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Posted 07 October 2014

Governor of the Central Bank of Ireland, Patrick Honohan receives UCD Economics Society's Thomas Kettle Award

Professor Patrick Honohan, the Governor of the Central Bank of Ireland has been presented with the Thomas Kettle Award from the UCD Economics Society. The Award is named in honour of the first Professor of National Economics at University College Dublin and co-founder of the UCD Legal & Economic Society in 1911; the forerunner to the UCD Economics Society.

In an excerpt from his address to the UCD Economics Society, Professor Honohan stated:

“Despite the progressive centralisation of important parts of central banking in Europe important tasks remain a national responsibility.  Among these is an overall responsibility for the preservation of national financial stability.  Bubbles and other sources of financial instability can, as we well know, emerge in the national economy even if not present across the euro area as a whole.  Interest rate policy is obviously not available as a tool to inhibit the growth of a country-specific asset price bubble, so what should be done?”

“Actually, an emerging academic consensus among central bankers even outside the context of the monetary union is that asset price bubbles and surges in general consumer price inflation should be dealt with separately, using a wider range of policy tools.  If the interest rate is being used to control inflation, then it is not available to dampen an asset price bubble: instead one or more macro-prudential tools should be used.  These can include a range of instruments outside the toolbox of the Central Bank, including tax policy, but they can also include such central banking and regulatory tools as capital adequacy surcharges, loan-to-value (LTV) and loan-to-income (LTI) caps for residential mortgages.” 

“The last two-mentioned instruments are not governed by EU law and are a matter for local discretion.  Actually, in decades gone by, Irish lenders followed mechanical rules on LTV and LTI ratios which seemed to keep them out of trouble.  Evidently they are both fairly crude: the borrower’s income can change, and an LTV ceiling is less constraining the higher the level of the property purchase price.  But given how badly banks misjudged risk-management in the post-millennial boom in Ireland, it is hard to deny that having a rule constraining LTV and LTI could avoid the re-emergence of this kind of problem in the future.  Even in the absence of a credit-driven bubble, there is much to be said for bringing back some rules of this type, limiting the share of their mortgage lending that is at high LTV and LTI rates, now that the property market has stopped falling and has indeed turned around with a bit of a bang in Dublin.  The use of macroprudential tools is a national responsibility and falls within the remit of the Central Bank.  We have been talking about this publicly for a while and have been working on developing appropriate measures. We will be announcing tomorrow our intention to introduce some measures along these lines and further detail on that will be available then.”


(Produced by UCD University Relations)


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