Annual Report 2006

Central Bank & Financial Services Authority of Ireland

Annual Report

Report of the Central Bank and Financial Services Authority of Ireland for the year ended 31 December 2006

 Central Bank and Financial Services Authority of Ireland 2007 Annual Report 2006

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Enquiries relating to this Report should be addressed to: Central Bank and Financial Services Authority of Ireland (Publications), P.O. Box No. 559, Dame Street, Dublin 2. Telephone 4344000; Telex 31041; Fax 6716561; www.centralbank.ie

This publication is available in both the English and Irish language. If any discrepancies or errors occur between the two language versions, the decision of the Central Bank and Financial Services Authority of Ireland as to the meaning correctly intended shall be final. Annual Report 2006

Central Bank and Financial Services Authority of Ireland

25 June 2007

Dear Minister,

I have the honour to enclose herewith the Activities and Annual Accounts of the Central Bank and Financial Services Authority of Ireland for the year ended 31 December 2006.

Yours faithfully,

John Hurley, Governor

The Minister for Finance

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Board of Directors

John Hurley Governor

Liam Barron David Begg Gerard Danaher

Roy Donovan David Doyle John Dunne

Alan Gray Patrick Neary Martin O’Donoghue

Brian Patterson Deirdre Purcell Brian Halpin Secretary

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The Board of Directors and Management of the Central Bank and Financial Services Authority of Ireland

John Hurley, Governor Liam Barron David Begg Gerard Danaher Roy Donovan David Doyle John Dunne Alan Gray Patrick Neary Martin O’Donoghue Brian Patterson Deirdre Purcell

Function Head of Function Director General Liam Barron — European Monetary Affairs and — John O’Leary International Relations Deputy Director General and Secretary Brian Halpin — Corporate Services — Michael Enright — Financial Control — Mary Sheehy — General Secretariat — Neil Whoriskey — Human Resources and Planning — Jim Cummins — Information Systems —Pa´draig O´ Conaill — Internal Audit — Donal Cahalane Assistant Director General Tony Grimes — Financial Markets — Pat Treanor — Payments and Securities Settlements — Dermot Maher Assistant Director General Louis O’Byrne — Currency Issue — Brian Murphy — Currency Production — Daragh Cronin Assistant Director General Tom O’Connell — Economic Analysis, Research and Publications — Maurice McGuire — Monetary Policy and Financial Stability — Frank Browne — Statistics — John Kelly

FINANCIAL REGULATOR Chief Executive Patrick Neary — Legal and Enforcement — George Treacy — Planning and Finance — Patricia Moloney — Registrar of Credit Unions — Brendan Logue Prudential Director Con Horan — Banking Supervision — Mary Burke — Financial Institutions & Funds Authorisations — Michael Deasy — Insurance Supervision — Patrick Brady — Investment Service Providers Supervision — Anne Troy — Markets Supervision — Martin Moloney Consumer Director Mary O’Dea — Consumer Information — Sharon Donnery — Consumer Protection — Bernard Sheridan Peter Charleton is on secondment to the International Monetary Fund as Alternate Executive Director from June 2005.

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Contents

Page Page Foreword 9 Economics, Research and Statistics 27 Economic Intelligence and Forecasting Economic Overview 11 Inflation and Competitiveness International and Euro Area Economy Monetary Issues Domestic Economy Econometric Modelling Public Finances Activities of the Central Bank and Structural Reform, Growth and Financial Services Authority of Productivity Statistics-Monetary, Financial, Balance-of- Ireland 17 Payments and Prudential Data

Management of Investment Assets 31 Introduction 17 Bank’s Investment Assets Portfolio Restructuring Price Stability and Monetary Policy 17 Return on Investment Assets Primary Objective Gold Holdings Analysis of Risks ECB Pooled Reserves Governor Briefing and ESCB Committees Risk Management Interest Rates Credit Growth Payments and Settlements 35 Real-Time Gross Settlement/TARGET TARGET2 Monetary Policy Implementation 20 TARGET2 — Securities Monetary Policy Operations in 2006 Traffic in 2006 Participation Levels in MROs and LTROs Availability and Service Level Fine-Tuning Operations Collateral Management Minimum Reserves Cross-Border Use of Eligible Assets Eligible Assets Correspondent Central Banking Model Collateral Assessment Links between Securities Settlement Single List of Collateral Systems Documentation on Monetary Policy Collateral Usage Instruments and Procedures Bond Register Liquidity Forecasts Payment Systems Policy and Oversight Developments in the ERM 11 Objectives of Payment & Securities Systems Oversight Financial Stability 24 Statutory Basis for Regulation What is Financial Stability? Payments Systems Regulation Mandate Securities Settlement Systems Regulation Stand-Alone Financial Stability Report RTGS System Analysis Retail Payments Assessment of Financial Stability in Ireland CREST Settlement IMF Financial Sector Assessment Payment Systems Policy/Oversight Stress-Tests of Domestic Credit Institutions Domestic Developments Financial Stability in the European Union Eurosystem Developments External Meetings Market Infrastructure Developments-Single Cooperation with the Financial Regulator Euro Payment Area

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Page Page

Currency Production and Issue 45 Governance and Organisation 61 Banknote Production and Processing Statutory Background Coin Production Board Structure Change in Design Governor Collector Coins Board Members Counterfeits Board Procedures Withdrawal of Irish Banknotes and Coin Powers Delegated to Governor Board Sub-Committees Participation in International Activities 47 Code of Practice for Directors and Staff ESCB Activities Ethics in Public Office Act, 1995 and Other EU Fora Standards in Public Office Act, 2001 EU Economic and Financial Committee Management Boards EU Economic Policy Committee Accountability OECD-Related Activities and Issues Bank Objectives EU Committee on Monetary, Financial and Internal Audit Balance-of-Payment Statistics ESCB Governance IMF Article IV and Financial Sector The Eurosystem and ESCB Assessment Programme ECB Decision-Making Bodies IMF Meetings International Monetary Fund Other International Activities Financial Operations 67 Management and Support Services 52 Accounting Policies Central Services Auditing and Reporting Standards Sharing of Monetary Income Human Resources Financial Results for 2006 Staffing Balance Sheet Developments Employment Policies Redemption of Irish Banknotes Human Resources Strategy Proceeds of Coin Training and Development Prompt Payment of Accounts 2006 Technical Assistance Organisational Development Statement of Accounts for year Organisation Development Programme ended 31 December 2006 73 ESCB Organisational Development Statement of Directors’ Responsibilities Strategy and Planning Statement on the System of Internal Internal Audit Financial Controls Legal Services Accounting Policies Media and External Communications Profit and Loss and Appropriation Account Educational Activity Balance Sheet Official Languages Act Notes to the Accounts Photographic Exhibition Auditors Reports

Appendix 1. Role of ESCB Committees 58 Economic and Financial Papers Published by Bank Staff since Appendix 2. Role of Other EU Fora 60 2006 107

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Abbreviations

BIS Bank for International Settlements CBFSAI Central Bank & Financial Services Authority of Ireland ECB European Central Bank EFC Economic and Financial Committee EMU Economic and Monetary Union EPC Economic Policy Committee ESCB European System of Central Banks EU European Union FR Financial Regulator FSC Financial Stability Committee GDP Gross Domestic Product GNP Gross National Product HICP Harmonised Index of Consumer Prices IMF International Monetary Fund IRIS Irish Real-time Interbank Settlement LTROs Longer-Term Refinancing Operations MROs Main Refinancing Operations NCBs National Central Banks OECD Organisation for Economic Cooperation and Development RTGS Real-Time Gross Settlement TARGET Trans-European Automated Real-Time Gross Settlement Express Transfer

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Foreword

The global economy outcome for 2007 is a quite modest average expanded strongly in 2006, increase in house prices. Regarding mortgage despite a weakening of US credit growth, the combined effect of growth during the course of moderating house prices and some slowing in the year. In the euro area housing output together with higher interest the pace of economic rates caused it to decelerate between March expansion picked up 2006 and the first half of 2007, but it still significantly, with the 2.7 per cent growth remains very strong increasing by 21 per cent recorded being almost double that achieved in in the year to April. 2005. This represents the strongest economic performance since 2000 and was reflected in An important milestone in 2006 was the substantial job creation and a fall in the rate of preparation of a 3-year Strategic Plan for the unemployment to a record low level. The euro Bank for the period 2007-2009. This document area is expected to continue to grow strongly is being published along with the Annual in 2007; while US growth is projected to be Report. The Bank also published the annual moderate, global expansion remains robust. Financial Stability Report in November 2006 The short-term risks to this outlook are broadly and subsequently held the usual round table balanced, but a rise in protectionist pressures, discussions with credit institutions. oil price movements and global imbalances pose risks over the longer term. In another important development, in September 2006 the Bank hosted a major On the domestic front, the economy international conference in Dublin on performed strongly in 2006. GNP and GDP productivity and growth, a niche area where grew by 7.4 per cent and 6 per cent, the Bank has committed significant resources. respectively. In 2007, both GNP and GDP are expected to grow by about 5 per cent. HICP Turning to the Bank‘s own activities, total 3 inflation in 2006 was 2 ⁄4 per cent and is earnings on investment portfolios amounted to 3 expected to remain at 2 ⁄4 per cent in 2007. \274.5 million in 2006 and the Bank‘s portfolio The overall picture of the Irish economy is grew to \12.1 billion at the end of the year. positive but there are some aspects that cause The Bank‘s profits for 2006 amounted to concern. Growth remains unbalanced, driven \110.2 million. The Activities Section of the disproportionately by domestic demand and Report sets out all the work undertaken by the the strong rate of growth has contributed to Bank in 2006. inflationary pressures. This, in turn, is affecting Ireland’s competitiveness, particularly since the I would like to thank the Board of Directors for domestic price level is already the highest in all their valuable input, commitment and the euro area. support during the past year. I would like to pay a special tribute to Tom Considine and to The pace of house price inflation eased in the Friedhelm Danz who both retired from the latter part of 2006, reflecting increases in Board during 2006. They both made a very interest rates since the end of 2005 and an significant contribution to the work of the increased level of housing supply. In more organisation. I would like to welcome the two recent times there have been small month-to- new members, David Doyle and Alan Gray, to month declines in house prices. The likely the Board, and I look forward to working with

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them. I would also like to express my sincere organisation forward and meet the various appreciation to the Chairman of the Financial challenges in the years ahead. Regulator, Brian Patterson, and to its Chief Executive, Patrick Neary, for their continuing It was a year which saw a continued high level co-operation and support. of co-operation between the staff and management of the two sides of the CBFSAI. I Our Director General, Liam Barron, will be would like to pay special thanks to all of the retiring in August. I would like to express my staff in the organisation for their hard work and deep appreciation to Liam for his outstanding dedication in meeting many challenges over contribution to this organisation over a long the year. career, in particular as Director General and member of the Board. I would like to wish Liam’s successor, Tony Grimes, the very best in John Hurley his new role. He is well placed to bring the Governor

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Economic Overview

The International and Euro-Area strength of investment spending since early Economy 2006 reflects a number of positive forces. The global economy continued to expand Building on a favourable external impulse, strongly in 2006, slowing only slightly from the investment growth has benefited from high and very strong rates of growth recorded in increasing profit growth, a more positive previous years. A notable feature was that demand outlook and favourable financing growth became more balanced across the conditions. different regions, with growth slowing in the US and accelerating in Europe. While growth in Reflecting the better growth performance, Japan slowed around the middle of 2006, it labour market conditions have improved. recovered thereafter and, for the year as a Employment growth has picked up strongly, whole, remained strong. In addition, robust with the rate of job creation now rising at its growth in some large emerging economies, fastest rate since 2000. Reversing the pattern of previous years, 2006 saw an encouraging coupled with strong trade activity, contributed pick-up in full time employment growth. The to the solid pace of global growth. As a result better labour market performance has also of the rebalancing of global activity, growth been evidenced by a fall in the unemployment differentials across the major economies are at rate, which has moved down by over 1 per their lowest levels in over a decade. Despite cent and is now below its previous cyclical low, the rebalancing of global growth, however, the reached in early 2001. The positive labour impact on external imbalances has been market developments have also helped limited, with large external deficit and surplus generate some improvement in the growth of positions changing only marginally. consumer spending, although private consumption growth has been moderate in In the euro area, the pace of economic growth comparison to the strength of investment picked up significantly last year with higher oil spending. prices and the slowdown in the US economy only having a muted impact. The euro-area On the whole, euro-area growth prospects economy grew by 2.7 per cent last year, almost continue to look bright. Business sentiment double the growth rate recorded in 2005. This surveys remain relatively strong and suggest was a good deal stronger than expected, with that growth momentum is not likely to slow in growth in 2006 around one percentage point the near term. Financially, the euro-area private above the consensus expectation projected at sector is in good shape and the fact that the beginning of last year. After a number of companies are investing and hiring at a solid years of subdued growth, this was the strongest pace lends credence to the view that the euro- growth performance since 2000. area economy has moved onto a more solid self-sustainable growth path. Over the course of the past year, the euro-area recovery has broadened out. While export In comparative terms, the strengthening of strength continues to provide support, activity in the euro area over the course of the domestic demand has become an increasingly past year contrasts with some slowdown in important driver of growth. In particular, the growth elsewhere, especially in the US. In the strength of investment has provided latter case, the slowdown in growth reflected a considerable impetus. While to some extent, sharp downturn in house-building, following a there may be an element of catch-up after a long boom. While the contraction in prolonged period of subdued growth, the construction and home sales in the US has

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been much sharper than expected, it has not One manifestation of this was an increase in spilled over to the wider economy, to date. In the inflation rate, which was persistently particular, consumer spending has continued somewhat above that of the euro area to grow strongly, supported by solid generally. The HICP inflation rate increased to employment and wage growth. With the 2.7 per cent, compared with a euro area figure downturn in the housing market likely to persist of 2.2 per cent. The labour market also for some time, the US is expected to grow remained tight, with the unemployment rate 1 below trend in 2007. With global growth also hovering in or around 4 ⁄2 per cent, which expected to slow somewhat, the pace of represents close to full employment conditions. expansion in the euro area going forward will be more reliant on the strength of domestic Growth was driven largely by domestic demand and, in particular, consumer and demand in a continuation of the pattern of investment spending. 2005. There were some important changes, however, in the composition of that demand. With regard to euro-area inflation, oil price Most notably, activity in the house construction developments and related base effects have led sector appears to have peaked last year. The to some volatility in the headline rate over the headline figures for the number of houses past year. Oil prices have remained high and completed rose quite sharply but when volatile and continue to pose a threat both to allowance is made for certain statistical effects, growth and inflation. In this regard, it remains the underlying increase was rather small, from essential to ensure that second-round effects about 86,000 units in 2005 to about 88,000 on wage and price-setting behaviour are in 2006. The available data for this year, both avoided. In the longer term, it is difficult to say leading indicators and information on actual how the price of oil might evolve. However, completions, indicate that a fall in output is continued oil price strength would appear to likely, perhaps to around 80,000 units. The reflect the combination of strong demand, lack impetus to growth from house construction, of spare production capacity and uncertainties therefore, all but ceased last year and the surrounding supply. This makes it more likely sector’s gradually declining activity levels now that higher oil prices will persist for some time constitute a drag, albeit a limited one, on the yet and creates the risk that they could cause economy’s overall growth rate. more protracted problems for the global and euro-area economies. There were also key developments in the price of residential property in 2006. House prices Notwithstanding these risks, however, the rose on a month-to-month basis throughout the conditions are in place for ongoing economic first three quarters of the year, by an average expansion in the euro area. The strengthening of 1.2 per cent per month. From October of the internal growth dynamic suggests that onwards, however, there was little change in the euro-area recovery should have greater the level of prices and, as a result, the year-on- resilience going forward. Financially, the euro- year rate of increase began to ease area private sector is in good shape and the significantly. In the most recent months, there fact that euro-area companies are investing and have been small month-to-month declines in hiring strongly supports the view that the euro- house prices. These developments reflected a area economy has moved onto a more self- combination of factors, including the very high sustainable growth path. level of housing supply and the lagged impact on affordability of the increases in short-term Domestic Economy interest rates that had occurred since the end The domestic economy put in a strong of 2005. This pattern of relatively little change performance last year with growth in GNP and in house prices from month to month GDP of 7.4 per cent and 6 per cent continued into the early part of 2007, with the respectively. This robust rate of expansion was result that the year-on-year rate of price above the economy’s potential growth rate. increase fell from an average of 13.4 per cent

12 Annual Report 2006 in 2006 to just 5.1 per cent in April 2007. The On the export side of the economy, there was latter year-on-year increase largely reflected a continuation of the rather muted price increases in the second and third quarter performance of 2005. Overall export volumes of 2006. This welcome easing in price increased by just under 5 per cent, about one increases is likely to result in a quite modest percentage point higher than in 2005. This was average increase in house prices this year. The still below the growth of Ireland’s export combined impact of these moderating house markets. In fact, the weighted imports of the price and output developments can also be country’s trading partners grew by an seen in the growth in mortgage credit. While estimated 8 per cent last year while the overall this has decelerated from a rate of 28.1 per volume of world trade increased by between 9 cent in June 2006 to 22.0 per cent in March and 10 per cent. Even though the performance 2007, it still remains very strong. of exports seems to have improved somewhat in the early part of 2007, there is a concern that Overall spending on construction in the market share losses might become an ongoing economy, when expressed as a proportion of feature of developments. It is important to GDP, also appears to have reached a peak last avoid such an outcome. In the long run, in a year, largely reflecting the developments in the small open economy like Ireland, a satisfactory performance by the exporting sectors is a house construction sector already mentioned. prerequisite for sustaining increases in living Construction spending corresponded to about standards over time. 15.5 per cent of GDP in 2002 but this rose sharply to 21.2 per cent in 2006. In contrast, In this regard, last year also saw another this ratio is set to decline modestly in 2007 and increase in the balance-of-payments deficit to 2008. The gradual contraction of the house- about 4 per cent of GNP following a sharp rise building sector will be offset by continuing in 2005. For many years prior to that, the growth in other components of construction, current account had been in approximate such as public infrastructure and non- balance, even during the years of very strong residential private investment. However, any economic growth in the latter part of the growth in the construction sector as a whole is 1990s. There are a number of factors behind likely to be modest and well below the overall the emergence of this imbalance. The rise in oil growth rate of the economy. Nevertheless, prices undoubtedly contributed to this, as well overall construction spending is expected to as the strength of domestic demand, which remain relatively high as a proportion of GDP plays a role in drawing in imports. The weaker for some considerable time. performance of exports, which has already been mentioned, also seems to have been a Private consumption growth remained strong factor. While the deficit, in itself, is unlikely to last year. This was very much a continuation cause major problems in the short term, the of the pattern in 2005 when spending growth relative absence of short-term consequences picked up from a more muted performance should not give rise to complacency, as the earlier in the decade. Expenditure was higher deficit reflects a deterioration in the supported by strong income and employment economy’s competitiveness position. growth but there was little evidence of major spending in anticipation of the maturing of This deterioration can be tracked not only by SSIAs, most of which only became accessible the weaker external performance but also by in early 2007. There was some increase in conventional measures of competitiveness. The spending on home improvements but that may Bank’s real Harmonised Competitiveness have been driven by other factors, such as the Index, which takes account of comparative significant costs of trading up, which may have consumer price inflation as well as led more households to simply improve their exchange rate movements, showed a current accommodation rather than move deterioration through last year of about 4 per house. cent, essentially offsetting the modest

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competitiveness gains of the previous year. This Reflecting the economy’s strong growth last continued to be the pattern year-on-year year, there was a General Government surplus through the first quarter of 2007. This of about 2.9 per cent of GDP. It should be underlines the need to take action to cope with recalled, however, that the strength of tax the deterioration in competitiveness. These receipts partly reflected the robust level of include measures that can be taken by activity in the housing market; this related not government aimed at promoting productivity just to the construction of new homes but also growth, through increasing competition, to the level of turnover in the second-hand upgrading infrastructure and providing a market. framework that fosters R&D, innovation and The prospects for the economy in 2007 and entrepreneurship in general. Increased 2008 are generally positive but there are risks productivity can only be achieved at enterprise to the outlook. The Bank’s current projection is level and it is essential for both public and that the economy will continue to grow quite private enterprises to focus on the need to strongly but at a decelerating pace. In terms of promote efficiency in their operations in the GDP growth, an outturn of 6 per cent last year context of an increasingly globalised world. seems likely to be followed by growth of about Also important are moderate pay 5 per cent in 2007, with perhaps some further developments, which take account of deceleration next year to about 4 per cent. The productivity trends as well as the low inflation likely path of GNP growth is broadly similar, euro-area environment. It is particularly although the high GNP growth of 7.4 per cent important that pay in the more sheltered in 2006, which reflected rather modest net sectors of the economy develops in a manner factor income outflows, may fall somewhat that does not put upward pressure on wages more sharply to about 5 per cent in 2007, and costs in the economy generally. It is also followed by growth of about 4 per cent next important that there is continuing flexibility in year. the economy to cope with any adverse shocks The HICP inflation rate is likely to ease back that might occur such as, for example, a sharp 3 from an average of about 2 ⁄4 per cent this year appreciation of the euro. 1 to an average of around 2 ⁄4 per cent in 2008. Inflation, as measured by the Consumer Price Part of the recent deterioration in Index (CPI), is expected to average 5 per cent competitiveness reflects developments in this year. The significant differential compared inflation. Using the harmonised HICP measure, to the HICP reflects the impact of higher inflation rose to 2.7 per cent in 2006 compared mortgage interest rates, which are included in with 2.2 per cent in 2005. Furthermore, a the CPI but are excluded from the HICP. differential between Irish inflation and euro- Inflation measures, such as the HICP, that are area inflation re-emerged towards the end of targeted by central banks almost never include 2005 and persisted through last year. This an interest rate element. This has the desirable differential was smaller than the one that effect of ensuring that interest rate increases existed at the start of the decade but still aimed at curbing inflationary pressures do not averaged between a half and one percentage have the paradoxical effect of increasing point. It was evident mainly in services sector measured inflation in the short-run. Unusually, inflation and seems to reflect the more in the Irish case, for historical reasons, public dynamic rate of growth of domestic demand in attention and commentary focuses mainly on Ireland relative to the rest of the euro area. The the interest-inclusive CPI. As the impact of risks to competitiveness from higher inflation higher mortgage interest rates begins to fall out here than in our trading partners are underlined of the year-on-year inflation comparison, the 1 by the fact that the domestic price level is CPI increase should fall back to about 3 ⁄2 per already the highest in the euro area and cent on average in 2008. Towards the end of about 20 per cent above the euro-area next year, the annual increase is likely to be average. below 3 per cent.

