Lane approaching fork in road as prospect of ECB post nears

TCD and regulatory roles position Central Bank governor for ECB chief economist job

It was the year Ronald Reagan was sworn in for a second term as US president, Bruce Springsteen's album Born in the USA topped the charts, and more than 100,000 pilgrims converged on the Co Cork village of Ballinspittle in the hope of seeing a statue of the Virgin Mary move: 1985.

It was also the year that a bookish fourth-year student in Blackrock College in south Dublin, Philip Lane, flummoxed by Ireland's then almost 18 per cent unemployment rate and mass emigration, decided he wanted to become an economist.

“I was reading at the time about Japan being amazing, America being amazing and Ireland being so gloomy,” recalls Lane (49), who became the 11th governor of the Central Bank of Ireland in late 2015. “It was always puzzling why this country was so gloomy.”

Difficult economies often churn out eminent scholars of what’s called “the dismal science”. “Argentina is full of amazing economists. Italy is full of amazing economists. If you come from a rich country, it’s less interesting,” says Lane.


Having emerged from Trinity College Dublin six years later as a top-ranked economics graduate, Lane went on to secure a PhD at Harvard, lecture for a stint at fellow Ivy League school Columbia University, and spend almost two decades, from 1997, at TCD, where he specialised in global flows of money and, of course, observed the local go-go Celtic Tiger years and subsequent crash.

Three years into the job as Central Bank governor this month, Lane may soon become the shortest-ever holder of the position.

Minister for Finance Paschal Donohoe decided last year to put Lane forward to succeed then European Central Bank (ECB) vice-president Vitor Constancio as his term neared an end. However, Donohoe withdrew Lane's name in February as it became clear that his rival for the position, Spain's economy minister Luis de Guindos, had the necessary political support from fellow euro-zone finance ministers.

ECB chief economist

Still, it laid a marker that Ireland was no longer satisfied to be the only founding member of the euro not to have held an ECB executive board seat. Lane, whose technical expertise had shone through when both candidates were grilled earlier this year by the European Parliament's influential economic and monetary affairs committee, is now widely tipped in European capitals to secure the next available position. The ECB's chief economist, Peter Praet, retires next May.

Lane is careful in his language, but his ambition is clear.

"I was clearly happy to go forward last year," Lane tells The Irish Times in an interview from his second-floor office overlooking the Liffey at the bank's new headquarters in Dublin's north docklands. "I think it remains the case that any members of the [Eurosystem], whether it's a governor or another person in the system, should be ready to come forward if called upon."

Was he surprised when one of his deputy governors, Sharon Donnery, threw her hat in the ring in August as a candidate to become chairwoman of the ECB's powerful banking supervision arm, the Single Supervisory Mechanism? The move, after all, was seen at the time as complicating Lane's chances, as a small country would have struggled to take two senior roles at the institution at the same time.

“No. Obviously myself and Sharon are very close and we talked about it. The way the Eurosystem works, and the European Union more widely, is that it’s a shared responsibility of all member states to help run these organisations. It’s important that people are willing to put their names forward. It’s not easy to have that spotlight, but we are respected members of the Eurosystem and seen as a high performer.”

While Donnery lost out to Italian economist Andrea Enria, currently head of the European Banking Authority, earlier this month in an ECB governing council ballot on the matter, she is being spoken about as a likely successor to Lane in Dublin.

The successor to Praet does not automatically become the ECB's chief economist. However, no other member of the executive board holds a doctorate in economics, outside of its president, Mario Draghi.

The role is essentially that of a key conduit through which information flows to the board and the wider governing council. It comes up as the ECB’s €2.6 trillion quantitative easing (QE) bond-buying programme, launched in early 2015 in an effort to reboot inflation and the euro-zone economy, draws to an end next month and the bank looks at raising interest rates late next year for the first time in more than a decade.

“I don’t think we would think of it as the end of QE. It’s the end of [monetary policy] loosening,” says Lane, noting that the ECB has committed to reinvesting for an extended period of time any money that it receives as bonds on its balance sheet mature.

