Makhlouf defends mortgage rules and notes shadow-banking risks

Gabriel Makhlouf used his maiden formal speech as Central Bank governor to defend mortgage-lending rules he inherited and pledge to focus on the risks attached to Ireland's €4.4 trillion shadow banking industry.

In a wide-ranging speech, delivered to students and staff at the Waterford Institute of Technology, Mr Makhlouf highlighted the need for one of the world's most open economies to improve its resilience to challenges posed by Brexit, climate change and the pace of technological progress.

The governor also lent his support to the European Central Bank's (ECB) new president, Christine Lagarde, as she seeks to review the organisation's strategy. This may lead to a change to its core target of maintaining euro-zone inflation at close to, but below 2 per cent, according to some economists.

Economic resilience

“Economic transitions have been a feature of society throughout history,” Mr Makhlouf said. “Building economic resilience is the most effective way to help societies manage them. Arguably a distinguishing feature of the transitions we are currently experiencing – and will experience in the future – is the pace of change.”

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The former UK civil servant, who served as head of New Zealand's treasury department between 2011 and this year, was selected as the 12th governor of the Central Bank in May, succeeding Philip Lane, who has become the chief economist of the ECB.

Mr Makhlouf said mortgage-lending restrictions introduced in 2015 – and which are currently subject to their annual review – “are a permanent feature” of the mortgage market.

Last month, Colin Hunt, chief executive of AIB, the country's largest mortgage lender, called on the regulator to relax the rules, while Taoiseach Leo Varadkar said in July that they should be loosened to help renters seeking to build up a deposit to buy a home.

“The annual review of the measures allows us to challenge ourselves to ensure they are set in a way that ensures bank and borrower resilience is maintained and that we don’t see a damaging credit-house price spiral emerging,” the governor said.

Funds

Turning to the growing area of market-based finance that takes place outside banks, which is often referred to as shadow banking, Mr Makhlouf promised to focus more closely on the risks that could emanate from the world’s sixth-largest jurisdiction for such activity.

While this industry covers heavily regulated areas such as investment funds and money market funds, in the Republic it also includes the euro zone’s largest securitisation vehicle sector and a leading hub for unregulated European collateralised loan obligations.

"The key point is that the resilience of market-based finance at the current scale – both in Ireland and internationally – remains untested in times of stress," Mr Makhlouf said."I am particularly interested in understanding and assessing the risks in the non-bank sector as are many of my colleagues around the world."

He said that Ireland must be “at the forefront of these policy discussions” on this area.