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The deceleration in output growth next year in oil prices, due to possible interruptions to will be largely driven by a decline in the growth supply against a background of continuing of domestic demand. This, in turn, will reflect strong demand. Some uncertainty also remains two main factors. First, there will be an over the speed and extent of the slowdown in inevitable easing back in the growth of private US growth. Trade and investment links consumption expenditure, following the boost between the US and Ireland are extensive. to spending from the maturing of SSIAs. Second, there will be a restraining effect from A number of vulnerabilities also continue to a gradual reduction in housing output from the exist in the domestic economy. One of these very high levels of recent years to more is the overall size of the construction sector. sustainable levels, a process that seems to be Although the sector is expected to gradually already underway. On the export side, further decline as a proportion of overall activity over somewhat weak export growth seems the most the next few years, it still remains unusually likely outcome. Overall, therefore, this implies large and one cannot rule out the possibility of slower growth both in output and employment a sharper fall in output, particularly if the terms. Indeed, the unemployment rate may rise economy were to be hit by some sort of shock modestly from its current full employment that adversely affected incomes and level, and could increase to close to 5 per cent. employment. The recent deterioration in competitiveness is also a concern and there is While the gradual easing in both growth and a need to reverse some recent trends in order inflation represents an essentially benign to avoid the possibility of a sharper or more outcome, with output and employment close severe adjustment process at some point in the to potential and the economy growing at a future. The appropriate responses have already sustainable rate, there are risks surrounding this been outlined above, the important elements central scenario. On the external side, a sharp being measures to boost productivity growth in appreciation of the euro against the US dollar, the long term and promoting flexibility in and perhaps other currencies, as part of a response to short-term shocks as well as correction of existing global current account moderate pay developments that take account imbalances remains a possibility. It is difficult to of productivity trends. The overall stance of measure the extent of such a risk, as it is fiscal policy is also important, in order to impossible to be precise about the appropriate ensure that it has a stabilising effect through current account position for any economy at the operation of automatic stabilisers, within any particular point in time. It is, therefore, the terms of the Stability and Growth Pact, and difficult to assess the sustainability of the does not inappropriately boost or depress current constellation of external deficits and activity at any point in time. Such a surpluses. On the other hand, it would be combination of policies is required to ensure complacent to rule out the possibility of that the economy remains on a path of strong significant exchange rate movements occurring and sustainable growth and that living as a part of the adjustment process. Other risks standards continue to rise further over the are also present, most notably further volatility coming years.

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Annual Report 2006

Activities of the Central Bank and Financial Services Authority of Ireland

Introduction HICP and the implications of inflation In accordance with Section 6 (l) of the Central differentials within the euro area. The ECB is Bank Act, 1942 (as inserted by Section 7 of the focused on assuring price stability over a Central Bank and Financial Services Authority of medium-term time horizon and does not Ireland Act, 2003) the Bank is required to attempt to fine-tune price developments in the prepare and send to the Minister for Finance, short term. This medium-term orientation within six months, a report of its activities allows monetary policy to take into account during the previous year. The report is laid concerns about output fluctuations. The before each House of the Oireachtas. This decision to publish a quantitative definition of chapter reports on the Bank’s activities for price stability fosters transparency and 2006. accountability and also provides a benchmark for stable inflation expectations in the euro Price Stability and Monetary Policy area. Monetary policy in the euro area is determined by the Governing Council of the European Analysis of Risks Central Bank (the Council) which comprises Monetary policy decisions are based on a the Governors of each of the thirteen comprehensive analysis of the risks to price participating Members States’ central banks stability, organised on the basis of two (including the Governor of the Central Bank & complementary perspectives on the Financial Services Authority of Ireland) and the functioning of the economy. These six members of the Executive Board of the perspectives centre around an ‘‘economic European Central Bank (ECB). analysis’’ and ‘‘monetary analysis.’’ The former aims at assessing short- to medium-term Primary Objective determinants of price developments, focusing The primary objective of monetary policy is the mainly on the assessment of current economic maintenance of price stability in the euro area. and financial developments and the implied The ECB announced its monetary policy risks to price stability. This includes an analysis strategy in May 1998, which it confirmed and of shocks hitting the euro-area economy and clarified in May 2003. The strategy comprises projections of key macro economic variables. a quantitative definition of price stability and The latter ‘‘monetary analysis’’ approach two analytical perspectives (i.e., an economic assesses medium- to long-term trends in analysis which assesses short- to medium-term inflation in view of the close long-run determinants of price developments and a relationship between money and prices. monetary analysis which focuses on a longer- Monetary analysis takes into account term horizon, exploiting the long-run link developments in a wide range of monetary between money and prices) for assessing indicators including M3 and its components inflation risks. Price stability has been defined and counterparts, especially credit, and various as a year-on-year increase in the growth rate measures of excess liquidity. In this context, the of the Harmonised Index of Consumer Prices Council has adopted a reference value for the (HICP) for the euro area of below but close to annual growth rate of euro-area broad money 2 per cent over the medium term. This stock (M3) and it monitors the actual growth underlines a commitment to guard against the of M3 relative to this value. The reference value risk of deflation and it also addresses the is a medium-term concept and, accordingly, possible presence of a measurement bias in the short-term deviations of M3 growth from the

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reference value do not necessarily have 2007, bringing the average standard variable implications for future price developments. mortgage rate to over 5.1 per cent. Consequently, as the Council has stressed, such deviations do not automatically require a Chart 1: ECB Official Interest Rates policy response. % 7 Governor Briefing and ESCB Committees MLR For monetary policy discussions, the briefing 6 MRR Dep Rate includes an assessment under both pillars of 5 the monetary policy strategy leading to a judgement on the appropriate interest rate 4

stance for the euro area. Information is also 3 supplied relating to other monetary-policy related matters addressed by the Council, 2

including issues concerning the financial 1 statistics of the Eurosystem and the 0 implementation of monetary policy. Discussion 1999 2000 2001 2002 2003 2004 2005 20072006 of issues at the Governing Council is informed by preparatory work by the committees of the ESCB, on which the Bank is represented. One of these is the Monetary Policy Committee Credit Growth (MPC). In 2006, as in previous years, the MPC The Bank compiles and publishes credit worked on a number of regular reports aggregates for Ireland. The growth rate of prepared for the Governing Council, including private-sector credit (PSC), which had the macroeconomic projections for the euro maintained a steady upward trend since the area and public finance reports. In addition, the middle of 2003, began to moderate towards MPC prepared a report on structural issues the end of 2006, and this trend continued into dealing with factors behind output growth early 2007. The adjusted1 annual increase differentials in the euro area. reached its highest level since the spring of 2000 in June 2006 at 30.3 per cent, but slowed Interest Rates Increased to 23.2 per cent by March 2007. Some of the Having started to increase interest rates in moderation in the growth rate of PSC, December of 2005 from their cyclically low however, can be attributed to the securitisation levels, the ECB continued its tightening policy of residential mortgages during the second half during 2006 with a series of quarter percentage of 2006 and in March 2007. Such mortgages point increases. The minimum bid rate of the are removed from credit institutions’ books main refinancing operations of the Eurosystem and, consequently, are excluded from total was increased by 125 basis points over the PSC. course of the year, from 2.25 per cent on 1 January to 3.50 per cent at the end of the year. Residential mortgage demand remained strong It was considered that these increases were in 2006 despite higher mortgage interest rates. warranted in light of risks to price stability. Outstanding residential mortgages increased Reflecting this increase in official rates, the by \24 billion over the year, which was above average standard variable mortgage rate in the 2005 increase of \22 billion. The growth Ireland increased to over 4.8 per cent at the rate of residential mortgages, which had end of 2006, compared with just over 3.6 per moderated during 2005, reaccelerated during cent at the end of 2005. The official rate was last year, with the annual growth rate (adjusted increased by a further 25 basis points in March for securitisations and reclassifications)

1 i.e. excluding lending to non-Monetary Financial Institutions (MFI) IFSC entities and adjusted for valuation effects caused by exchange-rate movements.

18 Annual Report 2006 reaching a record high of 28.1 per cent in steadily rising since mid-2003, increasing from March 2006. Annual growth eased in an adjusted annual growth rate of about 8 per subsequent months, and finished the year at cent to a record high of 32.6 per cent in June 24.2 per cent. The growth rate reached its 2006, and has remained above 30 per cent up lowest level since November 2002 in March until March 2007. An analysis of the sectoral 2007, at 22.0 per cent. breakdown of credit growth indicates that the rapid expansion of non-mortgage credit was Chart 2: Adjusted Annual Growth driven by exceptionally strong lending to the Rates for Credit real estate and construction sectors. Property- related lending2 dominates PSC and has % 35 accounted for most of the increase in PSC in recent years. At end-2006, property-related 30 lending accounted for over 61 per cent of total

25 PSC, and for almost 80 per cent of the increase in credit during the year. Non-property related 20 lending, having recorded an increase in its

15 annual growth rate in 2004 and 2005, experienced an easing in its growth rate to 10.9 10 Private-sector credit per cent in 2006. Some of this slowdown, Residential mortgages 5 however, was accounted for by a series of reclassifications of credit, mainly from the other 0 2001 2002 2003 2004 2005 2006 personal sub-sector into real estate activities and house mortgage finance.

Non-mortgage credit has accounted for an increasing share of PSC in recent years. The rate of growth in non-mortgage credit has been

2 Property-related lending is defined as lending to the real estate activities sub-sector, construction and the personal sector for housing. While it is acknowledged that a significant but unquantified portion of lending to the construction sector is not property related (such as construction work on infrastructural projects), it is usual to include this sector in property-related lending.

19 Annual Report 2006

Monetary Policy Implementation main factor behind this rise was circulation of The implementation of monetary policy in the Eurosystem banknotes, which increased by euro area is conducted on a decentralised basis some 11 per cent in 2006 and ended the year i.e. by the individual National Central Banks at \629 billion. (NCBs). Within this framework, financial The banking system in Ireland continued to institutions in Dublin submit tenders for Main take a disproportionately high share of Refinancing Operations (MROs), Longer-Term Eurosystem monetary policy lending, reflecting Refinancing Operations (LTROs) and Fine- the importance of Dublin as a financial centre. Tuning Operations (FTOs) direct to the Bank, Such lending in 2006 represented over 65 per and allotments of liquidity — the amounts cent of the assets on the Bank’s balance sheet having been determined by the ECB — are compared with 60 per cent in 2005. carried out by the Bank and reflected on its balance sheet. Standing overnight deposit and Monetary Policy Operations in 2006 lending facilities are also provided by the Bank Main Refinancing Operations (MROs) — to financial institutions, on their own initiative, weekly liquidity-providing operations with a on behalf of the Eurosystem. The minimum maturity of one week — have been conducted reserve deposits3 of credit institutions in Ireland using a variable rate tender system4 since 2000, are maintained at the Bank. with a minimum bid rate pre-announced by the ECB. The intention of the minimum bid rate is Chart 3: Euro Area Liquidity Shortage (€bn) to signal the Eurosystem’s monetary policy stance. The bulk of refinancing to the banking 480 system (about 77 per cent) was provided by 460 the Eurosystem through weekly MROs. On average, the Eurosystem provided \307 billion 440 each week through MROs during 2006, 420 compared with \290 billion during the 400 previous year. Eurosystem MRO financing

380 provided by the Bank to financial institutions in Liquidity Shortage Ireland also increased, averaging \10.9 billion 360 in 2006 compared with \8.0 billion in 2005. 340 Credit institutions in Ireland bid for record 320 volumes during the year, peaking at a total DecNovOctSepAugJulJunMayAprMarFebJan '06 amount bid of \14.8 billion on 17 October 2006. To help credit institutions to prepare their bids In 2006, the total refinancing needs of the in the MROs, the ECB continued to publish a banking system in the euro area (the liquidity forecast each week of the daily average shortage) continued to increase, ending the autonomous factors that affect liquidity, year just above \450 billion (see Chart 3). The together with the allotment amount that allows liquidity shortage for 2006 averaged \422 for neutral liquidity conditions, called the billion compared with \378 billion in 2005. The benchmark allotment amount.

3 Credit institutions in the euro area are required to hold compulsory deposits on account with the NCBs, called minimum or required reserves. The main function of the minimum reserves system is to stabilise money market rates by smoothing the effect of daily liquidity fluctuations. It also enlarges the structural liquidity shortage. The minimum reserve requirement for each credit institution is calculated on the basis of selected liabilities (the reserve base) and reserve balances are remunerated at an average of the MRO rates. Where an institution fails to meet its requirement, sanctions may be imposed by the ECB. 4 Under the variable rate tender procedure, participants bid for the amount of liquidity they require as well as the rate they are prepared to pay for funds. The ECB provides funds to the highest bidders first, then to the others in decreasing order of the rate bid, until the full allotment amount has been provided. The lowest rate at which funds are allotted is called the marginal rate. At this rate, the ECB provides whatever amount remains to be allotted, and participants receive an amount proportional to the amount of their bid. Thus, all bids above the marginal rate are satisfied in full; bids at the marginal rate are satisfied in part; while bidders below the marginal rate receive no funds.

20 Annual Report 2006

Throughout the year the ECB continued its Ireland were above-average users of LTRO policy, initiated in late 2005, of allotting more funding in 2006, with Ireland second only to than the benchmark amount (usually an Germany in the amount of funding provided additional one or two billion euro) to counter through this instrument. the spread between short-term money market rates and the minimum bid rate (see Chart 4). Chart 5: Monetary Policy Related Lending Notwithstanding this, the ECB aimed to to Credit Institutions in Ireland (€bn) neutralise liquidity conditions at the end of each maintenance period by way of a fine 35 tuning operation. MRO 30 LTRO

Chart 4: Spread between Minimum Bid 25 Rate and MRO Marginal Rate 20

0.20 8 15

7 Spread between the 10 0.16 minimum bid rate and the EONIA (LHS) 6 5 5 0.12 Extra amount allotted by ECB above the benchmark 0

allotment (RHS) 4 DecNovOctSepAugJulJunMayAprMarFebJan '06 0.08 Basis Points

3 EUR Billions

2 0.04 Participation Levels in MROs and LTROs 1 During 2006, the average number of 0.00 0

MayAprMarFebJan AugJulJun OctSep DecNov counterparties (financial institutions) '06 participating in each MRO in the Eurosystem was 377, compared with 351 participants in 2005. In Ireland, an average of 16 Longer term refinancing operations (LTROs) counterparties participated in each MRO; this — monthly liquidity-providing operations with a is unchanged from 2005 and higher than the maturity of three months — continued to be 13 in 2004. LTRO participation in the euro area conducted using a variable rate tender as a whole increased slightly to 162 banks, on procedure with no minimum bid rate5. The average, taking part in each operation Eurosystem provided \40 billion in LTRO compared with 151 in 2005. The average funding to the financial sector each month in number of domestic counterparties the course of 2006. In January 2007, against the background of a continued increase in the participating in LTROs in Ireland was broadly euro-area liquidity shortage, the Governing stable with, on average, 13 counterparties Council decided to increase LTRO funding to participating compared with 12 the previous \50 billion per month to maintain the LTRO’s year. share of total funding at 25 per cent. Fine-Tuning Operations (FTOs) Chart 5 shows the total monetary policy As mentioned above, the ECB used fine-tuning lending outstanding to financial institutions in operations throughout the year to even out Ireland at the end of each month during 2006 liquidity imbalances at the end of reserve (i.e., the total of the MRO and the three maintenance periods. Six liquidity-absorbing outstanding LTROs). This lending increased and five liquidity-providing operations were from \19.4 billion at end-2005 to \27.0 billion carried out. Irish counterparties participated in at end-2006. As in previous years, banks in five of these operations.

5 In contrast to the MROs, the LTROs are not used to signal the Eurosystem’s monetary policy stance.

21 Annual Report 2006

Minimum Reserves Collateral Assessment The average level of minimum reserve The Bank is responsible for reporting to the requirements of credit institutions in Ireland ECB eligible assets listed on the Irish Stock was \7.7 billion during 2006, compared with Exchange and mortgage-backed promissory \6.1 billion the previous year. Institutions in notes (MBPNs) as these are issued. Over the Ireland held balances on their minimum reserve course of the year, the Bank assessed a wide accounts at the Bank that were marginally in range of debt instruments for eligibility. excess of requirement (the excess averaged Eighteen (synthetic) ABS issues, previously \43 million, or 0.6 per cent, over the year). deemed eligible by the Bank, lost their The Bank, on behalf of the ECB, monitors eligibility status in October following the compliance of credit institutions in Ireland with introduction of new eligibility criteria for ABS the minimum reserve requirement system. In (the new criteria aimed at increasing the overall 2006, there were 7 occasions on which transparency of the collateral framework by sanctions were imposed for breach of specifying the precise conditions that must be obligations, compared with 8 in 2005. The size fulfilled by ABS in addition to criteria applicable of a sanction is linked to the average shortfall to debt instruments in general). At year-end, in minimum reserve holdings over a the Bank had included a total of 408 assets on maintenance period. the ECB’s eligible assets database (EADB), During the year, the Governing Council of the amounting to \172.5 billion, an increase of 51 ECB decided that statistical reporting and per cent on 2005 (see Table below). minimum reserves obligations would apply to Irish credit unions from the start of 2009. The Single List of Collateral Eligible Assets The Eurosystem’s preparatory work for the All Eurosystem credit operations must be fully gradual introduction of a single list of eligible collateralised by assets approved by the ECB. assets was finalised in 2006 with the inclusion This is to protect the Eurosystem against of non-marketable assets, i.e., credit claims incurring losses in its monetary policy and (loans to non-financial corporations and public payment system operations. In 2006, as in sector entities) and retail mortgage-backed previous years, a distinction was made debt instruments (incorporating mortgage- between two categories of asset eligible for use backed promissory notes (MBPNs)), from 1 6 as collateral in Eurosystem credit operations. January 2007. This two-tier approach, however, was replaced on 1 January 2007 with the establishment of a single list of eligible assets. Assets included on EADB by CBFSAI

2005 2006

No. \ No. \ Short term paper 31 418 32 68 Gov/Corp bonds 17 33,284 14 34,557 MTNs 105 26,985 216 44,691 Jumbo pfandbrief-style 7 15,500 10 21,000 Traditional pfandbrief-style 2 200 10 780 ABS 83 37,775 126 71,383 ’ Total 245 114,162 408 172,479

6 The so-called Tier One asset category consisted of marketable debt instruments (including government bonds, covered/uncovered issues by credit institutions and asset-backed securities (ABS)) fulfilling uniform eligibility criteria specified by the ECB. Tier Two assets consisted of mainly non-marketable assets (such as bank loans in Germany, Austria, France and Spain and mortgage-backed promissory notes in Ireland) that were of particular importance to national financial markets/banking systems and for which eligibility standards were established by the NCBs subject to ECB approval.