He’s giving nothing away about how long that will last.

“In the coming weeks and months, clearly more will have to be said about the reinvestment policy,” he said, adding that, for the moment, it is “very important”, especially for borrowers on ECB-tracker mortgages, to appreciate that the bank has committed to not increasing its main rate, currently at zero, until after next summer.

Lane acknowledges, though, that a general global “tightening of financial conditions” – that’s central bank speak for less cheap and easy money sloshing about – is one of the key risks facing Ireland, as a small, open economy.

The US Federal Reserve is leading major central banks internationally in scaling back extraordinary measures used in the wake of the financial crash to keep the show on the road. It has raised interest rates eight times since 2015. Meanwhile, China, one of the biggest buyers of other governments’ bonds and supporters of low interest rates over the past two decades, is pivoting towards more domestic spending.


Other threats to Ireland include trade, tax and Brexit, according to Lane.

“I think the risk factor with trade is mixed. Yes, the US-China dispute is not disappearing but there is no sign of a global war,” he said.

On the tax front, Ireland, as an export economy, would be affected under any international move to collect levies where goods and services are consumed, rather than produced, he added.

And then there is Brexit, which is negative under every scenario.

“From word go, it has always been clear that uncertainty was more around trade and goods – whether there would be a customs union, a free-trade agreement or whatever. It has always been reasonably clear that services would operate under some form of equivalence regime and especially in financial services,” says Lane.

“So, the financial services sector has been most prepared for this. There will be financial market volatility – in sterling, especially – depending on the day-by-day assessment of the likelihoods of ‘hard’ versus ‘soft’ Brexit.

“The more immediate unknowns are about the physics of this. Will there be long queues at ports? Will there be forgotten areas, or underappreciated areas, like medicines and foodstuffs, etc, where we’re not too sure about how everyone is prepared? So, the disruption under a disorderly Brexit may be in more in those areas.”

The Central Bank has received more than 100 applications from overseas firms looking to base operations in Ireland to ensure access to the EU single market post-Brexit.

London-based Barclays’s Irish unit is set to become the biggest lender in the Republic as it becomes home to €224 billion of assets within the next four months. It said last month that the Central Bank had given the expansion plan, which will involve up to 200 new jobs, the go-ahead to expand Barclays Bank Ireland.

Bank of America Merrill Lynch has also selected Dublin as its post-Brexit EU banking hub, while UK health coverage provider Bupa and insurers XL Insurance, Beazley and Hiscox are among others that have outlined plans to move operations to Ireland as the UK leaves the EU.

IDA Ireland has said that asset managers account for about half of the applications. These are known to include Wall Street giant Morgan Stanley and US investment group Legg Mason as well as UK-headquartered groups including Aberdeen Standard Investments and Baillie Gifford and hedge fund Marshall Wace.

“There was a surge [in applications] after the summer, but it’s probably stabilising now,” says Lane. “It’s across many sectors, payments as well. It’s a significant step-up, but proportionate. It’s not the case that it’s transforming the banks.”

Lane rejects a lingering view that the Central Bank, chastened by the domestic banking crisis, is reluctant to see investment banking or more exotic financial activities ending up in Dublin as a result of Brexit.

“Our responsibility is to be rigorous supervisors of anything that is permitted,” he says. “There’s no internal policy saying any line of business is to be discouraged. By and large, all sorts of things are coming here.”

Lane spent most of his career studying central banks from the outside. Still, he says he was surprised, on actually joining one, by the sheer volume of work that gets done.

“Ireland is a small country. It’s midsized from a Eurosystem point of view. But we have a large financial system. We have the local system which is important for the local economy and local consumers. But we’re also the supervisor of a lot of externally-facing banks, insurance companies and investment funds.”

Staff numbers, which were just under 1,500 when Lane joined, are set to hit 1,900 by the end of this year.

