ireland's biggest banks are getting a new regulator today and here's how it's going to work". thejournal.ie. 4 November 2014.
  41. ↑ https://www.centralbank.ie/press-area/press-releases%5CPages%5CStatement-ReportoftheCommitteeofInquiryintotheBankingCrisis.aspx
  42. ↑ https://www.centralbank.ie/press-area/press-releases/Documents/FAQ%20%E2%80%93%20New%20regulations%20on%20residential%20mortgage%20lending.pdf
  43. ↑ "What will the new Central Bank mortgage regime mean to you?". The Irish Times. 28 January 2015.
  44. ↑ http://www.irishtimes.com/business/economy/central-bank-to-review-mortgage-rules-says-governor-1.2488855
  45. ↑ "Maurice O'Connell: Present Governor of Ireland's Central Bank". Moyvane.com. 1 January 2002. Retrieved 11 April 2010.
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