22 Annual Report 2006

During the year, the Bank invested framework (see section on Single List). The considerable resources in developing a detailed requirements for the use of credit framework for accepting credit claims from its claims are contained in the new documenation. counterparties as collateral in Eurosystem The new terms and conditions came into effect credit operations7. As part of the related from 1 January 2007. preparatory work, the Bank was in regular Liquidity Forecasts contact with counterparties and the Irish Banking Federation (IBF). As a means of The Bank provides forecasts of the liquidity assisting counterparties in their preparations for needs of the domestic market as an input to using credit claims as collateral, the Bank held the ECB’s liquidity management decisions. an information session for counterparties on Arrangements with the NTMA for managing the envisaged framework in September. the Exchequer account at the Bank, which facilitate more accurate forecasts of domestic The Bank was also in regular contact with the money market liquidity conditions, continued IBF and issuers of MBPNs regarding the to work well in 2006. formulation of an appropriate credit assessment methodology for MBPNs within the Developments in the Exchange Rate confines of the Eurosystem Credit Assessment Mechanism (ERM II) Framework (ECAF). The ECAF defines the As of 1 January 2007 the number of currencies procedures, rules and techniques which ensure participating in ERM II decreased to seven, not that all eligible assets in the single list of including the euro, as Slovenia discontinued collateral meet the Eurosystem’s high credit use of the Slovenian tolar and introduced the standards. To this end, the IBF/issuers decided euro. Slovenia has thus become the thirteenth to seek an external rating for MBPN issues and EU Member State to adopt the single currency contacted Moody’s rating agency towards the and is the first of the new Member States to end of 2005. Following a detailed analysis of join Economic and Monetary Union. The the product, Moody’s assigned a public long- currencies remaining in ERM II are the Cyprus term issue rating of Aa1 to issues of MBPNs. pound, the Latvian lat and the Maltese lira, This rating is considerably above the minimum ERM II participants since May 2005; the − credit standard of A imposed under ECAF. Slovakian koruna, a member since November Documentation on Monetary Policy 2005; the Estonian kroon and the Lithuanian Instruments and Procedures litas, which joined in June 2004; and the The 2007 edition of the Bank’s Documentation Danish krone, which has been an ERM II on Monetary Policy Instruments and member since 1999. Procedures was circulated to counterparties in For each currency participating in the December 2006; this version was published on mechanism, a central rate against the euro is the Bank’s website as well as in hard copy. The defined together with intervention rates set at Bank’s Documentation contains the margins 15 per cent above and below the contractual terms and conditions applicable to central rate. The relevant ERM II central bank, counterparties for conducting monetary policy the ECB and euro-area NCBs (including the operations with the Bank. It was prepared by Bank) stand ready to conduct intervention the Bank in conformity with the revised ECB operations at the margins, in principle General Documentation on Eurosystem automatically and for unlimited amounts, with monetary policy instruments and procedures of (and at the initiative of) eligible market 2006. Its content was verified by the ECB. participants. However, the ECB and the The main amendments to the new participating non-euro area NCBs can suspend documentation relate to non-marketable assets, automatic intervention if such intervention primarily credit claims (bank loans), and their were to conflict with the Eurosystem’s primary incorporation into the Eurosystem’s collateral objective of maintaining price stability.

7 Detailed information can be found in the Bank’s ‘‘Documentation on Monetary Policy Instruments and Procedures’’ 2007.

23 Annual Report 2006

Financial Stability environment, with particular attention to the What is Financial Stability? associated risks and vulnerabilities that exist in the financial system. This is being done through A stable and robust financial system is needed publication of the annual Financial Stability not only to help maintain price stability but is Report and regular stress-testing exercises with important for the performance of the overall the domestic banks. Second, the Bank and the economy and its resilience to shocks. Financial Financial Regulator maintain a dialogue with stability exists where the various components the domestic banks in order to highlight issues of the financial system (financial markets, for the financial system. Finally, there are on- payment and settlement systems and financial going efforts to develop procedures to deal intermediation) function smoothly and without with a potential crisis and to facilitate an interruption, with each component resilient to orderly resolution. shock. Historical experience suggests that financial instability can be very costly both in Stand-Alone Financial Stability Report economic and social terms. If financial The Bank published its third stand-alone institutions run into difficulties then other Financial Stability Report in November 2006. banks, businesses and consumers could be The aim of the Report was to convey the negatively affected. There have been many Bank’s assessment of the risks and examples of financial crises in the past in vulnerabilities in both the financial system and various countries that proved to be very costly the macroeconomic environment while also in terms of economic disruption and lost attempting to convey the importance of a growth. The incidence of these crises seems to stable financial system and to stimulate have grown over time in the wake of financial discussion of the financial stability climate market deregulation and innovation. This among financial market participants, financial explains why central banks are concerned with sector analysts and the wider public. financial stability. Analysis Mandate There is an on-going effort to monitor, measure The Bank’s mandate to contribute to the overall and assess both existing and emerging risks and stability of the Irish financial system derives vulnerabilities in the financial system. In from its statutory duty under the Central Bank & general, this work focuses on issues arising in Financial Services Authority of Ireland Act, the macroeconomy in the household, non- 2003, and also from the mandate of the financial corporate, banking and insurance European System of Central Banks, which sectors. The main areas of research addressed requires the ECB and NCBs to contribute to in the Financial Stability Report 2006 included financial stability in the euro area. While the the following: Bank has overall responsibility for financial (i) the systemic consequences of long-run stability, the Financial Regulator has a mandate trends in banking; to promote a sound financial system and to protect consumers. Consequently, the Bank (ii) two approaches to stress-testing of the works in close co-operation with the Financial domestic credit institutions; Regulator to ensure that financial stability is (iii) two studies on the residential property maintained in Ireland. market, covering the extent of any correlation in the change in house There are three main elements in the discharge prices across different segments of the of our mandate. First, the Bank aims to raise market and the role of income and awareness of financial stability matters and to interest rates in determining house develop the knowledge base in this area. The prices, and aim is to impart information so that people, especially borrowers and lenders, are well (iv) stylised facts on Irish corporate informed about the economic and financial balance sheets.

24 Annual Report 2006

Assessment of Financial Stability in Ireland facing the system, such as those arising from In the Financial Stability Report 2006 the the housing market and the level of household overall assessment was that financial stability indebtedness. Nonetheless, some comfort was risks had increased since the previous year’s taken from the fact that stress tests, which had Report was published. However, the overall been undertaken by the CBFSAI with the major conclusion was that the Irish financial system lending institutions, suggest that these continued to be in a good state of health. The institutions have adequate capital buffers to key vulnerabilities of the financial system were cover a range of shocks. identified as those arising from strong credit growth and rising indebtedness levels Stress-Tests of Domestic Credit Institutions combined with higher repayment burdens and A round of stress testing was launched in 2006 increased uncertainty with respect to house by the Bank with the 11 domestic retail credit prices. The Report emphasised that these institutions, which were required to assess its vulnerabilities in the Irish financial system were vulnerability to hypothetical shock scenarios. important at that time because there were also These shocks included a major fall in foreign risks to the macroeconomy, arising from both direct investment, a negative world trade domestic and international developments, shock, exchange-rate appreciations of differing which were also apparently increasing. magnitudes, interest-rate increases, and falls in Nonetheless, the CBFSAI noted in the Report house prices. At the same time, there was a that the shock-absorption capacity of the separate assessment by the Bank of the banks’ banking system left it well placed to withstand vulnerability to various risks. The results of both pressures from possible adverse economic and stress-testing exercises, notwithstanding some sectoral developments. However, the various important caveats, suggest that the banking vulnerabilities as well as risks to the economic sector’s shock absorption capacity remains outlook would continue to pose issues for the strong. banking system. Financial Stability in the European Union The CBFSAI also has a mandate to contribute to financial stability in the EU. This is a particularly challenging mandate at a time when the business of banking is becoming increasingly internationalised and the Irish financial system is becoming more integrated with other countries’ financial systems. The Bank liaises with the key international organisations which also have an interest in Tom O’Connell, Central Bank, Helmut Ancans, Bank of Latvia and Frances Ruane, Trinity College at the Prospects for Productivity and maintaining financial stability across the EU. Growth in Ireland and the Euro Area conference held in Dublin on Our common aim is to enhance cross-border 15 September arrangements for financial stability matters. IMF Financial Sector Assessment During 2006, the International Monetary Fund The Bank provides the Irish input into the ECB’s (IMF) completed its second assessment of the financial stability report through its Irish financial sector. The first assessment had membership of the Banking Supervision been completed in 2000. The IMF’s assessment Committee and its associated working groups of financial stability concluded that the Irish and task forces. The latest assessment of financial sector had continued to perform well financial stability in the euro area published by since 2000, with financial soundness and the ECB is that the euro-area financial system is market indicators being generally strong and in a generally healthy condition. This, the outlook for the system being positive. The combined with a relatively favourable assessment highlighted risks and challenges economic outlook, suggests that the most likely

25 Annual Report 2006

prospect, notwithstanding some important risks Co-operation with the Financial Regulator and vulnerabilities, is for financial system There is close co-operation between the Bank stability to be maintained in the period ahead. and Financial Regulator on matters relating to financial stability. While the Bank has overall External Meetings responsibility for financial stability, the Financial Regulator has a mandate to promote a sound The state of financial stability in Ireland is of financial system and to protect consumers. A interest to many different organisations. The joint committee, the Financial Stability CBFSAI accommodates any requests to discuss Committee which is chaired by the Director financial stability issues. During 2006, meetings General and includes senior personnel from were held with domestic credit institutions, the Bank and the Financial Regulator, is a key ratings agencies, the IMF as well as the element in this co-operation. A memorandum Department of Finance. In addition, the Bank of understanding underpins the co-operation liaised with other EU and euro-area central between both parties. The annual Financial banks to exchange views on financial stability Stability Report reflects the joint views of the issues as well as to offer technical assistance. Bank and the Financial Regulator.

26 Annual Report 2006

Economics, Research and Statistics environment export performance was rather Economics and statistics work in the Bank muted and, following the pattern of recent during 2006 encompassed the following years, the main growth driver was domestic activities: demand.

G The provision of an effective economic The main issues of concern internationally last intelligence service including the year mirrored those of the previous year, monitoring, analysis and projection of namely the persistence of global imbalances, short-term developments in Ireland, the energy price volatility and political uncertainty euro area and the wider global economy. in certain key regions. A major concern domestically was the rather unbalanced growth G Economic research on a range of profile, which in recent years has become structural issues including macroeconomic, increasingly reliant on domestic expenditure, microeconomic and financial stability with a corresponding decline in the relative issues and the maintenance and contribution of external demand. development of a macroeconomic model. In this context, work was undertaken on a number of relevant topics including an G The provision and analysis of statistics assessment of recent trends in the Irish energy including monetary, financial, balance-of- sector, the exchange rate exposures of the Irish payments and prudential data. economy and developments in exports, In addition to the above activities, a significant savings, investment and the balance of additional development last year was the payments. In addition, the implications of the organisation of an international conference on Doha world trade round were examined. In ‘‘Prospects for Productivity and Growth in terms of domestic issues, a stress testing Ireland and the Euro Area’’. exercise to assess the macroeconomic implications of a major correction of the Much of the economics work of the Bank is housing market was completed with the results carried out in co-operation with other published in the Financial Stability Report Eurosystem National Central Banks and the 2006. Research work on the housing market ECB through a system of Committees, Working focused on the role of interest rates, income Groups, Research Networks and Task Forces. and affordability in determining house prices. This work supported the Governor of the Bank The implications of maturing SSIA accounts and other members of the ECB Governing were assessed in research that addressed the Council in formulating policy throughout the likely impact on domestic demand. In addition, year. In addition, it contributes to effective the role of real and financial wealth in prudential supervision and consumer determining consumption was also examined. protection by the Financial Regulator. Work was undertaken as part of a Eurosystem The work undertaken is summarised in the task force to develop a real-time database for following paragraphs under a number of broad Ireland and the euro area. As part of this work headings: economic intelligence and an examination of data revisions in Irish forecasting, inflation and competitiveness, quarterly national accounts was completed. monetary issues, economic modelling, public Further work is underway on a coincident finances, structural issues (including the indicator of the Irish economy with a view to conference on productivity and growth) and broadening its scope. In addition, work on statistics. various issues related to forecasting and econometric methods was published in the Economic Intelligence and Forecasting Bank’s Technical Paper series. The Irish economy grew strongly last year at Six forecasting exercises were completed a rate somewhat above its estimated long-run during the year, with two of these conducted potential rate. Despite a very positive external within the context of the Eurosystem’s Broad

27 Annual Report 2006

Macroeconomic Projection Exercises and the At the euro-area level, the Bank participated in other four for publication in the Bank’s the third Eurosystem Research Network, which Quarterly Bulletin. is on wage dynamics. A paper on the relationship between the wage share of The more formal approaches to economic national income and inflation, written for this analysis were supplemented by assessments of network, was presented at a joint ECB-CEPR business sentiment based on contacts with key conference in December and has been firms in various sectors across the economy. submitted to the ECB Working Paper series. The results of these contacts were reported to Other background research papers covered the Board of the Bank on a number of topics such as the usefulness of core inflation occasions during the year. In addition, work for forecasting headline inflation and a began on an annual broadly-based postal segmented markets model of inflation, both of survey of business conditions with the first such which were published in the Bank’s Technical survey being conducted in early 2007. Paper series. Monetary Issues Inflation and Competitiveness Research work in the Bank has also examined Developments in domestic prices, costs and a number of monetary issues. These included a competitiveness were monitored closely during study of the usefulness of interest rate spreads the year, with assessments and forecasts as a monetary indicator, an analysis of published in the Quarterly Bulletins. Consumer transparency-related characteristics of price inflation increased during 2006 which, European and US sovereign bond markets and combined with an appreciation of the effective a study of the relationship between commodity exchange rate, implied deterioration in price prices, money and inflation. The latter paper competitiveness. Average HICP inflation in the was presented at the ECB workshop on the role year was 2.7 per cent, up from 2.2 per cent in of monetary analysis in monetary policy and 2005. Average euro-area inflation in 2006 was has been accepted for publication in the ECB 2.2 per cent. In addition, four inflation Working Paper series. Another study examined projection exercises using agreed assumptions how the effects of monetary policy on inflation in the context of where some but not all were produced, and submitted to the ECB as individuals are liquidity constrained. part of a coordinated Eurosystem exercise. A number of reports on various aspects of Other work conducted during 2006 include an economic competitiveness were prepared for article published in the Quarterly Bulletin the Board of the Bank, including an assessment examining developments in short-term of exchange rate exposures of the Irish securities markets in the euro area. In addition, economy and an update on recent trends in two other papers were prepared and presented at ECB expert group meetings in Frankfurt. One inflation and competitiveness, which was paper dealt with Other Financial Institutions published in the No. 2 Quarterly Bulletin 2007. and their contribution to money and credit development in Ireland. This was a collaborative project between staff members in two departments — MPFS and Statistics. The other paper detailed developments in Irish credit markets and this paper was presented to an ECB Expert Meeting on ‘‘Housing Finance and Monetary Policy’’. Econometric Modelling Work on the further development of the Bank’s macroeconometric model continued last year. George Lee, Economics Editor, RTE and Governor Hurley at the The model is used for forecasting and scenario Prospects for Productivity and Growth in Ireland and the Euro Area analysis both in stand alone mode for the conference analysis of the Irish economy and as part of a

28 Annual Report 2006 system of linked country models for the investment in Irish growth and progress was analysis of the euro-area economy. An made on firm-level projects that provide extensive revision of the model was insights into the sources of growth in undertaken to ensure consistency with Ireland. quarterly ESA95 National Income statistics. In addition, work was undertaken to construct A number of papers documenting this work detailed measures of capital input and to assess have been published or accepted for the link between house prices and publication by leading Irish and international consumption spending with the results being journals including the Journal of Economic published in the Bank’s Technical Paper series Growth, Oxford Review of Economic Policy and and Quarterly Bulletin. During the year, work the Economic and Social Review. on a new version of the model was begun with a focus on improving forecasting performance. Statistics — Monetary, Financial, Balance-of- Payments and Prudential Data Public Finances Public finance developments continued to be The Bank has large and growing reporting reviewed last year as part of the Bank’s role in obligations in the area of statistical reporting. assessing domestic economic policy. The Bank ECB requirements for money and banking, actively participated in various ESCB working balance-of-payments and financial accounts groups, in the ESCB’s assessment and have continued to expand in 2006. Regular projection of public finances in the euro area domestic publications now include a quarterly and the EU 25. Background research covered note on sectoral developments in private- a range of topics including the impact of sector credit, in addition to the ‘Monthly demographic trends on pensions and other Statistics’. The Bank also collects data and age-related expenditures and a review of fiscal undertakes statistical analyses on behalf of the projection elasticities. Financial Regulator.

Structural Reform, Growth and Productivity During 2006, work commenced on updating A highlight of the Bank’s work on structural ECB regulations in the area of Monetary and reform, growth and productivity was the Financial Institutions (MFI) balance sheet8 and organisation of a successful conference in interest rate9 statistics, which concentrate on September 2006 featuring a number of high- the development and harmonisation of data profile international experts, as well as Bank across the euro area. researchers presenting work on a range of topics including the determinants of, and Preparations continued on the development of prospects for, growth in the Irish economy, an statistical reporting for the Other Financial optimal foreign direct investment strategy for Intermediaries (OFIs) sector. Efforts have Ireland, prospects for growth in the euro area focused on the two largest OFI subcategories (with a particular focus on trends in total factor — investment funds and financial vehicle productivity) and the factors behind the corporations (FVCs). As a result, over 4,000 slowdown in productivity growth in Europe investment funds and sub-entities will shortly compared to the US. commence reporting statistical data. The data In addition, a number of studies were collected will be supported by the Centralised completed during the year on cross-country Securities Database (CSDB) to ensure that the patterns of growth including the role of requisite statistical breakdowns are derived. measurement issues in comparing growth Work is also ongoing on the development of across countries. In the Irish context, a study statistical data on the increasingly important was completed on the role of capital FVC sector.

8 Regulation (EC) No 2423/2001 of the ECB of 22 November 2001 concerning the consolidated balance sheet of the monetary financial institutions sector (ECB/2001/13). 9 Regulation (EC) No 63/2002 of the ECB of 20 December 2001 concerning statistics on interest rates applied by monetary financial institutions to deposits and loans vis-a`-vis households and non-financial corporations (ECB/2001/18).

29 Annual Report 2006

Thematic meeting of ESCB Statistics Committee held in Dublin in September Further progress has been made on the of financial statistics. As part of this project, the development of the CSDB within the ESCB. Bank and the CSO developed a joint survey This database is essential for the compilation of form to integrate statistical requirements for portfolio investment statistics on a security-by- balance of payments and the forthcoming ECB security basis, as required by the Balance-of- Investment Fund Regulation. This has helped to Payments’ Guideline10 and forthcoming ECB reduce the statistical reporting burden on Investment Fund Regulation. respondents, and to avoid duplication of work in both institutions. The amended Monetary Union Financial Accounts (MUFA) Guideline11 came into force Finally, the Bank’s Statistics Department carried in 2006, substantially increasing the data out statistical analysis on behalf of the Financial requirements of the ECB in the area of Regulator. In 2006, two reports on private quarterly financial accounts. The Bank also motor insurance statistics were published.13 provides financial sector data to the Central They examined trends in premium income, Statistics Office (CSO), for input in the accident frequency and claims costs, and compilation of annual financial accounts. presented analysis of market share and pricing. As in previous years, the Bank maintained a very close working relationship with the CSO, particularly in the areas of balance-of-payments and financial accounts. A joint project was established as part of the SPAR-BES12 initiative to consider possible efficiency gains in the area

10 Guideline of the European Central Bank of 16th July 2004 on the statistical reporting requirements of the ECB in the field of balance-of-payments and international investment position statistics, and the international reserves template (ECB/2004/15). 11 Guideline amending Guideline ECB/2002/7 on the statistical reporting requirements of the European Central Bank in the field of quarterly financial accounts (ECB/2005/13). 12 Statistical Potential of Administrative Records for Business and Environmental Statistics. 13 Private Motor Insurance Statistics, 2003 and 2004.

