Central Bank of Ireland
The Central Bank of Ireland is the national central bank for Ireland within the Eurosystem. From 1943 to 1998, it was the monetary authority responsible of the issue and control of the Irish pound. It is also the country's primary financial supervisory authority.
The Central Bank of Ireland was founded on 1 February 1943, succeeding the Currency Commission of Ireland, a currency board established in 1922. Since 1 January 1972, it has operated under the Central Bank Act 1971, which completed the transition from the strict post-independence currency peg to the pound sterling to a fully autonomous central bank.
In addition to its monetary role, the Central Bank is also a financial supervisory authority. In that capacity, it increasingly implements policies set at the European Union level. It is the national competent authority for Ireland within European Banking Supervision. It is a voting member of the respective Boards of Supervisors of the European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority. It is Ireland's designated National Resolution Authority and plenary session member of the Single Resolution Board. It provides the permanent single common representative for Ireland in the Supervisory composition of the General Board of the Anti-Money Laundering Authority. It is also a member of the European Systemic Risk Board.
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, so the introduction of an independent currency was a low priority. British banknotes, and notes issued by Irish trading banks circulated and British 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 '''' was created, which was to be maintained at parity with the British Pound Sterling by a Currency Commission which would keep British government securities, Pounds Sterling cash, and gold to keep a 1–1 relationship.
From 1928 to 1979, the UK and Ireland were in a de facto currency union.
Foundation of the Central Bank to decimalisation (1942–1971)
Although the Central Bank Act 1942 renamed the Currency Commission, the new institution initially lacked traditional central banking functions:- it was not given custody of the cash reserves of the commercial banks
- it had no statutory power to restrict credit, though it could promote it
- the Bank of Ireland remained the government's banker
- the conditions for influencing credit through open-market operations did not yet exist
- Ireland's external monetary reserves were largely held as external assets of the commercial banks
Such was the proliferation of small industrial banks and hire purchase firms in the late 1960s, the 1971 Central Bank Act was introduced to enhance authorisation and supervision standards significantly.
Decimalisation 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, concurrently with the same process in the United Kingdom.In 1972, the Bretton Woods system of fixed exchange rates broke down and, in the wake of the 1973 oil crisis, inflation in Britain increased dramatically. As economic theory would suggest that a smaller economy whose currency is pegged to a larger one will suffer the larger economy's inflation rate, the option to discontinue the link with sterling began to be considered. Simultaneously, the creation of a Dublin money market and the 1968 transfer of commercial banks' Pound Sterling assets to the Central Bank created the technical capacity to break the sterling link. In the mid to late 1970s, opinion within the bank was moving toward breaking the link with the Pound Sterling and devaluing the Irish currency in order to limit inflationary effects from abroad.
The EMS and movement toward a single European currency
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 in June 1978, the basic features of the European Monetary System were outlined, including the creation of the European Currency Unit, a basket of the Community's currencies used as a unit of account used to price some international financial transactions and capital transfers, 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 Economic Community's currencies, it would have provided stability for 75% of Ireland's external trade, but Britain, which still accounted for 50% of Ireland's external trade, decided to stay out of the EMS. Despite this, on 15 December 1978, the government 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, and Ireland took the narrower margin. The EMS started on 13 March 1979, and towards the end of the month the Pound Sterling started to appreciate against the EMS currencies because of rising oil prices. By 30 March the Pound Sterling breached the upper fluctuation band limit of the Belgian franc and the Irish currency could no longer both track Sterling and remain in EMS. After over 50 years, the parity of the Irish and British currencies was broken, and the Irish currency became known as the Irish pound.
The initial experience of the EMS was disappointing. It had been expected that the Irish Pound would appreciate in value against the Pound 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 against some of the other EMS currencies.
Eventually, the EMS settled down, and Irish inflation was 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. 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 in the Currency Centre in Sandyford, 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 beginning with the letter T. The Bank did not initially issue €200 or €500 notes but subsequently begun to do so.
Domestic banking crisis
The Central Bank noted in November 2005 that an overvaluation existed of 40% to 60% in the Irish residential property market. 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". Management ignored warnings from the Bank's financial stability unit and from the Economic and Social Research Institute, regarding excessive lending to property speculators and developers. A parliamentary inquiry later questioned the credibility of this former staff member's testimony. Also ignored was key information from the Economic and Social Research Institute about the scale of bank loans to property speculators and developers It was reported that it sought to gag a prominent economist from talking about the fragile state of the nation's banks in relation the Irish branch of Northern Rock. The Central Bank "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 interests, and "rigorously" concealed data from the relevant external supervisors on the large exposures of Irish banks to individual developers.In November 2007, they stated: "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."
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.
The Central Bank annual report, published three months before the Irish State unconditionally guaranteed the deposits of 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".
The next annual report had little to say about how and why the Irish banking system collapsed. 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.
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.
The European Commission in a November 2010 review of the 2008 financial crisis said: "Some national supervisory authorities failed dramatically. We know that in Ireland there was almost no supervision of the large banks." 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."