"The last decade has been a phase of reconstruction, initiated under [former governor] Patrick Honohan, but I do think the last few years has brought us to a situation, including the inevitable expansion of numbers, that we now think we're in a phase of consolidation."

Financial supervision

Under Lane, financial supervision was split last year into prudential regulation, led by deputy governor Ed Sibley, which seeks to ensure that firms are financially sound and have the correct controls in place, and financial conduct, headed up by Derville Rowland.

Rowland’s division has been most in focus in recent times, presiding over the industry-wide tracker-mortgage examination, which has, as of the end of August, uncovered 38,400 cases where borrowers were either wrongfully denied their right to a cheap tracker mortgage or put on the wrong rate. The State’s banks have set aside about €1 billion to deal with refunds, compensation and other costs.

The banks and Central Bank came in for sharp criticism in October last year for the slow pace of progress on the review, which had started two years earlier. Was Lane caught off guard by the level of public and political uproar at the time?

“This was a well-worked-out project since before I got here. But there was a crunch last autumn. The first source of surprise and disappointment was that some of the banks were non-compliant. We had some banks that were not taking the process sufficiently seriously, they were not moving quickly enough, they were not being sufficiently accommodative of consumer interests.”

Lane insists that the Central Bank was determined to see the project through, though he acknowledges that it was accelerated by the high-profile focus of the Oireachtas finance committee and the Minister for Finance on the matter last year.

“As the supervising regulator, we have to operate within a tight legal framework, so typically we don’t disclose much until something is concluded. But with trackers we were providing periodic updates. But, of course, when you put out information that is partial and incomplete, that triggered concern in the political system about what is going on.”

Lane said he thinks criticism of the Central Bank over the issue “is fading as we’ve shown we’re able to deliver, as we’ve shown this examination is delivering for so many people.”

The Central Bank governor signalled that the next tracker update to be published, in January, will show a small increase in the number of impacted customers and that it expects to have completed its auditing of banks’ figures soon thereafter.

The regulator, which had begun enforcement investigations into the six main mortgage lenders by the end of last year, expects to have completed some of these in 2019, according to Lane.

Mortgage-lending limits

Lane’s predecessor, Honohan, will probably be best remembered for presiding, before he retired, over the introduction of mortgage-lending limits in an effort to prevent a future crash. The rules have been tweaked a number of times under Lane, but the Central Bank decided on Wednesday, in its latest annual review of the measures, to leave them unchanged.

“The mortgage rules are an important way for the Central Bank to do our core job, which is preserving financial stability,” Lane says. “I do think the rules now are structurally well designed.”

Lane also inherited a banking system that was still struggling with massive levels of soured loans, though these have falling at pace in recent years as banks restructured distressed debt in a recovering economy. Lenders have resorted more recently to selling non-performing loans (NPLs), including mortgages, to distressed debt firms, or so-called vulture funds, amid regulatory pressure lower their NPL ratios.

It has been politically contentious. “We have always been clear that neither we nor the ECB are requiring loan sales. [However], I think it’s important to say that loan sales do have a role in terms of national risk reduction. If there’s a downturn in the future, it would have been a vulnerability to have all non-performing loans remaining on the books of the banks.”

The hope, of course, is that a line will finally be drawn under NPLs, like the tracker-mortgage scandal, next year.

And it would enhance the already CV of a central banker whose ambition is understated but undimmed.

CV Name: Philip Lane

Position: Governor, Central Bank of Ireland

Age: 49

Career: Lane held the prestigious Whately chair in political economy at Trinity College Dublin from 2012 until his appointment to the Central Bank in November 2015. He remains Whately Professor of Political Economy (on leave). He ran the economics department at Trinity for 12 years.

In March 2015, ECB president Mario Draghi appointed him chairman of the advisory scientific committee of the European Systemic Risk Board.

Family: Married to Orla, they have two schoolgoing children.

Pastimes: Liverpool supporter. Tries to run to work a few times a week. Avid reader of fiction and non-fiction.