30 Annual Report 2006

Management of Investment Assets dealers and senior analysts of the Bank’s Investment Assets Financial Markets Department, At end-December 2006, the Bank’s investment together with a representative from portfolios comprised euro-denominated assets the Risk Unit, meets weekly to of \11.6 billion and US dollar holdings of \0.5 formulate short-term policy. billion, together amounting to \12.1 billion. G The Bank’s Investment Desk carries This total represents an increase of \1.3 billion out the day-to-day dealing activities on the comparable figure last year. The that are required to implement increase is accounted for mainly by increased decisions and to ensure that the holdings of euro assets and accumulation of Bank’s investment assets are fully dividends and interest. The Bank’s euro invested. portfolio derives mainly from sales of foreign G Risk monitoring and performance currency assets in the context of portfolio measurement are carried out restructuring since 2002 and also from its independently of the Financial holdings prior to January 1999 of EMU legacy Markets Department. currencies. Under the Statute of the ESCB, one of the basic The parameters within which the Bank’s tasks of the System is to hold and manage the investment portfolio is managed are official reserves of Member States. Thus, the determined by the Board of the Bank: Bank’s foreign currency holdings form part of these include the currency composition of the foreign reserves of the Eurosystem. The the non-euro reserves, the choice of Treaty on European Union (the Maastricht investment instruments, and the overall Treaty) provided for the initial transfer by NCBs \ degree of risk that the Bank considers of up to 50 billion of foreign reserve assets to \ appropriate for its investment activities. the ECB (the Bank’s portion amounted to 0.4 The risks inherent in managing the Bank’s billion). Moreover, under the EU Treaty, the investment portfolio are managed by a ECB may make further calls of foreign currency comprehensive system of controls, limits assets from NCBs’ foreign-exchange reserves. and procedures. The organisation of asset Portfolio Restructuring management activities at the Bank is as Table 1 below shows the change in the follows: currency composition of the Bank’s investment G An Investments Committee of the portfolio between euro- and non-euro- Board reviews investment policy denominated assets since December 1998. It and performance. can be seen that over 96 per cent of the portfolio is now denominated in euro. G This is supported by the Bank’s Furthermore, the exchange rate risk on the Investment Assets Committee, which small non-euro portion (held in US dollars) is considers policy issues and strategy hedged. This ensures that the Bank has virtually relating to the investment portfolio. no exposure to volatility of returns arising from This Committee, under the the impact of exchange rate movements on the chairmanship of the Assistant euro value of its investments. Director General, includes senior staff of Financial Markets The Bank’s Hold-to-Maturity (HTM) portfolio14 Department, Financial Control grew to \2.12 billion as at the end of 2006 as Department and the Risk a result of the reinvestment of income earned. Monitoring Function. During the first half of 2006, the durations of G A Standing Investments Committee, the US dollar and euro portfolios were comprising management, senior maintained at their existing low levels in order

14 A HTM portfolio, because it is not traded during its life, is not subject to mark-to-market accounting rules; rather the return is spread evenly over the life of the assets included in the portfolio.

31 Annual Report 2006

Table 1: Currency composition (%) of the investment portfolio since EMU

Dec ’98 Dec ’99 Dec ’00 Dec ’01 Dec ’02 Dec ’03 Dec ’04 Dec ’05 Dec ’06

Euro 29 28 27 28 43 68 80 95.5 96.2 Non-euro 71 72 73 72 57 32 20 4.5 3.8

to avoid some of the capital losses that would Gold Holdings be associated with rising yields. In the second The Bank holds a small portion of its assets in half of the year, however, the duration of the gold. Gold holdings were valued at \92 million USD portfolio was gradually increased, at end-year. The gold is held in physical form reflecting the market perception that US and, with the exception of coin stocks held in interest rates were near their peak. the Bank, may be placed on deposit in the London gold market depending on market Return on Investment Assets conditions. The Bank did not purchase or sell Total earnings (income and capital gains) on any gold during 2006. the investment portfolios amounted to \274.5 million compared with \240.4 million in 2005. ECB Pooled Reserves In rate-of-return terms, earnings on the In January 1999 the Governing Council of the investment portfolios were 2.55 per cent ECB decided that \39.5 billion — that is, \50 compared with 2.37 per cent last year. The billion adjusted downwards for the shares of higher return in 2006 is primarily due to higher the countries (UK, Sweden and Denmark) not interest returns on cash holdings. participating in the euro area — should be transferred to the ECB at the commencement The investment portfolio is invested in a of EMU. Each NCB’s contribution to the ECB wide range of instruments — deposits, reserves was in proportion to its shareholding other money market instruments, in the ECB, which, in turn, is a function of each government bonds and other high-quality Member State’s shares of the euro-area’s GDP fixed-income securities. The objective is to and population. Further reserves were maximise return within pre-defined risk transferred to the ECB as other countries joined parameters. Within this framework, the EMU, namely Greece (January 2001) and Bank employs a number of strategic and Slovenia (January 2007). The size of the tactical investment methodologies and portfolio managed by the Bank on behalf of the techniques. On a day-to-day basis, the ECB was \524.9 million at the end of 2006. investment strategy involves positioning the portfolio to take advantage of The basic objectives of ECB investment policy opportunities to enhance returns in the are to protect the value of the ECB’s reserves international money and capital markets. and to ensure that their assets are sufficiently Exposure to foreign currency risk is kept to secure and liquid to support the ECB’s a minimum. monetary policy. When foreign exchange intervention takes place, the foreign reserve Over the year, the Bank managed its assets of the ECB are used. At the end of 2006, investment assets (both foreign currency and the ECB’s net foreign reserve assets amounted euro denominated) by reference to benchmark to \42.3 billion compared with \43.5 billion portfolios created by Merrill Lynch on behalf of (revised) at the end of the previous year. The the Bank. These benchmark portfolios change in the value of the portfolio reflects incorporate the Bank’s preferences for liquidity, primarily the depreciation of the US dollar and risk and return. The active management of the Japanese yen vis-a`-vis the euro, which was Bank’s assets in 2006 produced results in partly offset by the appreciation of gold and excess of the return on the benchmark positive net returns from portfolio management portfolios. over the year.

32 Annual Report 2006

The foreign reserves transferred to the ECB are Risk Management managed in a decentralised manner by the The risk control policy framework governing NCBs. The ECB determines the investment the Bank’s asset management and monetary parameters; makes policy decisions, including policy operations is established by the Board of setting performance benchmarks, approving the Bank and is reviewed regularly. The counterparties and setting permitted risk levels; framework consists of various risk policies, and performs control and monitoring functions. procedures and limits. The Bank’s code of The benchmarking framework is set at both conduct for dealers, settlement staff and strategic and tactical levels and each NCB’s decision makers covers potential conflicts of performance is measured against the tactical interest, private financial accounts, insider benchmark and against the other NCBs. Within trading, dealing limits and related issues. this framework, each NCB undertakes management and settlement functions The Bank’s Risk Management Unit, a formal associated with their portion of the ECB autonomous unit, is responsible for the reserves. NCBs act on behalf of the ECB on a measurement, monitoring and reporting of the disclosed agency basis so that market Bank’s risk exposures and for monitoring and participants can differentiate between reporting compliance with limits etc. The Unit operations carried out on behalf of the ECB also measures the return on the Bank’s and those undertaken on NCBs’ own behalf. investment portfolios. The measurement of The Bank enters trades onto the ECB reserve performance involves the attribution of return management system, which permits the ECB to across portfolios, sectors and instruments. The monitor positions and exposures and to carry Bank’s performance in terms of the return out performance measurement. achieved on its portfolios is measured against a notional benchmark portfolio that is compiled A new operational framework for the ECB’s externally by Merrill Lynch. foreign reserve management was implemented smoothly during January 2006. The new The Risk Management Unit is operationally framework involves currency specialisation, independent of the dealing function and according to which euro-area NCBs will no presents regular reports to the relevant longer necessarily participate in the operational decision-making bodies of the Bank including management of both a US dollar and a the Board, the Audit Committee, the Japanese yen portfolio on behalf of the ECB. Investment Committee and the Management The changes to the framework have been Board. In addition to the work performed by introduced as a step towards achieving the the Risk Unit, the Bank’s asset management objective of rationalising and making more and monetary policy operations are audited by efficient the decentralised implementation of the Bank’s Internal Audit Department, by the investment operations within the Eurosystem, Bank’s external auditors — the Comptroller and particularly in view of the future enlargement Auditor General and Deloitte and Touche and of the euro area. The Bank opted to manage a by the ECB’s external auditors — KPMG. US dollar portfolio exclusively. The main risks associated with managing the In 2006 work continued on extending the list investment portfolio are currency risk, market of eligible instruments in which foreign reserves risk, credit risk, liquidity risk and operational can be invested. Foreign exchange swaps for risk (including settlement risk). investment purposes and US Treasury STRIPs (Separate Trading of Registered Interest and Currency Risk is the risk of capital losses as a Principal) were added to the list. Progress has consequence of fluctuations in exchange rates. been made in the work on the introduction of This risk is managed by minimising the Bank’s interest rate swaps. Also, a pilot automated holdings of volatile foreign assets while taking securities lending programme is to be Eurosystem obligations into account. The established for the USD portfolio. currency distribution of the portfolio is

33 Annual Report 2006

Table 2: Value at Risk Analysis of Investment Portfolio

\m Interest Rate Foreign Exchange Total Risk Risk Risk*

31 December 2006 127.8 1.8 128.1 31 December 2005 126.9 2.6 126.6

*VaR measures the potential loss at a specific confidence level (e.g. 99%) over a certain period of time (e.g. 1 year). Thus, the figure of \128.1 million implies that at 31 December 2006 there is a 1% chance that the portfolio’s value would be \128.1 million or more below its current value at 31 December 2007.

reviewed periodically using quantitative counterparty according to its credit rating and techniques such as currency optimisation the maturity of the deposit. The Bank’s models, Value at Risk (VaR) and stress testing exposure to banks and issuers of securities as well as a variety of qualitative factors. At analysed by credit rating is shown in Table 3 end-December 2006, the Bank managed below. portfolios denominated in euro and US dollars (hedged against the euro). Liquidity Risk refers to the possible losses or difficulties that could arise in converting assets Market Risk relates to the impact of changes into cash. This risk is managed by ensuring that in interest rates on the value of the investment the investment portfolio is invested in portfolio. The management of market risk in the instruments for which deep and active markets Bank is primarily based on duration, although exist, such as securities issued by governments Value at Risk and stress testing techniques are and other high- quality issuers and by applying also used. The duration of a portfolio maximum exposure limits. determines its sensitivity to interest rate changes — the higher the duration the more Operational Risk is the possibility of direct or risk is assumed. Global economic conditions, indirect losses, or of reputational damage, bond yields, view of market participants, and arising from inadequate or failed internal liquidity requirements are all factors that are processes, people and systems or from external taken into account in setting the duration for events. This risk is managed by the segregation the investment portfolios. of the dealing, settlement and risk management functions; by restricted physical access to the Table 2 sets out the Value at Risk (VaR) on the dealing and settlements areas; and by a investment portfolio. comprehensive body of controls and procedures aimed at minimising the risk of Credit Risk relates to the possible loss in asset unauthorised trading. value due to the default of counterparty banks, issuers of securities or other counterparties. A high-level committee, chaired by the Deputy Credit risk is managed by confining exposures Director General, oversees the management of to high-quality instruments and to operational risk in the Bank. The operations of counterparties with high credit ratings. All each function are reviewed regularly to ensure approved counterparties and issuers must have that potential exposures are identified and that an acceptable credit rating from at least one appropriate controls are implemented. A full of the international credit rating agencies. For review of operational risk is furnished to the deposits, maximum limits are set for each Board on an annual basis.

Table 3: Exposure of Investment Portfolio by Credit Rating

% of Investment Portfolio Aaa Aa1 Aa2 Aa3 A1 A2 A3 Total

End December 2006 62 12 12 13 1 — — 100 End-December 2005 55 16 16 12 — 1 — 100

34 Annual Report 2006

Payments and Settlements technical consolidation of the TARGET Real Time Gross Settlement/TARGET system, a harmonized service level for users of the system and a single price The Irish Real-time Interbank Settlement structure. Following consultation with the Company Limited (IRISCo) was TARGET user community, the Governing incorporated on 30 May 1995 to facilitate Council approved, in July 2004, the the development of a real-time gross General Functional Specifications for this settlement (RTGS) system in Ireland. This Single Shared Platform (SSP), which is to RTGS system (known as IRIS — Irish Real- replace the individual national RTGS time Interbank Settlement) became platforms and constitute the TARGET2 operational in March 1997 and is now the system. domestic RTGS system for the settlement In December 2004, the Governing of euro transactions. The total value of Council accepted a joint offer made by the payments processed by the RTGS system Banca d’Italia, Banque de France and is significantly higher than that processed through the domestic retail clearing Deutsche Bundesbank to build and system, although the corresponding operate the platform. The Bank of England number of transactions is much lower. and the Sveriges Riksbank have decided not to participate in TARGET2, with The RTGS system is managed and Sveriges Riksbank’s participation ceasing operated by the Bank and is interlinked at end-December 2006. All euro-area with the Trans-European Automated Real- NCBs have confirmed their intention to time Gross settlement Express Transfer participate in the SSP. (TARGET) system. TARGET, which Despite the centralisation of RTGS commenced operations on 4 January processing, the existing business 1999, is the mechanism used to effect real- relationship and contacts between NCBs time cross-border payments in euro and to and their banking communities will facilitate monetary policy implementation. continue. The Bank participates in the TARGET consists of the national RTGS various Eurosystem Committees and systems of the 12 euro-area countries and Working Groups that are defining the of the ECB Payment Mechanism. In specifications of the SSP, developing the addition, the national euro RTGS systems necessary legal arrangements and of Denmark, Poland, Slovenia (live from 1 preparing for system training and testing. January 2007) and the United Kingdom are connected to TARGET. The major innovations arising from the TARGET2 system will be: Payments are effected across settlement G Replacement of the current accounts of the participating institutions at decentralised TARGET structure with their local central bank and can be made the Single Shared Platform (SSP). either on behalf of customers or on an G Availability of state-of-the-art liquidity institution’s own behalf. The TARGET system, which operates from 06.00 until management tools, such as 17.00 (local time), facilitates payments on prioritisation of payments, liquidity behalf of customers until 16.00 with inter- reservation, definition of sender bank payments processed until 17.00. limits and active queue management. TARGET2 G The possibility for users to submit In October 2002, the ECB Governing timed transactions. Council decided on the long-term strategy G The possibility for euro-area users to for TARGET (TARGET2) which envisaged group individual RTGS accounts held

35 Annual Report 2006

with different euro-area central In February 2005, the ECB’s Governing Council banks and pool the available published a TARGET2 Progress Report in which intraday liquidity for the benefit of all it provided information on a number of issues, members of the group of accounts. including liquidity management and pooling, home accounting issues, settlement G The provision of settlement services for all kinds of ancillary systems, arrangements for ancillary systems, pricing of including retail payment systems, the TARGET2 core services and migration to large-value payment systems, the SSP. foreign exchange. This was followed in October 2005 by a G Enhanced reliability and resilience, Second Progress Report on TARGET2 which and sophisticated business clarified the ‘go live’ date of the SSP and the contingency arrangements. dates for migration of the various national G Access for users to comprehensive banking communities, with the Irish community online information and easy-to-use scheduled to migrate to the TARGET2 platform liquidity control measures. on 18 February 2008.

Table 4: Composition of Migration Groups and Changeover Dates

Group 1 Group 2 Group 3 Group 4 19 Nov. 2007 18 Feb. 2008 19 May 2008 15 Sep. 2008

Austria Belgium Denmark Cyprus Finland Estonia Germany France ECB Reserved Latvia Ireland Greece for Lithuania Netherlands Italy contingency Luxembourg Portugal Poland Malta Spain Slovenia

Meeting of Task Force on TARGET2 Migration Issues held in Lisbon, 7-8 June 2006

36 Annual Report 2006

The Second Progress Report also presented a setting up of a new service — TARGET2- pricing scheme for the core services to be Securities (T2S) — for the settlement of provided by TARGET2 with the pricing scheme securities transactions of multiple CSDs on a to be decided following discussion with the single platform in central bank money. banking community. It also provided Following an informal consultation of the information on pricing of the intraday liquidity market, the Governing Council decided, in pooling feature and ancillary system October 2006, to mandate the Payment and settlement, night-time settlement in TARGET2, and contingency arrangements. Settlement Systems Committee (PSSC) to prepare a detailed feasibility study on the In July 2006 the ECB issued a ‘‘Communication project by end-February 2007. It was intended on TARGET2’’, the purpose of which was to that this study would provide the elements for update market participants on decisions the Governing Council to finally decide to regarding TARGET2 participation and pricing. launch the project. The Eurosystem held a number of tri-party meetings (CSDs, banks and The subsequent Third Progress Report, issued NCBs) to present elements of the feasibility in November 2006, provided an update on study as it progressed, while the ECB met outstanding issues related to pricing and also separately with Central Counterparties. The on legal issues. In addition, the Report CBFSAI participated in the tri-party meetings described the progress made with regard to and also in internal Eurosystem discussions on contingency procedures and testing and the project. migration activities. On 8 March 2007, following consideration of a project blueprint and the feasibility study Timely communication with the various user prepared by the PSSC, the Governing Council communities is of primary importance to the concluded that the T2S project was feasible success of the TARGET2 project and is carried and decided to launch the next phase of the out both at Eurosystem and NCB level. project. The objective of this phase is to Accordingly, on a regular basis throughout prepare, in cooperation with CSDs and market 2006, the Bank provided updates on TARGET2 participants, user requirements that the developments to the Board of IRISCo, the Eurosystem regards as deliverable within a owner of the local RTGS system, and also to its reasonable cost and time scale. A public Operations Committee. It also arranged consultation was launched on 26 April in order presentations on developments to the wider to obtain input regarding the user local banking community, when appropriate. requirements. A further public consultation will take place by the end of 2007, requesting A vital element of preparation for TARGET2 will comments on fully articulated user be advance testing of the readiness of requirements. It is intended that the Governing participants to interact with the TARGET2 SSP. Council will decide on the development phase The Eurosystem published, in November 2006, only after this public consultation has taken a TARGET2 User Test Guide that provided place (i.e., by early 2008). general information on testing procedures and detailed scenarios for connectivity and The concept behind the T2S project is that interoperability tests. User testing for the Irish CSDs would use T2S as a common technical banking community is scheduled to commence service for settlement of securities transactions, in June 2007. with the securities accounts of such CSDs being maintained on the T2S technical platform TARGET2 — Securities alongside central bank cash accounts. The In July 2006, the Governing Council of the ECB CSDs would maintain their relationships with announced its intention to explore, in intermediaries, investors and issuers, as well as cooperation with central securities depositories their asset servicing function (such as the (CSDs) and other market participants, the management of corporate actions). It is

37 Annual Report 2006

intended that T2S would be developed and of total transactions processed by the TARGET operated within the Eurosystem on the system in 2006. TARGET2 platform in order to exploit synergies to the fullest extent. Four Eurosystem national Availability and Service Level central banks (Deutsche Bundesbank, Banco The overall availability of TARGET was 99.87 de Espan˜a, Banque de France and Banca per cent in 2006, compared with the minimum d’Italia) are ready to develop and operate T2S. availability requirement of 99.44 per cent. Availability of the IRIS system was 99.78 per Traffic in 2006 cent. As indicated in Table 5, TARGET as a whole processed a total of 83.2 million payments with Collateral Management a total value of \534 trillion in 2006. This Under the terms of Article 18.1 of the corresponds to a daily average of 326,000 ESCB statute, all credit operations payments with a value of \2.1 trillion. The conducted by counterparties with the growth of 9.2 per cent in the volume of Bank must be based on adequate transactions was mainly due to an increased collateral provided to the Bank by its number of customer payments, reflecting a counterparties. further migration of commercial payments from Risk control measures are applied to correspondent banking to interbank systems collateral underlying monetary policy and such as TARGET. intra-day operations in order to protect the Eurosystem against the risk of financial loss In excess of 1.2 million payments were if such collateral has to be realised in the processed through IRIS during 2006 with the event of default of a counterparty. The risk value of those payments amounting to control measures entail the application to approximately \6.7 trillion. The average daily individual assets of a ‘‘valuation haircut’’ number of transactions initiated by IRIS which varies on the basis of the nature of participants during 2006 was 4,775, up 11.6 the asset concerned and the liquidity per cent on the 2005 figure, with an average category into which it falls. Application of daily value of \26.1 billion. the ‘‘valuation haircut’’ entails the value of the underlying asset being calculated as Transactions processed by IRIS represented 1.2 the market value of the asset less a certain per cent by value and 1.5 per cent by volume percentage (i.e., the haircut).

Table 5: TARGET Traffic

2006 2005

Volume of transactions for year (million) 83.2 76.2 Volume of transactions per day 326,000 296,000

Value of transactions for year (trillion) 534 489 Value of transactions per day (\ trillion) 2.1 1.9

Average Daily Transactions via IRIS

Volume of transactions per day Domestic 2,870 2,619 Cross-border (TARGET) 1,905 1,658 Total 4,775 4,277

Value of transactions per day (\ billion) Domestic 13.9 10.8 Cross-border (TARGET) 12.2 11.0 Total 26.1 21.8

Target Availability and Service Level Overall availability of TARGET (per cent) 99.87 99.83 Minimum availability requirement 99.44 99.44 IRIS availability 99.78 99.93

38 Annual Report 2006

The Bank values assets put forward by its that other SSS. Across the Eurosystem, the counterparties, both at the time of use of links for delivery of collateral on a nomination of assets as collateral for a cross-border basis is very much less than particular credit operation and the use of the CCBM. subsequently on a daily basis until maturity of that operation. If the value of the Collateral Usage underlying assets falls below a certain During 2006, the Bank’s counterparties level, the Bank requires the counterparty continued to make extensive use of assets on to pledge additional assets (i.e., a margin a cross-border basis as collateral for monetary call). Similarly, if the value of the policy and intraday credit operations underlying assets, following their conducted with the Bank. At end-December revaluation, exceeds a certain level, the 2006, assets delivered on a cross-border basis Bank releases excess assets to the accounted for 90 per cent of the total collateral counterparty on request. used by the Bank’s counterparties for such Cross-Border Use of Eligible Assets credit operations, up from 80 per cent in 2005. The main issuers of these assets were credit Counterparties may use eligible assets on institutions which accounted for 51 per cent of a cross-border basis, i.e., they may obtain the total (mainly bonds and medium-term funds from the Bank by making use of eligible assets located in another Member notes) and corporate issuers which accounted State. In the Bank’s case all Irish for 30 per cent (bonds, medium-term notes and Government Bonds provided to the Bank asset-backed/mortgage-backed securities). as collateral are delivered into its account in the Euroclear system. The Bank also Bond Register uses its account in the Euroclear system to Irish Government Bonds (and other bonds hold other securities issued into Euroclear for which the Bank acts as registrar) are and which are provided to the Bank as settled in Euroclear, which is based in collateral. The other mechanisms available Belgium. The Bank maintains the register to counterparties to mobilise assets on a of bonds issued on the domestic market cross-border basis are the Correspondent by the National Treasury Management Central Banking Model and Links between Agency, the Housing Finance Agency, the Securities Settlements Systems. European Investment Bank and Ulysses Securitisation plc. Ulysses Securitisation is Correspondent Central Banking Model a state-sponsored financing vehicle, which (CCBM) was incorporated following the passing of The CCBM was developed by the NCBs the Securitisation (Proceeds of Certain and by the ECB to ensure that eligible Mortgages) Act, 1995. assets may be used on a cross-border basis irrespective of country of issue. Under this The Bank, in its role as registrar, effects model, central banks act as custodians dividend and redemption payments to (correspondents) for each other in respect account holders, including Euroclear (on of securities accepted in their local behalf of relevant participants in the depository or settlement system. Euroclear system). The total of all holdings of Euroclear participants in each bond is Links between Securities Settlement recorded in an omnibus account on the Systems (SSSs) Bank’s register in the name of Euroclear Eligible links between EU SSSs can also be Nominees Limited. Transactions between used for the cross-border transfer of Euroclear participants are effected within securities, subject to those links having the Euroclear system without affecting the been approved by the ECB. A link Bank’s Register, while transactions between two SSSs allows a participant in between registered holders and Euroclear one SSS to hold securities issued in participants necessitate updating of the another SSS without being a participant in Register.

39 Annual Report 2006

At the end of 2006, the nominal value of bonds From an EU perspective, the legal basis for the on the Register amounted to \31.5 billion, a Bank’s oversight role is covered in the Treaty small decrease over the value outstanding at establishing the European Community, and also end-2005. Four bonds matured during 2006 in the Statute of the European System of resulting in redemption payments of \377.8 Central Banks and the European Central Bank. million. There were no new Irish Government Article 105 (2) of the Treaty, and Article 3 of bond issues by the NTMA in 2006. At end- the Statute, both state ‘‘. . . the basic tasks to December 2006 there were 1,950 accounts on be carried out through the ESCB shall be . . . to the Register, down from 2,983 at end-2005. promote the smooth operation of payment systems.’’ In order to fulfill its obligations under the European Union Council Directive 2003/48/EC The Bank’s payment and securities settlement of 3 June 2003 on taxation of savings income systems oversight role is also reflected in in the form of interest payments, in 2006 the Section 7 of the Central Bank and Financial Bank notified the Revenue Commissioners of Services Authority of Ireland Act, 2003, which interest payments made during 2005 on bonds includes the objective of ‘promoting the on the Bank’s register to individuals resident in efficient and effective operation of payment and other EU Member States and other relevant settlement systems’. territories. In carrying out its oversight role, the Bank’s Payment Systems Policy and Oversight primary focus is on promoting an environment Objectives of Payment and Securities in Ireland that is safe, effective and efficient, Settlement Systems Oversight and on ensuring that all credit institutions with The principal aim of oversight (or regulation) of a requirement to do so can access these these systems is to ensure that they function at systems on a fair and equitable basis. The Bank all times in an orderly manner, thereby also aims to ensure that the systems do not minimising systemic risk. Implementation of an operate in such a way as to cause, or add to, effective oversight regime for payment and instability in the operation of Ireland’s financial securities settlement systems protects the markets. The proper functioning of these country’s financial infrastructure as a whole systems is a core requirement for maintaining from possible ‘domino effects’ that might occur financial stability, and for meeting both the if one or more credit institutions participating business needs of the economy generally and in such systems were to encounter credit or the personal banking requirements of the liquidity problems. The focus of payment and public at large. securities settlement systems oversight is on By virtue of Ireland’s membership of the the systems themselves, rather than on the Eurosystem, the Bank’s role in relation to participating institutions. payment and securities settlement systems Statutory Basis for Payment and Securities oversight is not purely domestic, but now has Settlement Systems Oversight a wider dimension. The Eurosystem has as its The statutory basis for the Bank’s payment and focus the definition and implementation of a securities settlement systems oversight role single monetary policy aimed at ensuring both derives from two sources. In terms of domestic price stability throughout the euro area and the legislation, the Central Bank Act, 1997 stability of the financial system generally, empowers the Bank to regulate these systems. thereby maintaining public confidence in the This Act provides for the authorisation by the euro as a sound currency. Payment systems Bank of all payment and securities settlement provide the means by which the Eurosystem systems operating in the State, and for the implements its monetary policy, making approval of the rules under which they operate. regulation, or oversight, of payment systems It also permits the Bank to impose conditions a key task for the ECB and the euro-area on, and to revoke, such approvals. NCBs.

40 Annual Report 2006

Payment Systems Regulation central securities depositories of Belgium, Day-to-day responsibility for payment systems France and the Netherlands. regulation rests with the Bank’s Policy and The Bank also participated in the Irish Market Oversight Unit, which is located in the Advisory Committee of Euroclear and in its Payments and Securities Settlements Payments Working Group, which is one of a Department. number of harmonisation working groups established by Euroclear as part of its new In carrying out this function during 2006, the business model initiative. Unit held regular review meetings with the Irish Payment Services Organisation (IPSO), the RTGS System representative body for the payments industry in Ireland; the Unit also attended board Due to its systemic importance, the domestic meetings of IPSO in its capacity as payment Real-time Gross Settlement (RTGS) system, systems overseer. In addition, the Unit known as IRIS (described in detail earlier in this attended board meetings of the Irish Paper report), continues to be the Bank’s primary Clearing Company Limited (IPCC), the Irish concern from an oversight perspective. Retail Electronic Payments Clearing Company The IRIS system aims to minimise overall Limited (IRECC) and the Irish Real-time systemic risk by providing a mechanism for Interbank Settlement Company Limited (IRIS). participants to effect all large-value interbank IPCC handles all retail paper payment payments in Ireland, both on participant banks’ instruments (e.g., cheques and credit transfers), own accounts and on behalf of their IRECC has overall responsibility for the clearing customers, in real-time (i.e., continuously and settlement of all retail electronic payments, throughout the day), gross (i.e., on an individual and the third company, IRIS, is responsible for basis) and in central bank money. IRIS is linked the Irish RTGS system (see below). The Unit to the TARGET system (see entry on IRIS also monitors both domestic and EU payment elsewhere in this Report for further details), systems developments on an ongoing basis. thereby also allowing cross-border payments to be made on the same basis. Securities Settlement Systems Regulation Participation by any credit institution in IRIS Throughout 2006 the Bank continued to co- requires the approval of the Bank. In deciding operate with the National Bank of Belgium in whether or not to issue such approval, the relation to the oversight of Euroclear Bank, in Bank takes an applicant’s financial strength into accordance with the provisions of a account, and also its technical ability to meet Memorandum of Understanding agreed in this the requirements of the system. As well as regard in 2002. The Bank’s role in this area being subject to oversight by the Bank, the IRIS stems from the fact that settlement of system is subject to regular ESCB risk analysis. transactions in Irish Government bonds take The system’s security features are also place in the Euroclear system. reviewed on a regular basis. The Bank also continued to monitor Retail Payments developments at CREST, the UK-based system operated by CRESTCo, which provides Over the course of 2006, the Bank, in its settlement for Irish securities other than capacity as payment systems overseer, government bonds. continued to monitor the work of IPCC and IRECC and the retail payment systems for In light of the Bank’s interest in the oversight which these companies are responsible. The of Euroclear Bank it also continued in 2006 to Bank also continued to administer the daily participate as observer in the college of interbank settlement process for these two regulators involved in the co-operative companies, which takes place via the IRIS oversight of Euroclear SA/NV, the parent system across the participating banks’ company of Euroclear Bank, CRESTCo and the settlement accounts.

41 Annual Report 2006

CREST Settlement Payment Services Organisation Limited (IPSO) Settlement of Irish equities — in euro — takes in implementing the Competition Authority’s place in CREST, the UK-based securities recommendations. settlement system, on the basis of real-time Introducing cheque truncation would dispense Delivery-versus-Payment (DVP) in central bank with the need for cheques to be physically money, for which the Bank of England acts as transferred between banks; in a truncated cash settlement agent. This means that the cash environment only data and/or electronic ‘legs’ of CREST securities transactions in euro images of cheques would be exchanged. The are settled individually on a gross basis, in Competition Authority recommended that central bank money, on a continuous basis IPSO should prepare and publish a cost/benefit over settlement bank accounts at the Bank of analysis of available options for the use of this England through the CHAPS Euro real-time type of technology. In 2006, IPSO engaged an gross settlement system, which is linked to the independent firm of consultants to examine the TARGET system. feasibility of introducing cheque truncation in the Irish clearing system; the report prepared in In late 2005, the Bank of England decided not this regard by the consultants is currently with to participate as a member NCB in the future the IPSO Board. Single Shared Platform of TARGET2, the successor system to TARGET. As a result, when On the topic of ACH functionality, the migration of national banking communities to Competition Authority recommended that the TARGET2 platform takes place in 2008 and IPSO should consult suppliers of this type of national systems have ceased operations, the facility and, following this consultation process, Bank of England will no longer be in a position prepare and publish a cost/benefit analysis of to act as settlement agent for euro- the available options. However, the denominated transactions in CREST. In that Competition Authority’s recommendation in context, the CBFSAI has agreed to replace the this regard has been overtaken by events in Bank of England as CREST settlement agent for terms of the Single Euro Payments Area (or euro-denominated transactions. As CREST is to SEPA) project (see below) and there would join a new Euroclear single technical settlement appear to be no sustainable business case in platform in late 2009, an interim arrangement the current environment for building an is envisaged, covering a period of ‘Ireland-only’ ACH. IRECC member banks are approximately 18 months. currently continuing their discussions on how best to handle retail electronic payments, both Payment Systems Policy/Oversight domestic and cross-border, in a SEPA environment. Domestic Developments In June 2005, the Competition Authority issued As reported last year, a full review of the IPCC its final report and recommendations following and IRECC retail payment systems against the completion of its ‘‘Study of Competition in the CPSS Core Principles for Systemically Provision of Non-investment Banking Services in Important Payment Systems15 was concluded Ireland’’. The Authority’s recommendations in by the Bank in August 2005. This review relation to the retail payment systems operated identified some shortcomings related to the by IPCC and IRECC concentrated on two main systems’ ability to complete settlement in the issues: cheque truncation and the provision of event of the default of a clearing system automated clearing house (or ACH) participant. Work continued throughout 2006 functionality in the Irish clearing system for to resolve these shortcomings; it is expected retail electronic payments. During 2006, the that this issue will be concluded in the current Bank monitored the progress made by the Irish year.

15 The ‘Core Principles for Systemically Important Payment Systems’, which provide guidelines for the safe and efficient operation of such systems, were published by the Bank for International Settlements (BIS) in January 2001. The Governing Council of the ECB has adopted these ‘Core Principles’ as part of the Eurosystem’s oversight standards to be applied to all systemically important payment systems in the euro area.

42 Annual Report 2006

Also during 2006, the Bank was involved in the to involve as many interested parties as National Payments Implementation possible in the process of payment systems Programme (NPIP), a joint IPSO/Department development (for example, bodies such as the of the Taoiseach initiative aimed at improving Consumers Association of Ireland, the Combat Ireland’s payment systems infrastructure. In this Poverty Agency and RGDATA are now regard, a National Payments Advisory Group — represented). The Bank also continues to be which brought together, inter alia, represented on the National Payments representatives of IPSO, the Departments of Advisory Group, and work will continue in the the Taoiseach and Finance, the Bank and the current year on a number of elements Financial Regulator — was formed to examine identified at the National Payments Conference a number of Irish payment systems issues. as being worthy of further attention.

Separate working groups — and supporting Eurosystem Developments ‘industry mirror groups’ — were set up under At the Eurosystem level, the Bank continued to the auspices of the National Payments Advisory participate during 2006 in the ESCB’s Payment Group to examine the following issues in detail: and Settlement Systems Committee and its associated sub-groups. Through these bodies, G encouraging consumers to move away the Bank contributed to the work of the ECB’s from using paper payment instruments Payment Systems and Market Infrastructure such as cheques to electronic alternatives Directorate. The principal policy- and oversight- such as direct debits; related issues addressed during 2006 included G examining the extent to which cash is the following: used to make payments, and investigating G ongoing work on TARGET2, the the possibility of encouraging consumers replacement for the current TARGET to increase their use of electronic system (see separate section elsewhere in alternatives; and this report), including oversight issues in G improving access to payment systems for relation to the new system; all groups in Irish society. G oversight of large-value and retail payment systems; These working groups prepared material for the first National Payments Conference, which G tasks related to various aspects of the was hosted jointly by IPSO and the SEPA project (see below); Department of the Taoiseach in Dublin Castle G work connected with the proposed on 12 December 2006. The conference was TARGET2-Securities; attended by an audience of more than 200, G assessment of securities settlement representing a broad range of payment systems systems against the Eurosystem standards users and providers, and was addressed by the for use of such systems in ESCB credit Governor and by the Minister for Finance. In operations. his address, the Governor indicated that the Bank, in line with Eurosystem developments in Market Infrastructure Developments this area, would in future be more actively involved in the oversight of payment SEPA (Single Euro Payment Area) instruments (such as debit cards, direct debits, The successful introduction of euro notes and credit transfers and cheques) as well as coins in 2002 created a single currency area in oversight of payment systems. The papers terms of cash, and made it simple for euro-area presented at the conference are available on consumers to use cash in a cross-border IPSO’s website. context, for example when travelling abroad on holiday. Following this development, the ECB Following the conference, it was decided to and the EU Commission have sought to ensure enlarge the National Payments Advisory Group that non-cash retail payments made in euro

43 Annual Report 2006

throughout the euro area would also become national migration plan aimed at ensuring that as easy to make for the consumer, and as the country’s retail payment systems become efficient, as their domestic equivalents. SEPA-compliant within the required timeframe.

The Eurosystem and the EU Commission have The Bank was represented at meetings of the been working to bring about a situation in IPSO SEPA Implementation Task Force which which euro-area commercial banking was set up to implement the measures outlined communities collectively make the changes to in the national migration plan. IPSO has also the payment systems infrastructure necessary set up a SEPA Stakeholder Forum which, it is to achieve this end. This initiative has come to hoped, will provide the means to keep be known by the acronym SEPA (i.e., Single interested parties other than financial Euro Payments Area), which covers three institutions — for example, public utilities, broad areas: business organisations and consumer groups — informed about SEPA developments. The SEPA G the SEPA Credit Transfer Scheme; Stakeholder Forum, which the Bank also G the SEPA Direct Debit Scheme; and supports, met twice in 2006, and IPSO is G the SEPA cards framework. currently examining ways to use this forum to engage with a wider audience on SEPA The first two of these initiatives will respectively issues. result in making available common credit transfer and direct debit payment instruments The ECB published its ‘4th Progress Report’ on that will be used throughout the euro area for SEPA in February 2006, and in November 2006 both national and cross-border payments, and also published a document entitled ‘The which will eventually replace their ‘national’ Eurosystem’s view of a SEPA for cards’. An EU equivalents currently in use in each of the euro- Commission consultation paper on ‘SEPA area Member States. The SEPA cards Incentives’ was published in March 2006. framework will ultimately result in the availability to consumers of SEPA-compliant The successful implementation of SEPA, and payment cards that will be accepted on the delivery of SEPA payment schemes and same terms throughout the euro area. A payment cards, is dependent on the removal of deadline of 31 December 2010 has been set the technical, commercial and legal barriers for the migration of a critical mass of payments that have thus far kept national retail payments to the new SEPA payment instruments. markets isolated. While the technical and commercial aspects are being dealt with as The euro-area commercial banks have formed outlined above, the legal barriers are being the European Payments Council (EPC) to addressed by the EU Commission in its provide a governance framework for ensuring proposed Directive for a new legal framework the collective delivery of SEPA by the national for payments in the Internal Market, otherwise banking communities within the specified known as the Payments Services Directive, or timeframe. All such communities are PSD. The proposed Directive was adopted by represented on the EPC; in the case of Ireland, the EU Commission on 1 December 2005, and this representation is provided by IPSO. was agreed by the Economic and Financial Affairs Council (ECOFIN) on 27 March 2007. IPSO and the Irish banks were one of the first The Directive was subsequently adopted by the euro-area banking communities to adopt a European Parliament on 24 April 2007.

44 Annual Report 2006

Currency Production and Issue design of the map of Europe on the common The main task of the Currency function of the side of the 10c, 20c, 50c, \1 and \2 coins to Bank is to provide the public with banknotes incorporate the geographical areas of the new and coin in the quantities and denominations Member States. Coins bearing the new designs which best suit their needs. The function is also will be issued in Ireland and in most euro-area responsible for the receipt and processing of Member States during 2007. used banknotes, for the re-issue of good quality Collector Coins banknotes and for the destruction of banknotes In April 2006, the Bank issued 5,000 circulating unfit for circulation. coin sets in proof quality. In the same month, a \10 silver proof collector coin and a \20 gold Banknote Production and Processing proof collector coin were issued to mark the Under the pooled production arrangements of centenary of the birth of Samuel Beckett. A the ECB, the Bank produced 86 million \5 total of 35,000 silver and 20,000 gold coins banknotes during 2006. In addition, some were produced. banknotes were received from and supplied to Because of the impending change to the design other euro-area NCBs. The Bank supplied retail of the map of Europe on the common side of banks with 218 million new banknotes and 201 the 10c, 20c, 50c, \1 and \2 coins, the Bank million re-issuable banknotes. was unable to issue a 2007-dated circulating During the year retail banks lodged 364 million coin set until January 2007. In keeping with the banknotes. A total of 394 million banknotes policy of featuring national heritage sites, the were sorted during the year and, of these, 144 packaging of this set features images of Du´n million were reissuable. Aonghasa and other monuments on the Aran Islands. Coin Production During 2006, the Currency Production Department produced 271 million coins. Demand for coin amounted to 393 million pieces compared to 400 million pieces in 2005. The details of the coins issued are outlined in Table 7 below.

Change in Design As a result of EU enlargement, the Council of Emmet Mullins, coin designer, with Governor Hurley and Michael Colgan, Gate Theatre, at the launch of a limited edition collector coin Ministers approved a proposal to change the to celebrate the centenary of the birth of playwright Samual Beckett

Table 6: Note Issues

\5 \10 \20 \50 \100 \200 \500 Total

No. of Banknotes (m) 42 40 144 187 2 — — 419 Value \m 232 404 2,878 9,333 161 11 33 13,052

Table 7: Coin Issues

1c 2c 5c 10c 20c 50c \1 \2 Total

No. of Coins (m) 113 91 79 51 35 8 6 9 393 Value \m 12457461848

Figures may not sum due to rounding

45 Annual Report 2006

Counterfeits Withdrawal of Irish Banknotes and Coin The number of counterfeits received by the National Analysis Centre in Sandyford The Bank continued to accept Irish banknotes decreased significantly compared with the and coins and these were withdrawn from previous year. Within the Eurozone, there was circulation. At 31 December 2006, the value of also a slight decrease. All of the counterfeits Irish banknotes in circulation was £198 million discovered could be detected using the and the value of Irish coin in circulation was recommended ‘‘Feel-look-tilt’’ test. £101 million.

Launch of 2007 coin set at Du´n Aonghasa on the Aran Islands

46 Annual Report 2006

Participation in International development phase. This decision is expected Activities by early 2008. ESCB Activities In the area of market operations, the The Governor and the Director General of the Governing Council decided to increase the Bank attend meetings of both the Governing allotment amount for each of the longer-term Council and General Council, which take place refinancing operations to be conducted in at the ECB’s premises in Frankfurt, Germany. 2007 from \40 billion to \50 billion. In the The Governing Council meeting is held on a context of the Single List of Collateral for fortnightly basis and the General Council meets Eurosystem monetary policy operations, the quarterly. Both the Governing Council and Governing Council approved further technical General Council are assisted in their work by details related to the Eurosystem credit ESCB committees (the role of each committee assessment framework (ECAF) for the inclusion is described in Appendix 1). Work conducted of credit claims from all euro-area countries as by the Governing Council in relation to the eligible assets as and from 1 January 2007, areas covered by these committees is set out together with Irish Mortgage Backed below. Promissory Notes (MBPNs) on the basis of Moody’s credit assessment methodology. In relation to payment and settlement systems, Furthermore, the Governing Council decided as indicated earlier, the Governing Council that securities issued under Short-Term approved the publication of documents on European Paper (STEP) compliant programmes TARGET2, which is scheduled to commence will be accepted for collateral purposes, as operations in November 2007, relating to soon as the STEP statistics on yields are pricing and legal issues, various methods of published on the ECB’s website. It was also participation in the system, contingency decided that Irish credit unions would start procedures and testing/migration for TARGET2 fulfilling the statistical reporting and minimum participants. The Governing Council also reserves obligation from January 2009. authorized publication of various documents on the Single Euro Payments Area (SEPA) On the basis of analysis conducted by the project. In addition, it announced in July that Banking Supervision Committee, the the Eurosystem was ‘evaluating opportunities to Governing Council monitored conjunctural provide efficient settlement services for and structural developments in the EU banking securities transactions in central bank money’ sector from a financial stability perspective; and that it had decided to explore the setting published its consideration of the policy up of a new service (TARGET2-Securities) for implications of the growth in hedge funds as securities settlement in the euro area. It well as its assessment from a financial stability subsequently made public its request to the perspective of recent developments in Payments and Settlement Systems Committee accounting standards; and continued to to prepare a detailed feasibility study of the promote co-operation and exchange of TARGET2-Securities project by end-February information between central banks and 2007. supervisory authorities on issues of common interest. On 8 March the Governing Council concluded In statistics, the ECB published for the first time that it was feasible to implement TARGET2- a set of integrated non-financial and financial Securities and therefore decided to go ahead accounts for the institutional sectors of the with the next phase of the project, namely the euro area. These annual accounts will definition of user requirements on the basis of provide the basis for developing euro-area market contributions. The scope of the project sector accounts in 2007. Harmonised will be determined by taking into account the Competitiveness Indicators, based on results of a public consultation. The Governing consumer prices, were constructed during the Council will then decide on the subsequent year for publication in January 2007. Statistics

47 Annual Report 2006

were also provided on Short-Term European implications of the entry of Slovenia into the Paper for the first time in 2006. Significant Eurosystem on 1 January 2007. It also progress has also been made regarding the addressed the accounting and monetary preparation of new ECB regulations for income implications of the expansion of the investment funds and financial vehicle ECB capital key as a result of EU enlargement. corporations and in updating the regulatory Throughout the year, in line with its agreed framework for reporting Monetary Financial work schedule, AMICO kept its Accounting Institutions’ balance sheets and interest rate Guidelines under review and updated and statistics. A major achievement was the launch agreed a revised common accounting in September 2006 of the Statistical Data treatment as necessary. Warehouse, which provides public access to a comprehensive on-line database. Among the issues with a legal dimension dealt with by the Governing Council in 2006 were Regarding communications, and in order to the establishment of the Single List of eligible strengthen the Eurosystem’s identity and its collateral for Eurosystem operations, the public perception, the Governing Council introduction of the euro in overseas territories, approved the implementation of a common proposals for the selection and functioning of Eurosystem signature in line with the NCB external auditors in accordance with Eurosystem mission statement. By the end of Article 27.1 of the ESCB Statute, the 2006 the ECB and all euro-area NCBs had connection of the Estonian NCB to TARGET begun the process of incorporating the word and guiding principles for adoption of ECB ‘‘Eurosystem’’ into their corporate design. legal instruments. In addition, there was a legal aspect to a number of other issues addressed The Internal Auditors Committee was by the Governing Council, including issues mandated by the Governing Council to relating to payment and security settlement perform a review of the costs of the hubs systems; legal aspects of convergence reports established by the Bundesbank and the Banque and of the updating of the ECB’s General de France for the theoretical valuation of Documentation on Eurosystem Monetary complex assets and asset-backed securities, Policy Instruments and Procedures; codes of held by central banks as collateral for financing conduct; currency and procurement matters, operations, for which no representative trading and issues relating to monetary financing of the prices are available. The review was completed public sector. in 2006 and focussed on the methodology and pricing approach relating to cost estimates. The Governing Council adopted 30 ECB legal acts and instruments during 2006, covering The main focus of the Information Technology matters such as the provision of reserve Committee was on making progress towards management services to non-euro area establishing an IT Enterprise Architecture for countries and institutions, management of the ESCB, which seeks to establish coherent Eurosystem foreign reserve assets, the ECB’s and efficient domains of IT activities. This work annual accounts, monetary policy instruments complements work being done by the Council and procedures, TARGET, the allocation of Task Force, which at present is addressing IT monetary income, the volume of coin issuance, Strategy and Governance issues. statistics, NCBs’ external auditors, issues relating to ECB capital, and measures required During 2006, following the request of the to prepare for the entry of Slovenia into the Governing Council, substantial progress was euro area. The Governing Council also made in the preparations for the introduction formulated and adopted 62 Opinions on of the second series of euro banknotes. The consultations of the ECB by the EU Council and Accounting and Monetary Income Committee Member States’ authorities relating to (AMICO), in conjunction with the Legal proposed draft legislation falling within the Committee, addressed the accounting ECB’s field of competence.

48 Annual Report 2006

The setting and monitoring of the ECB Budget, to central banks are discussed16. In 2006, the including the New ECB Premises Project, by main issues discussed at the meetings attended the Governing Council was conducted in line by the Bank included the economic situation with established timetables and procedures. and prospects for the global economy, issues The Cost Methodology Committee continued related to financial stability, supervision, its work on developing common standards for clearing and settlement, and International costing and management accounting for the Monetary Fund (IMF) issues17. Eurosystem. It also provided advice thereon to the Governing Council, as requested. EU Economic Policy Committee The Bank continued to participate in the work Other EU fora of the EU Economic Policy Committee (EPC). The Governor, together with the Minister for The focus of the EPC during 2006 was on a Finance, participated in the biannual Informal number of structural issues with the potential meetings of the ECOFIN Council (the role of to improve competition, productivity and which is described in Appendix 2), which were innovation in the European Union. There was a held in Vienna on 7-8 April, and in Helsinki on particular emphasis on measures to improve 8-9 September. In Vienna, the Informal the functioning of services markets while the ECOFIN discussed globalisation, focussing on efficiency and security of energy supply in the how to preserve and further strengthen EU was another important issue addressed. The Europe’s attractiveness as a business location group also continued to discuss a range of and for foreign investment. Issues related to the issues relating to the sustainability and quality IMF and World Bank were also discussed in of public finances, making use of new long- preparation for the spring meetings in term budgetary projections and work on fiscal Washington. In Helsinki, the Informal ECOFIN rules and institutions. The country-review discussed global competition, innovation and working group of the EPC focussed on productivity, including the role of financial monitoring the implementation of Member markets in this regard. States’ National Reform Programmes (NRPs) through its annual peer review process and The Bank is also represented on a number of input into the Commission’s assessment of high-level EU committees, namely, the NRPs and country recommendations. Economic and Financial Committee, the Economic Policy Committee and the Eurostat OECD-Related Activities and Issues Committee on Monetary, Financial and The Bank participated in the OECD’s Economic Balance-of-Payments Statistics. The main and Development Review Committee’s developments of each committee are discussion of the Economic Survey of Ireland described below and the role of each is prepared by the OECD secretariat. The outlined in Appendix 2. Committee has one member from each OECD country plus the European Commission and Economic and Financial Committee engages in a peer review of macroeconomic The primary purpose of the Economic and and structural policies, led by the Financial Committee (EFC) is to prepare the representatives of two examining countries. work of the ECOFIN Council, draft opinions for The Economic Survey was subsequently the Council and the Commission, and keep published in the early part of 2006. The Bank under review the economic and financial also participated in the work of the Economic situation of EU Member States. The Bank Policy Committee of the OECD, which met participates in EFC meetings, and EFC twice during 2006. The Committee discussed a Alternates meetings, when issues of relevance range of issues concerning the global

16 To prepare for the enlargement of the EU, institutional changes were made to the composition and working methods of the EFC in 2003. Central bank members now attend meetings of the EFC that discuss issues directly related to the tasks and expertise of NCBs. 17 The Bank is also represented on the EFC Sub-Committee on IMF issues, which prepares EU positions on IMF policy issues.

49 Annual Report 2006

economic situation as well as some related working-age population, and participation in major policy issues. EMU lowered interest rates. However, the Fund identified as potential challenges the EU Committee on Monetary, Financial and erosion of competitiveness and Ireland’s heavy Balance-of-Payment Statistics reliance on the construction sector. The rapid Fiscal governance matters in the context of the growth in bank credit to property-related Excessive Deficit Procedure (EDP) continued to sectors and the strong rise in household debt dominate the work of the CMFB. Among the as a share of household disposable income issues discussed were securitisation operations were seen as additional risk factors. by government, the recording of military expenditure and payments in connection with In its second FSAP Report, conducted in the transfer of pension commitments. Progress March, the Fund found that the Irish financial was made in updating the ESA95 Manual on sector continued to perform well since its first Government Debt and Deficit and on adopting review in 2000, with financial institution more streamlined procedures for consulting profitability and capitalisation very strong. The the CMFB on EDP matters. The CMFB also Fund acknowledged the risks associated with continues to play an important role in co- rapid credit growth and higher household debt ordinating the work of NCBs and National to GDP ratios. They found that, even in the Statistical Institutes in the development of event of an economic slowdown, the stress quarterly and annual accounts by institutional testing of the banking system conducted by the sector, and has been actively involved in Bank indicated that the financial system was discussions on updating the international well placed to absorb the impact of a downturn statistical manuals. in either house prices or growth more generally. In this regard, major domestic banks IMF Article IV and FSAP (Financial Sector have adequate capital buffers to cover a range Assessment Programme) of large hypothetical shocks. The Fund noted that good progress had been achieved since The IMF conducted its second Financial Sector 2000 in strengthening the regulatory and Assessment Programme (FSAP) in Ireland in supervisory framework in financial services. In March18, and its annual Article IV review of the line with its general recommendations, the Irish economy in May. The Bank provided Fund called for the continuous upgrading of statistics, analysis and opinions on the financial supervision to take account of market economic and financial issues raised by the and regulatory developments and the growth IMF mission teams. of the international financial services sector. Further enhancement of the supervision of the In the Article IV assessment, the Fund noted insurance sector was also recommended. that Ireland’s economic performance was one of the best among industrial countries; the IMF Meetings unemployment rate was among the lowest; and HICP inflation had declined to close to the The Governor and Director General of the euro-area average. Employment growth was Bank attended the IMF/World Bank Annual rapid, reflecting strong immigration and rising Meetings in September in Singapore, and the labour force participation. Good economic Bank was also represented at the spring policies had played a significant role with meetings. prudent government policies leading to declining government debt, low taxes on The Managing Director of the Fund, Rodrigo labour and business income encouraging de Rato, presented a second report on the labour supply and investment, and flexible Fund’s Medium-Term Strategy to the labour and product markets contributing to International Monetary and Financial growth. Favourable demographics boosted the Committee (IMFC) at the April 2006 meeting.

18 Ireland was among the first set of countries to participate in the IMF’s pilot scheme on FSAP reviews, and the first review was conducted in 2000.

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The report stated that in order for the Fund to mediterranean countries; issues and challenges achieve its medium-term objectives, it needed in the process of capital account liberalisation; to strengthen its surveillance work, adapt its and the reform of monetary policy instruments lending instruments to the changing needs of in Mediterranean countries. The high-level its members, help members build institutional Eurosystem-Bank of Russia seminar in Dresden capacity and improve governance, including on 12 October covered the following areas: that of the Fund itself. the current state and long-term prospects of the Russian economy and fiscal rules and At the Annual Meetings in Singapore, the monetary policy. Board of Governors approved a new resolution, proposed by the Managing Director, on quota and voice, which increased The Governor was a discussant at the high-level the quota for four emerging market economies seminar of central banks in the East Asia-Pacific — China, Korea, Turkey and Mexico. The region and the Eurosystem. The seminar was Managing Director also reported on the work hosted by the Reserve Bank of Australia, the the Fund had undertaken at that time in Reserve Bank of New Zealand and the ECB on relation to its first multilateral consultation on 20-21 November in Sydney. The Seminar was global imbalances. attended by the President of the ECB and the governors from the East Asia-Pacific Central Other International Activities Banks (EMEAP19) and the euro area. The issues The Bank participated in a number of high-level discussed included the link between the international seminars in 2006. The integration of emerging economies in the Eurosystem-Mediterranean seminar co- world economy and global inflation; global organised by the ECB and the Bank of Greece imbalances and their implications for financial in Nafplion on 25 January focused on recent stability; and regional financial integration and economic and financial developments in the intermediation of capital.

19 The Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP) comprise 11 central banks and monetary authorities in the East Asia and Pacific region (Australia, People’s Republic of China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore and Thailand).

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Management and Support Services The breakdown of staff numbers over the Central Services divisions within the organisation is set out in The Central Bank and Financial Regulator share Figure 1. corporate resources and services including Figure 1: Staff Breakdown by Division human resource management, administration,

accounting, internal audit, premises, 8 information technology and statistical services. The sharing of corporate resources and 317 323 services is in accordance with the corporate structure established by the Central Bank and Financial Services Authority of Ireland Act, 2003. The objective is to realise economies of scale, avoid duplication of costs, maintain a cohesive and flexible organisation, and assist business units in meeting their objectives. A Joint Management Board, which includes the Executive Directors of the Financial Regulator 329 and the Management Board members of the Central Bank Financial Shared ICCL Central Bank, has responsibility for prioritising Operations Regulator Services and resourcing service provision throughout the organisation. This includes planning, budgeting, and utilisation of shared services The staffing table overleaf reflects the mid year and corporate resources including staffing, restructuring of departments in both the Shared information technology, physical infrastructure Services division and the Financial Regulator. In and corporate services. the Shared Services division a General Secretariat department, incorporating the Press The provision of services to business units in Office, Legal Unit and the executive secretariat both the Central Bank and Financial Regulator functions, was established. Following a re- is conducted under memoranda of organisation in the Financial Regulator four understanding with the service departments of new departments — Legal and Enforcement, the CBFSAI. Planning and Finance, Markets Supervision and Investment Service Providers Supervision — Human Resources were established. Staffing Employment Policies There were 977 permanent staff serving at 31 The Bank is an equal opportunities employer December 2006 out of an approved staff with the majority of staff being permanent full- complement for end-2006 of 1,031.5 and time employees. Remuneration policy is based recruitment is progressing to fill the on appropriate comparators in the Public outstanding vacancies. In 2006 turnover of Sector and/or by reference to the relevant permanent staff decreased to 5.4 per cent from industry norms. The terms of National Pay 6.5 per cent in 2005. Agreements are applied to all categories of staff. The total staff employed at year-end was 323 in Central Banking operations, 329 in the Financial Regulator and 317 in Shared Services. Human Resources Strategy A further 8 staff were assigned to the Investor The Human Resources Strategy identifies seven Compensation Company Limited (ICCL). Staff high-level strategic goals, which now guide the employed comprised 739.5 clerical, work programme of the Human Resources professional and management staff and 237.5 department particularly in the areas of industrial, technical and service staff. performance management, training and

52 Annual Report 2006

STAFF SERVING AT YEAR END (FTE)

DEPARTMENT 2005 2006

Central Bank Governor & Management Board 6 6

Financial Operations Payments and Securities Settlements 35.5 39.5 Financial Markets 26 27

Economic Services European Monetary Affairs & 12.5 12.5 International Relations Economic Analysis, Research and 24.5 24.5 Publications Statistics 30.5 32 Monetary Policy & Financial Stability 18 19

Currency Services Currency Issue 105 102 Currency Production 60 60.5

Central Bank Operations Total 318 323

Shared Services Human Resources and Planning 39 41.5 Information Systems 49.5 52.5 Financial Control 50.5 39 Corporate Services 143.5 127 General Secretariat 0 22 Press Offi ce 5 0 Engineering Services 25 24 Internal Audit 8 11

Shared Services Total 320.5 317

Central Bank Total 638.5 640

Financial Regulator

Chief Executive Offi cer’s Offi ce Chief Executive Offi cer and Executive Board 3 3 Legal and Finance 25 0 Legal and Enforcement 0 13 Planning and Finance 0 15 Planning and Project Co-ordination 5 0 Registrar of Credit Unions 17 19

Prudential Division Banking Supervision 45 49.5 Financial Institutions & Funds Authorisation 65 64 Securities and Exchanges Supervision 46.5 0 Investment Services Providers Supervision 0 37 Markets Supervision 0 16.5 Insurance Supervision 26 30

Consumer Division Consumer Protection 53 50 Consumer Information 32.5 32

Financial Regulator Total 318 329 ICCL 7 8 TOTAL CBFSAI 963.5 977

53 Annual Report 2006

recruitment. Significant progress was made in Work commenced on the development of a reviewing and updating a wide range of comprehensive management development existing HR policies and procedures during programme in the second half of 2006. the year. Following the completion of a tender process, external consultants will be engaged in 2007 to In 2006 the Performance Management System develop and implement the programme. for management, administrative and professional grades was extended to include all Technical Assistance technical and general staff across the In 2006 the organisation hosted information organisation. A comprehensive training and study visits with officials from the Central programme was delivered for these groups Bank of Iran, the Bank of Slovenia, the National over the course of the year. Bank of Poland and the National Bank of Slovakia. The topics covered by these study The development of a Partnership Model, visits included Central Bank Policy and aimed at allowing increased staff participation Operations and Payment Systems. in change processes will be progressed following the transposition into Irish law of the Organisational Development European Directive on Information and Consultation in 2006. Organisation Development Programme The organisation development programme In recognising the growing social concern for continued through 2006. A number of employees to have a balance between paid facilitated workshops were held with work and the demands of personal and family management and professional staff aimed at life, the Bank has a range of flexible and improving strategy development and atypical working arrangements such as job- implementation, management development, sharing, part-time work, career break, special internal communications and organisation leave and short-term contracts. As at 31 cohesion. A major review of internal December 2006, there were 108 staff availing communications initiated during the year has of atypical working arrangements. recently been finalised and a range of initiatives will be implemented over the coming year. Training and Development The training and development programme ESCB Organisational Development continued to provide a wide range of staff The Governor continued to participate as a development courses, including leadership, member of the ECB Governing Council Task management and relationship development Force whose mandate is to address the skills. Acquisition of technical skills was also a organisational development of the Eurosystem, major focus of the training programme which includes addressing the streamlining of throughout the organisation in 2006. The processes and operational efficiency and Academic and Professional Training Scheme effectiveness. The CTF has reviewed the continued to provide staff with the opportunity process for the formulation of monetary policy to pursue further studies. and is currently examining the areas of IT, procurement, statistics, business continuity In addition, staff participated in a number of planning and operational risk. Final decisions Common ESCB training programmes. These on all such matters rest with the Governing programmes were run by various NCBs across the Eurosystem. Staff also attended courses Council. hosted by the Federal Reserve Bank in New York and other regulatory bodies such as the Strategy and Planning Financial Services Authority in the UK and the The process to develop the Central Bank Australian Securities & Investment Strategic Plan for the period 2007/2009 Commission. commenced in the latter half of the year. An

54 Annual Report 2006 extensive consultation process with 2007, including matters related to preparation management and staff was undertaken through for the inclusion of credit claims (bank loans) the Bank’s divisional structure. A number of to commercial and public sector borrowers in cross-divisional workshops were also held to the single list and the eligibility criteria for asset- discuss issues of common concern. The backed securities, were prominent. The Bank’s Financial Regulator was also consulted on contractual documentation governing the issues of mutual interest. The Strategic Plan relationship between the Bank and its 2007-2009 was approved by the Board in counterparties was amended, including the early 2007. introduction of a new Deed of Floating Charge over Certain Loans (i.e., credit claims) and Internal Audit changes to the Framework Agreement in The Internal Audit function (IAD) reported to respect of Mortgage Backed Promissory the Audit Committee of the CBFSAI three times Notes. during 2006. Audits undertaken during 2007 Discussions were held regarding the extension focused inter alia on the Supervision System, of the Eurosystem’s minimum reserve regime Operational Risk, Electronic Reporting, the to Irish credit unions and preparations were TARGET2 project, Spreadsheets, aspects of made for the establishment of TARGET2, SAP operations and a Value for Money (VfM) including the legal structure and interaction review of Training and Development. with securities settlement systems. In addition, advice was provided on consultations of the The function continued to participate actively ECB by the EU Council and Member States on in the Internal Auditors Committee (IAC) of the proposed legislation falling within the fields of ESCB and the Eurosystem. Five meetings of the competence of the ECB. IAC were attended, as were several meetings of subsidiary bodies dealing with IT, Amongst other issues dealt with over the accounting, and other issues. IAD participated course of the year were those regarding the in five IAC audits together with a variety of Statute Law Revision Bill, 2006, preparations for related activities during the year. the establishment of the Irish Financial Services Appeals Tribunal and issues relating to In accordance with the Standards of the copyright, pensions law, crisis management, Institute of Internal Auditors and with IAC statistical reporting requirements and requirements, an internal review of the Internal associated sanctions, sovereign immunity, the Audit function was undertaken. The findings Rome Convention and the Private Security are being considered and will be looked at Services Act, 2004. more closely in the context of an external The 16 EU Regulations and relevant Statutory assessment of the function (also mandated by Instruments made under domestic law on IIA & IAC standards) planned for the latter part financial sanctions directed against named of 2007. persons and entities for purposes, which A significant programme of staff training was included the financing of terrorism and completed covering many aspects of audit associated activities and participated in related methodology, as well as soft skills including EU and domestic sanctions committees, were personal development. administered. Media and External Communications Legal Services There was an ongoing focus on There was a wide variety of legal issues that communications with a variety of audiences in were addressed, both at the Eurosystem/ESCB 2006, including the general public, media and and domestic levels during 2006. the financial industry and markets. The General Secretariat Department helped coordinate Issues regarding the establishment of a single these communications on behalf of both the list of eligible collateral from the beginning of Central Bank and the Financial Regulator.

55 Annual Report 2006

Eurosystem/ESCB Communications Committee (ECCO) away meeting held in Dublin on 29 June

Six press conferences were held during the Media relations for the ECB and ESCB were year for the publication of the Quarterly coordinated on a domestic basis. The level of Bulletins, Annual Reports and the Financial interest in ECB-related activity remained high Stability Report for 2006. A total of 1,020 with media and financial analysts focusing on media queries were handled during the year. In issues related to monetary policy, banknote addition, 169 interviews were facilitated, issues and payments systems. 72 press releases were issued and 16 speeches were published. Educational Activity There was continued attention given to In addition to economic and financial issues, enhancing our interaction with second level there were also a number of activities schools on awareness of the functions of the undertaken in relation to communications on Central Bank and its role within the Eurosystem. banknotes and coin. This involved an This was aided by the publication, in Irish and information campaign on security features of English, of a new pack for second level schools banknotes to the public and cash handlers and on price stability, produced by the Eurosystem, launches of new collector coins and coin sets. and launched in Ireland by the Minister for The coin launches included an event at the Education. Gate Theatre, Dublin to mark the release of collector coins to commemorate the life of Official Languages Act Samuel Beckett. In March 2006 the Governor was requested by the Minister for Community, Rural and

Media Activity Total Gaeltacht Affairs to prepare a draft Scheme under section 11 of the Official Languages Act. Media Queries Handled 1,020 The Minister for Community, Rural and Press Releases Issued 72 Interviews 169 Gaeltacht Affairs confirmed the organisation’s Speeches Published 16 Scheme under the Official Languages Act on Press Conferences 6 14 November 2006. The scheme commenced

56 Annual Report 2006 on 1 December 2006 and outlines the services Michael Boran’s work focuses on the Plaza and in Irish the organisation has agreed to provide steps. It reveals the secret poetry of fleeting to the general public in addition to those moments captured as people go about their services it was already obliged to provide in everyday business. Irish under the Act. Facts and figures feature prominently in Photographic Exhibition commissioned by Michael Durand’s engaging series of portraits the Bank of CBFSAI staff, Statistical Portraits. Durand has portrayed each person with a pile of Three of Ireland’s leading photographic artists decommissioned (shredded) money. The size provided an insight into the world of the of the pile of cash corresponds to an economic CBFSAI from their own individual perspectives. statistic of the person’s choosing.

Michael Boran, David Farrell and Michael David Farrell presents When a Building Sleeps, Durand were selected to participate in the a series of photographic prints and video works Bank’s 2006 Art Project. Each artist was shot inside the Bank after office hours. commissioned to produce a body of work with Somewhat like the building’s suspended floors, consideration to any aspect of the Bank; its this work conveys a sense of weightlessness; the architecture, location or its social environment. viewer seems to float or hover over the city. The artists were granted access to all levels of this landmark building in Dame Street and This exhibition was arranged in collaboration organisation and each took up the challenge in with the Gallery of Photography, Temple Bar, their own way. Dublin.

Deirdre Purcell, Central Bank Director, with two of the artists, David Farrell and Michael Boran, at the opening night of the photographic exhibition

57 Annual Report 2006

Appendix 1: Role of ESCB issues of interest in the field of securities Committees settlement and clearing. Monetary Policy Committee The Monetary Policy Committee (MPC) assists Legal Committee in the fulfillment of the ESCB’s statutory tasks The Legal Committee (LEGCO) provides legal in relation to monetary policy in the euro area support for the statutory tasks of the ESCB, and the exchange rate policy of the assisting in the work of its decision-making Community. To this end, the MPC is involved, bodies — the Governing Council and the inter alia, in assessing strategic and other Executive Board — and reporting to the longer-term issues relating to monetary policy; Governing Council. In this regard, the activities preparing a set of economic forecasts for the of LEGCO include, inter alia, preparing ECB euro area; assessing the operational framework legal acts, instruments and contracts and for the implementation of monetary policy; contributing to reviews of the implementation reviewing fiscal policy and structural issues of this legal framework; providing legal advice relating to the euro area. to other ESCB committees on request; and monitoring legal developments in the euro area relating to the ECB’s field of competence and Statistics Committee to financial markets. LEGCO also promotes the The Statistics Committee covers areas such as exchange and co-ordination of views between the development, compilation and legal experts of NCBs and the ECB in areas of dissemination of relevant statistics to support common interest. the conduct of monetary policy. It also advises on conceptual and methodological issues International Relations Committee relating to statistics, provides opinions when The International Relations Committee the ECB is consulted on statistical matters, and monitors and formulates ESCB positions on promotes the harmonisation and adoption international economic, financial and monetary of best practices in the compilation of issues, including international financial statistics. architecture matters.

Market Operations Committee Banking Supervisory Committee The Market Operations Committee assists in The primary task of the Banking Supervisory the fulfillment of the ESCB’s statutory tasks Committee is to contribute to monitoring and related to the implementation of the single assessing developments in the euro-area/EU monetary policy and foreign exchange banking and financial sector from a financial operations as well as the management of the stability perspective. It also contributes to the ECB foreign reserves. It also contributes to design of financial regulation and supervisory assessing and reporting on financial market tools from a macro-prudential perspective and developments within and outside the EU. promotes co-operation between central banks and banking supervisors on issues of common Payment and Settlement Systems Committee interest. The Payment and Settlements Systems Committee’s role is to promote the smooth Eurosystem/ESCB Communications Committee operation of payment systems and, in The Eurosystem/ESCB Communications particular, to advise on the operation and Committee assists in designing both external maintenance of the Trans-European Automated and intra-system communications policies. This Real-time Gross settlement Express Transfer includes developing and co-ordinating (TARGET) system and the Correspondent communications in order to inform the public Central Banking Model for the cross-border use on the various tasks and actions of the of collateral. It also advises on general payment Eurosystem/ESCB. It also helps to develop systems policy and oversight issues, and on ways to present the Eurosystem to its staff.

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Information Technology Committee Accounting and Monetary Income Committee The Information Technology Committee The fulfilment of the ESCB’s responsibility in the supports and maintains the IT infrastructure accounting area, including accounting policies, and common business applications and principles and techniques, comes under the services of the ESCB. remit of the Accounting and Monetary Income Committee.

Banknote Committee Budget Committee The Banknote Committee assists the ESCB in The Budget Committee, chaired by the fulfilling its responsibilities with respect to Director General of the Bank, assists the banknotes. It also contributes, within its area of Governing Council in matters related to the competence, to the preparatory work for ECB’s Budget; it evaluates and monitors the enlargement of the euro area. ECB’s annual expenditure budget.

Cost Methodology Committee Internal Audit Committee The Cost Methodology Committee has a The Internal Audit Committee assists in mandate to develop common standards for, developing co-operation between the ECB and and provide advice on, costing and the NCBs in the field of internal audit, management accounting principles for the particularly in the area of joint ESCB Eurosystem. The Director General of the Bank projects. chairs this committee.

59 Annual Report 2006

Appendix 2: Role of Other EU Fora international institutions. While the ECB is Ecofin Council represented at all EFC committee meetings, The Council for Economic and Financial Affairs national central bank members attend (ECOFIN) is a formation of the Council of the meetings only for the discussion of topics EU, the EU’s principle decision-making body. It requiring their expertise, such as the comprises the ministers responsible for international economic situation, IMF and economic affairs and finance in EU countries. It related matters and financial stability issues; the normally meets about ten times a year and latter are dealt with at meetings of the EFC’s covers a broad range of economic, structural high-level Financial Stability Table. and tax policy issues, in addition to financial Economic Policy Committee market and EU budgetary issues. The Economic Policy Committee (EPC) The Eurogroup is an informal structure which comprises representatives from Member brings together the economic and finance States’ economic affairs and finance ministries, ministers of the euro-area Member States. It central banks, the European Commission and meets normally the day before the Ecofin the ECB. The committee assists in the meeting and deals with issues relating preparation of the work of the Ecofin Council, specifically to Economic and Monetary Union. with particular focus on long-term and In the course of the Informal Ecofin at structural issues. The EPC, which meets Scheveningen, the Netherlands in September formally around twelve times every year, also 2004, it was decided that the President of the supports the Economic and Financial Eurogroup should hold office for a period of Committee in keeping under review the short two years rather than on a six-month rotating and medium term macroeconomic basis. The current Eurogroup President is Jean- developments in the Member States and the Claude Juncker, Prime Minister and Finance European Union. Minister of Luxembourg. Committee on Monetary, Financial and Informal Ecofin Balance-of-Payments Statistics In addition to the regular ECOFIN meetings, The CMFB is a high-level Eurostat committee, the Council also holds ‘informal’ meetings once with members from all EEA20 central banks, every six months in the country occupying the national statistical offices and the ECB. It assists EU Presidency. The Informal ECOFIN meetings the European Commission in drawing up and represent a forum for open and informal policy implementing work programmes concerning dialogue between the Governors of the NCBs, monetary, financial and balance-of-payments economic and finance ministers, the ECB and statistics and advises on a wide range of issues the Commission. especially the measurement of debt and deficits for Stability and Growth Pact purposes. Economic and Financial Committee The CMFB is an independent committee with This EU committee consists of representatives advisory functions; it has no legislative powers. from Member States’ economic affairs and finance ministries, central banks, the This is given under the seal of the Central Bank Commission and the ECB. Its main task, and Financial Services Authority of Ireland. conferred on it by the Treaty, is to act as an advisory body to the ECOFIN Council and to The 25th day of June, 2007. the Commission on relevant economic and financial issues. This function includes monitoring the economic and financial situation of Member States, assessing the John Hurley, Governor international, economic and financial environment and monitoring financial and other relations with third countries and Brian Halpin, Secretary

20 The European Economic Area (EEA) constitutes the 25 EU Member States and three EFTA (European Free Trade Association) States, namely, Iceland, Liechtenstein and Norway.

60 Annual Report 2006

Governance and Organisation

Statutory Background virtue of which they are appointed to the The Central Bank and Financial Services Board. Non-executive directors are appointed Authority of Ireland (the Bank), formerly called by the Minister for renewable fixed terms of The Central Bank of Ireland, was established five years. The sole shareholder of the Bank is under the Central Bank and Financial Services the Minister for Finance. Authority of Ireland Act, 2003, (the Act). The Governor Act also established the Irish Financial Services Regulatory Authority (Financial Regulator) as a The Governor is appointed by the President, constituent part of the organisation with on the advice of the Government, for a term of statutory responsibilities for financial sector seven years. Mr. John Hurley, the current regulation and consumer protection. Governor was appointed with effect from 11 March 2002. The Governor is the Chairman of the Board of the CBFSAI and is also an ex- Board Structure officio member of the Governing Council of Responsibility for the management of the Bank the European Central Bank (ECB). He has sole is vested in the Board of the CBFSAI, which responsibility for the performance of the comprises five ex-officio directors namely the functions imposed, and the exercise of powers Governor, the Director General of the Central conferred, on the Bank by or under the EU Bank, the Secretary General of the Department Treaties or the ESCB Statute. of Finance, the Chairperson of the Regulatory Authority, the Chief Executive of the Financial The total remuneration paid to the Governor Regulator and seven non-executive directors for service during 2006 was \351,125. appointed by the Minister for Finance. Four of Superannuation benefits attaching to the these non-executive directors are appointed by Governor‘s salary are in accordance with the virtue of their membership of the Regulatory terms of the Civil Service Superannuation Authority. Ex-officio directors are members of Scheme. The Governor was also provided with the Board for as long as they hold the office by the use of a car.

Members of the Board The Members of the Board as at 31 May 2007, were:

Name Occupation Date First Date Last Appointed Appointed John Hurley Governor 11.03.02 11.03.02 Liam Barron Director General, CBFSAI 01.05.03 01.05.03 David Begg General Secretary, Irish Congress of Trade Unions 12.05.95 01.05.03 Gerard Danaher Senior Counsel 15.10.98 01.05.03 Roy Donovan Former Member of the Economic & Social Comm. of the EU 01.12.89 01.05.03 David Doyle Secretary General, Department of Finance 01.07.06 01.07.06 John Dunne Chairman, IDA 01.05.03 01.05.03 Alan Gray Managing Partner, Indecon International Economic Consultants 21.12.06 21.12.06 Martin O’Donoghue Emeritus University Professor 01.07.98 01.05.03 Patrick Neary Chief Executive, Financial Regulator 01.02.06 01.02.06 Brian Patterson Chairman, Financial Regulator 01.05.03 01.05.03 Deirdre Purcell Author 01.05.03 01.05.03 Tom Considine ceased to be a member of the Board on 30 June 2006 on his retirement as Secretary General of the Department of Finance. Friedhelm Danz retired from the Board on 26 October 2006. Total fees due to Directors in 2006 in respect of membership of the CBFSAI amounted to \137,083.

61 Annual Report 2006

Board Procedures powers which it would either not be possible The Board holds eleven regular meetings each or appropriate to delegate. These include year. A quorum of seven normally applies for provisions relating to the Governor’s position all meetings. The Governor approves the or that are specified to be Board responsibilities agenda and papers, which are circulated to the or which require the formulation of an opinion Directors one week in advance of meetings. by the Board. Additional Board meetings may be called by Board Sub-Committees the Governor at short notice either on his own initiative or at the request of any two Directors. The Board established three sub-committees on The Secretary of the Bank keeps minutes of all 30 June 1994 as follows: Board meetings. G The Audit Committee; G The Remuneration and Budget The agenda for meetings typically includes: Committee;

G Reports on monetary and financial G The Investments Committee. developments; Board regulations detail the terms of reference G Reports on various issues relating to the of each sub-committee and membership in Irish economy, the European economy each case is comprised of Directors — of whom and the international economy; one is appointed as Chairman — and a further member of the Regulatory Authority with G Reports on regulatory developments to observer status. The Secretary of the Bank, or keep the Board informed on policy issues a nominee, minutes all meetings of the sub- and where decisions by the Board are committees and, when approved, these required; minutes are circulated to the Board. G Management of the investment assets of the Bank; The members of the sub-committees, as at 31 May 2007, were as follows: G Substantial financial contracts to be placed by the Bank for the procurement Audit David Begg (Chair), Martin of goods and services; Committee O’Donoghue, Deirdre Purcell*, Alan Ashe** G General management, planning and Remuneration & Roy Donovan (Chair), John Dunne*, budgetary issues; Budget Martin O’Donoghue, Dermot Committee*** Quigley**, Liam Barron (Director G Quarterly and annual financial statements General), Patrick Neary* (Chief and results. Executive, Financial Regulator)

Powers Delegated to Governor Investments Gerard Danaher (Chair), Liam Committee Barron, Jim Farrell** The Governor, the Director General and the Chief Executive of the Financial Regulator are *Members of both the Board and the Regulatory Authority. executive members of the Board. As provided **Members of the Regulatory Authority who are not for in the Central Bank Act, 1942,itisthe also members of the Board but who participate at Board’s practice generally to delegate powers meetings of the above CBFSAI Board committees to the Governor for the exercise and with observer status. ***The Director General and the Chief Executive are performance of all functions, powers and members of this Committee when meeting on duties of the Bank with the exception of those budgetary matters only.

62 Annual Report 2006

Governor John Hurley, Dr. T. K. Whitaker and Bundesbank President Axel Weber at the second Central Bank Whitaker Lecture

Code of Practice for Directors and Staff Board submit annual statements of interests to The Governor is prohibited by law from the Public Offices Commission and to the holding shares in, or being a Director of, any Secretary of the Bank. bank or other credit institution, financial institution or insurance undertaking. The Ethics in Public Office Regulations also prescribe executive positions in the Bank at or A Code of Practice for disclosure of interest by above the Professional 1 level as designated members of the Board has been in operation positions. The Secretary of the Bank submits since 23 April 1992. This Code was updated annual statements of interests to the Governor, during 2002, in accordance with the and the other holders of designated positions Government’s 2001 Code of Practice for the submit annual statements of interests to the Governance of State Bodies, and was adopted Secretary of the Bank. by the Board on 19 September 2002. All members of the Board and staff of the Bank Ethics in Public Office Act, 1995 and are subject to the provisions of the Prevention Standards in Public Office Act, 2001 of Corruption Acts, 1906 and 1916. The Bank The Ethics in Public Office Regulations, 1997, has a written code of conduct for staff. have prescribed membership of the Board of the Bank as a designated directorship for On 28 November 2002, the Board of Directors purposes of the Ethics in Public Office Act, adopted a Code of Conduct for Board 1995 and the Standards in Public Office Act, Members which sets out the standards of 2001. In accordance with this, members of the conduct and integrity expected of each

63 Annual Report 2006

member in the performance of his or her Within the terms of the Central Bank Act, 1998, functions as a member of the Board of the the Governor meets with the Minister from Bank. The Code of Conduct contains a wide time to time to keep him informed regarding range of requirements with which Directors are the Bank’s performance of its statutory duties. obliged to comply. Management Boards Subject to the requirements of the Maastricht Treaty and the confidentiality provisions The Central Bank Management Board, which is imposed by law, the Governor appears before chaired by the Director General, and includes Joint Committees of the Oireachtas on request. the Deputy Director General and three This practice was put on a statutory basis in the Assistant Directors General, manages the Central Bank Acts, 1997 and 1998. performance of the Central Bank on behalf of the Governor and Board. The Financial Regulator Executive Board, which is chaired by Objectives the Chief Executive, and includes the As a member of the European System of Consumer Director and the Prudential Central Banks (ESCB), the statutory objectives Director, manages the performance of the of the Bank are laid out in Section 6 of the Act Financial Regulator on behalf of the Regulatory as follows: Authority. Joint Management Boards, which includes the Executive Directors of the ‘‘6.—(1) The Bank shall perform all Financial Regulator and the Management functions imposed, and exercise all Board members of the Central Bank, has powers conferred, on the Bank by or responsibility for prioritising and resourcing under the Rome Treaty or the ESCB service provision throughout the organisation. Statute. This includes planning, budgeting, and 6A—(1) In discharging its functions and utilisation of shared services and corporate exercising its powers as part of the resources including staffing, information European System of Central Banks, the technology, physical infrastructure and primary objective of the Bank is to corporate services. maintain price stability.

Accountability (2) The Bank also has the following As required by Section 61 of the Central Bank objectives: Act, 1942, the Bank prepares a report of its (a) contributing to the stability of the activities during the year and presents this financial system; report to the Minister for Finance within six months after the end of each financial year. (b) promoting the efficient and Copies of this report are laid before each effective operation of payment House of the Oireachtas. Section 6H of the and settlement systems; and Central Bank Act, 1942 requires the Bank to prepare and transmit to the Comptroller and (c) discharging such other functions, Auditor General a Statement of Accounts for duties and powers as are the year concerned. The Comptroller and conferred or imposed on it by the Auditor General audits, certifies and reports on Rome Treaty, the ESCB Statute or the Statement of Accounts and remits both any enactment’’. his/her report and the Statement of Accounts to the Minister. Copies of both of these The legislation empowers the Minister to documents are also laid before each House of request the Governor, the Board or the the Oireachtas. The Bank’s accounts are also Financial Regulator to consult with him, in audited by independent external auditors as relation to their respective functions, and also required by Article 27 of the ESCB/ECB to request the Governor to consult the Minister Statute. with respect to the price stability objective. The

64 Annual Report 2006

Governor and the Board are required to members of the Executive Board of the ECB comply with this, insofar as the request is and the Governors of the National Central consistent with the Rome Treaty, the ESCB Banks of the euro-area countries. As the Statute or any law of the State. primary decision-making body of the ECB, it is responsible for the formulation of the single Internal Audit monetary policy for the euro area and the The Internal Audit Function is an independent setting of guidelines for its implementation. It and objective appraisal function, which is meets twice a month, with monetary policy required to provide audit assurance that the discussions and interest rate decisions being system of risk management and internal control generally reserved for the first monthly is adequate to manage and control those risks meeting. Other issues discussed include to which the Bank is exposed. It also assists the foreign exchange operations; payment Bank in its pursuit of efficiency and systems; currency production and issue; and effectiveness. operational areas, such as budgetary and legal matters. (The role of the ESCB committees is The Internal Audit Charter provides that the described in Appendix 1). Head of Internal Audit reports directly to the Governor and the Chairman of the Financial Regulator and has unrestricted access to the The main tasks of the Executive Board (the Audit Committee and members of the Joint second decision making body of the ECB), Management Board. The Internal Audit which consists of the ECB’s President, Vice- function submits four-monthly written reports President, and four other members, are to to the Governor, the Chairman of the Financial prepare the meetings of the Governing Council Regulator, the Audit Committee and the Joint and to implement monetary policy in Management Board giving an assessment of accordance with the guidelines and decisions how effectively the Bank’s objectives are being laid down by the Governing Council. The met. The Internal Audit function also reports to President of the ECB chairs both the Governing the Internal Audit Committee of the ECB on the Council and the Executive Board. outcome of ESCB and Eurosystem audits and other audit issues. The General Council (the third decision- ESCB GOVERNANCE making body of the ECB) comprises the President and the Vice-President of the ECB The Eurosystem and European System of and the Governors of the National Central Central Banks Banks of all EU Member States. Its work The Eurosystem consists of the European includes contributing to the advisory and Central Bank and the National Central Banks of coordinating functions of the ECB and tasks the euro-area Member States. Responsibility for relating to the National Central Banks of non- monetary policy, the primary objective of euro area Member States. which is price stability, resides within the Eurosystem. Other tasks of the Eurosystem relate to foreign exchange operations, reserves The Governor and the Director General of the management, the operation of payments Bank attend meetings of both the Governing systems, prudential supervision and financial and General Councils. stability.

The European System of Central Banks consists International Monetary Fund of the ECB and the National Central Banks of all EU Member States. Ireland’s relations with the IMF are handled by the Central Bank and Financial Services ECB Decision-Making Bodies Authority of Ireland in association with the The Governing Council comprises the six Department of Finance. The Board of

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Governors of the IMF1 is the highest decision- making body of the organisation, consisting of one Governor and one Alternate Governor for each member country. The Board of Governors meets once a year at the IMF/World Bank Annual meetings; twenty-four Governors sit on the International Monetary and Finance Committee2, which meet twice each year. In Ireland’s case, the Minister for Finance is a Governor and the Governor of the CBFSAI is an Alternate Governor of the IMF. The CBFSAI works closely with the Department of Finance to coordinate Irish policy advice on IMF issues and Ireland’s operational interests at the Fund3.

1 The Governor is appointed by the member country and is usually the Minister of Finance or the Governor of the Central Bank. All powers of the IMF are vested in the Board of Governors. The Board of Governors may delegate to the Executive Board all except certain reserved powers. The Board of Governors normally meets once a year. 2 The IMFC acts as an advisory committee to the Board of Governors on matters relating to the Board of Governors’ functions in supervising the management and adaptation of the international monetary and financial system. This includes reviewing developments in global liquidity and transferring resources to developing countries. 3 The CBFSAI acts as Ireland’s fiscal agent within the framework of operations with the IMF, holding the IMF accounts through which Ireland’s quota payment is passed.

66 Annual Report 2006

Financial Operations

Accounting Policies It is the Bank’s policy in preparing its financial statements to follow, as far as possible, generally accepted accounting principles (GAAP). However, because of the unique nature of some of its operations as a central bank, and as a member of the Eurosystem, certain deviations from GAAP are necessary. All such deviations from GAAP are clearly identified in the statement of the Bank’s Accounting Policies, which is provided as part of the Statement of Accounts.

Auditing and Reporting Standards Under the Central Bank and Financial Services Authority of Ireland Act, 2003, the Bank is required to prepare and submit its Statement of Accounts to the Comptroller and Auditor General within six months of every year-end. The Comptroller and Auditor General must in turn audit and report on the Statement of Accounts to the Minister for Finance who is required to lay them before both houses of the Oireachtas.

Under Article 27 of the Statute of the European System of Central Banks (ESCB), the Accounts of the Bank must be audited by an independent external auditor recommended by the Governing Council of the ECB and approved by the European Council. Deloitte & Touche were appointed as independent external auditor of the Bank for 2006.

As a member of the Eurosystem, the Bank complied with regular extensive reporting requirements to the ECB, comprising both statistical and financial data.

Sharing of Monetary Income As a member of the Eurosystem, the income the Bank earns from the assets backing currency in circulation and bank deposit liabilities, forms part of the total income of the Eurosystem. Under Article 32 of the Statute of the ESCB, this income, described as ‘‘monetary income’’, is to be pooled by all the National Central Banks (NCBs) and then redistributed according to each NCB’s share in the capital of the ECB.

From 2002 onwards, a revised system for monetary income allocation was required, as national banknotes are no longer issued. Euro banknotes are issued by NCBs on behalf of the Eurosystem as a whole and circulate freely throughout the Euro area and externally. Because NCBs could be expected to undergo significant changes in their relative income positions

67 Annual Report 2006

following the issue of euro banknotes on which monetary income is earned, the Treaty provided for a gradual progression to the ultimate situation where monetary income on banknotes outstanding would be allocated according to each NCB’s share of the capital of the ECB. Each NCB’s share of capital of the ECB is based on national population and Gross Domestic Product. The agreed scheme provides for a six-year adjustment period extending from 2002-2007.

Financial Results for 2006 Profit for the year to 31 December 2006 amounted to \110.2 million compared with a corresponding amount of \122 million in 2005, as summarised in Table 1 below.

During 2006, both interest income and interest expense rose in line with increases in international interest rates. Interest income increased by \384.4 million to \1,077.7 million, mainly attributable to increases in the interest receivable on higher levels of monetary policy-related lending to credit institutions of \320 million and of \59.9 million on premium gains on securities1. Interest payable rose by \332.5 million to \817.6 million and primarily related to an increase in the interest payable on credit institutions of \98.2 million, \68.7 million on Intra-Eurosystem liabilities and \65.5 million on Government deposits. In summary, net interest income was \51.9 million greater than in 2005.

There was a net loss from financial operations of \48.0 million in 2006 compared to a net loss of \3.0 million for the previous year. The 2006 outcome is comprised of net realised exchange rate and capital losses of \4.5 million (\10.2 million gains in 2005), and unrealised exchange rate and capital losses of \43.6 million (\13.2 million in 2005). The realised and unrealised losses incurred in 2006 were due primarily to capital losses on securities, generally reflecting higher bond yields in line with rising international interest rates.

There was a deficit of \2.4 million in Other Income compared with a surplus of \5.9 million in 2005, mainly due to higher charges arising from the net result of pooling of Eurosystem Monetary Income and an increase in interest costs related to pension liabilities.

Total operating costs of \99.5 million, comprising pay, non-pay, banknote raw materials and depreciation, charged against profit increased by \10.4 million, or 11.7 per cent in 2006. Staff costs including pay increased by \9.6 million (15.8 per cent), while other operating costs increased by \0.8 million (2.9 per cent). A

1 The premium on securities moved from a loss in 2005 (\47.9 million) to a gain in 2006 (\12 million).

68 Annual Report 2006 detailed analysis of the Bank‘s operating costs is given in Note 8 of the Statement of Accounts.

After transfers to reserves and adjustments related to the recognition of the Bank‘s pension liability as required under FRS 17, the Bank‘s Surplus Income amounted to \98.5 million, which accrues to the Exchequer.

Table 1: Summary Profit and Loss Account

\million 31 Dec 31 Dec Change 2006 2005

Interest income 1,077.7 693.3 384.4 Interest expense 817.6 485.1 332.5 Net Interest Income 260.1 208.2 51.9

Net result of financial operations (48.0) (3.0) (45.0) Other income (2.4) 5.9 (8.3) Total Net Income 209.7 211.1 (1.4)

Staff expenses 71.0 61.4 9.6 Administrative expenses 20.3 18.6 1.7 Banknote raw materials 1.8 3.2 (1.4) Depreciation 6.4 5.9 0.5 Total Operating Costs 99.5 89.1 10.4

Profit (income less operating costs) 110.2 122.0 (11.8)

Figures may not sum due to rounding.

Table 2: History of Profit 1999-2006

1999 2000 2001 2002 2003 2004 2005 2006

\million 248.0 520.5 563.0 828.6 69.0 106.9 122.0 110.2

Bank profit levels in the years 2000-2002 were unusually high primarily due to realised exchange rate and capital gains and the windfall profit in 2002 from Irish banknotes (see Table 2 above). These exceptional items no longer arise and the ongoing level of profits will essentially reflect the prevailing interest rate environment.

Balance Sheet Developments Total balance sheet assets as at 31 December 2006 were \40.2 billion, which is \7.3 billion more than the corresponding figure for 31 December 2005. Monetary policy-related lending to credit institutions increased by \6 billion.

At end-year, the Bank‘s liability for euro banknotes in circulation amounted to \7,454 million, which represented an increase of \748 million on the previous year and reflects a general increase in the value of euro banknotes outstanding worldwide. Liabilities to euro area credit institutions (commercial banks) increased by \4.7 billion. These deposit balances can vary depending on the individual credit institutions scheduling of their average minimum reserve requirements. Liabilities to other euro area residents

69 Annual Report 2006

denominated in euro, essentially Government deposits, increased by \1.2 billion. Intra-Eurosystem net liabilities to the ECB increased by \486 million. This comprised an increase of \2,449 million in the value of the net issue by the Bank of euro banknotes over and above its capital key share of the total euro banknote issue and a decrease of \1,964 million in the Bank‘s liability to other central banks of the Eurosystem in respect of cross-border payments made by domestic financial institutions in euro through the ESCB‘s large-value payment system — TARGET2. As at 31 December 2006, the Bank‘s pension liability stood at \428 million, an increase of \41 million over the previous year.

Redemption of Irish Banknotes Irish banknotes ceased to be legal tender with effect from 9 February 2002. As at 31 December 2002, notes to the value of \299.7 million were outstanding. A provision of \60 million was created at that time in respect of unredeemed Irish notes. During 2006, an amount of \5.4 million was redeemed (compared to \6.8 million in 2005) leaving \251.3 million Irish banknotes still outstanding and a balance on the provision account of \11.6 million at end-December 2006.

Proceeds of Coin Under Irish legislation, the benefit from the coin issued by the Bank on behalf of the Minister for Finance accrued over the years since 1943 to the ‘‘Currency Reserve’’ of the Bank. To coincide with the introduction of euro coin from 1 January 2002, and to bring the position into line with general practice in other EU States, legislation was passed in March 2002 to permit the proceeds from the issue of coin to be transferred directly to the Exchequer. In 2006, a total of \39.5 million in respect of the net proceeds of coin issued was paid to the Exchequer (\45.0 million in 2005). During the year, the value of euro coin issued was \47.8 million (\51.3 million in 2005). Irish coin redeemed totalled \0.8 million (compared with \1.2 million in the previous year). Full details are incorporated in Note 32 of the Statement of Accounts.

Prompt Payment of Accounts 2006 The Bank is obliged to comply with the provisions of the European Communities (Late Payment in Commercial Transactions) Regulations, 2002, which provides that penalty interest will become payable if payments for commercial transactions are not met within 30 days, unless otherwise specified in a contract or agreement. The regulations do not apply where the interest penalty is less than \5. The rate of interest applicable to late payments is the ECB main refinancing rate plus 7 percentage points, with the relevant rate at 1 January

2 Trans-European Automated Real-time Gross settlement Express Transfer system.

70 Annual Report 2006 and 1 July each year applying for the six-month period after these dates. In 2006, interest was payable at a rate of 9.25 per cent from 1 January and 9.75 per cent from 1 July.

The following is a summary of interest payments made to suppliers during 2006 in accordance with the provisions of the Regulations referred to above.

G Total number of late payments 31 G Total value of all late payments (A) \350,561.65 G Total value of all payments (B) \35,649,481.83 G A as % of B 0.98% G Total amount of interest paid on late payments \909.61

71

Annual Report 2006

Statement of Accounts of the Central Bank and Financial Services Authority of Ireland for the year ended 31 December 2006

73

Annual Report 2006

Statement of Directors’ Responsibilities The main statutory provisions relating to the role and duties of the Directors are covered in Sections 5, 5A and 6 of the Central Bank Act, 1942, (as substituted by Sections 4, 5 and 6 of the Central Bank and Financial Services Authority of Ireland Act, 2003) and Section 22A of the Central Bank Act, 1942 (as inserted by Section 18 of the Central Bank and Financial Services Authority of Ireland Act, 2003). Moreover, under Section 6 of the Central Bank Act, 1942 (as inserted by Section 7 of the Central Bank and Financial Services Authority of Ireland Act, 2003), the Bank is responsible for the maintenance of proper accounting records. This responsibility also extends to the preparation and presentation to the Comptroller and Auditor General of a Statement of Accounts within six months of the end of each financial year and the appointment of external auditors as required by Article 27 of the Statute of the European System of Central Banks and of the European Central Bank.

The Board has overall responsibility for the system of internal financial control in the Bank, which is designed to safeguard the assets of the Bank and to prevent and detect fraud and other irregularities. To discharge this responsibility, the Board has established an appropriate organisational structure. In this regard, the Audit Committee of the Board meets periodically with the Internal and External Auditors and members of the Management of the Bank to discuss control issues, financial reporting and related matters. The Internal and External Auditors have full access to the Audit Committee.

The Board is satisfied that generally accepted accounting principles and standards, adapted to suit the nature of central banking activity and both domestic and European System of Central Banks’ statutory provisions which apply to the Bank, have been consistently applied and are supported by reasonable and prudent judgements and estimates.

John Hurley, Governor

David Begg, Director

13 June 2007

75 Annual Report 2006

Statement of Internal Financial Controls On behalf of the Board, I acknowledge the Board’s responsibility for ensuring that the Bank maintains effective systems of internal financial control and reviewing their effectiveness on an ongoing basis. The Board has formally adopted a code of conduct which requires each Director to ensure that the Bank has in place an effective system of internal controls including financial controls, operational controls, risk management and fraud prevention. The systems of control in place provide reasonable but not absolute assurance of the safeguarding of assets against unauthorised use or disposition, the maintenance of proper financial records and the reliability of the financial information provided and published. In essence, these systems are designed to manage rather than eliminate inherent financial risks. The systems of control include:

G A clearly defined organisation structure with specified authorisation limits and reporting requirements to senior management and the Board;

G Appropriate terms of reference for the Board and management committees with responsibility for core policy areas;

G A comprehensive financial and budgeting management information system which incorporates: — Approval of annual plan and detailed expenditure budgets by the Board — Quarterly reporting to the Board on financial and budgetary performance — Regular reporting to the Board on capital expenditure;

G Detailed policies and procedures relating to financial controls. An operational risk framework has been developed for the whole organisation. Each business area is responsible for the management of risk and the implementation of appropriate controls and procedures aimed at minimising and monitoring such risks. An Operational Risk Committee, which comprises senior management, has responsibility for the oversight of the management of operational risk. A full review of operational risk is furnished by the Bank Audit Committee to the Board on an annual basis. To assist departments in the ongoing assessment of risk, an operational risk database has been developed. Details of the risk controls deployed in respect of the management of investment assets are outlined in the Activities Chapter under Risk Management and in Note 35 to the Statement of Accounts. The Internal Audit Department independently and systematically reviews the controls in place and reports to the Board Audit Committee on a regular basis. The Audit Committee approves the Internal Audit Plan and work programme. In addition, the Audit Committee meets with and receives reports from both external auditors. The Chairman of the Audit Committee reports to the Board on all significant issues considered by the Committee and the minutes of meetings of the Audit Committee are circulated to the Board for consideration at subsequent meetings of the Board. The Board-level Committee structures have been designed so that the Board and the Irish Financial Services Regulatory Authority work closely together to ensure that their respective obligations in relation to the control of expenditure and the management of operational risk are managed within a consistent and complete framework.

76 Annual Report 2006

I can confirm that the Board reviewed the effectiveness of the system of internal financial controls during the year ended 31 December 2006.

John Hurley, Governor

13 June 2007

77 Annual Report 2006

Accounting Policies (a) Form of Presentation of Accounts In preparing the accounts, the Bank, as a participating member of the ESCB1, has a policy of following the accounting policies which the Governing Council of the ECB considers to be appropriate to the nature of central banking activity, and the statutory provisions2 which apply to the Bank.

The accounts have been prepared (i) on the historical cost basis of accounting, modified to include market valuations of securities, unmatured contracts and gold and all assets and liabilities denominated in foreign currency and (ii) in accordance with accounting standards generally accepted in Ireland in as far as it is considered applicable to a participating member of the ESCB. Accounting standards generally accepted in Ireland in preparing accounts giving a true and fair view are those recognised by the Institute of Chartered Accountants in Ireland and issued by the Accounting Standards Board.

The accounting unit is the euro.

Having regard to the role and activities of a central bank, the Bank is of the opinion that a cash flow statement would not provide any additional or useful information to users of the accounts. Therefore, such a statement is not included as part of these accounts.

The accounts have been prepared pursuant to Section 6H of the Central Bank Act, 1942 (as inserted by Section 7 of the Central Bank and Financial Services Authority of Ireland Act, 2003).

Throughout the Statement of Accounts the term ‘Bank,’ where used, refers to the Central Bank and Financial Services Authority of Ireland (CBFSAI).

(b) Income Recognition The accruals concept in accounting for income has been adopted.

(c) Fixed Assets (i) Measurement Fixed assets are stated at cost and are not revalued. (ii) Depreciation All fixed assets are depreciated on a straight line basis over their anticipated useful lives as follows: Freehold Premises (excluding site costs) — 50 years Plant and Machinery — 5 to 15 years Other — 5 years

1 Throughout this document the use of the term the European System of Central Banks (ESCB) refers to the twenty-five National Central Banks (NCBs) of the Member States of the European Union on 31 December 2006 plus the European Central Bank (ECB). The term ‘Eurosystem’ refers to the twelve NCBs of the Member States participating in the Monetary Union, plus the ECB on the same date. 2 The principal statutory provisions are: Treaty on European Union, 1992, Central Bank Acts 1942-1998, Central Bank of Ireland (Surplus Income) Regulations, 1943, Coinage Act, 1950, Decimal Currency Acts 1969-1990, the Economic and Monetary Union Act, 1998 and the Central Bank and Financial Services Authority of Ireland Act, 2003.

78 Annual Report 2006

(d) Superannuation Under the Bank’s superannuation scheme permanent Bank staff obtain the same superannuation benefits as established civil servants. The Bank pays these benefits out of current income as they fall due. The Bank discloses the cost of providing benefits in accordance with Financial Reporting Standard (‘‘FRS’’) 17 ‘‘Retirement Benefits’’. Scheme liabilities are measured using the projected unit method, which takes account of projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. These cash flows are discounted at the interest rate applicable to high-quality corporate bonds of the same currency and term as the liabilities. The current service cost and any past service costs are charged to the Profit and Loss account within staff expenses and to the Currency Reserve in respect of Mint staff. Actuarial gains and losses are recognised in the appropriation account. In determining the value of scheme liabilities assumptions are made as to price inflation, pension increases, earnings growth and employees. The assumptions underlying the 2006 liabilities and pension cost are set out in Note 34 to the Financial Statements. (e) Coin Provision and Issue Proceeds and expenses relating to the provision and issue of coin are transferred directly to the Currency Reserve under the provisions of the Coinage Act 1950, the Decimal Currency Acts 1969-1990 and the Economic and Monetary Union Act 1998. The cost of production of coin is charged to the Currency Reserve in the year in which it is incurred. Proceeds from the issue of coin are credited to the Currency Reserve in the year they are received (Note 32). Section 14A of the Economic and Monetary Union Act 1998 (as inserted by Section 137 of the Finance Act 2002) which came into operation on 25 March 2002 provides for the net proceeds from the issue of coin, from 1 January 2002, to be passed directly to the Exchequer as directed by the Minister. (f) Foreign Currency Transactions Accounting transactions denominated in foreign currency are converted to euro equivalents at exchange rates prevailing at the settlement date of transaction. (g) Amortised Income Premiums and/or discounts arising on securities are treated as net interest income and amortised on a straight-line basis over the period to their maturity and accounted for through the Profit and Loss account. (h) Valuation Policy Assets and liabilities denominated in foreign currency, unmatured investment and foreign currency contracts outstanding and shares in the Bank for International Settlements (BIS) are valued at mid-market closing exchange rates at year-end (Note 31). The exchange rate valuation of assets and liabilities is performed on a currency- by-currency basis. Gold is valued at the closing market price and securities at mid-market closing prices at year-end. The valuation of securities is performed on a security-by-security basis. Securities held in long term investment portfolios are not valued but are held at cost in the Balance Sheet until maturity.

79 Annual Report 2006

(i) Recognition of Gains and Losses Realised gains and losses arising from sales of foreign exchange, gold and securities are accounted for through the Profit and Loss account. Foreign exchange realised gains and losses are calculated by reference to average cost, commencing 1 January 1999, with the foreign currency valuation at that date becoming opening cost.

Unrealised gains identified at the end of every financial year in accordance with the Bank’s valuation policy (Accounting Policy (h)) are accounted for through the Profit and Loss account and transferred therefrom to the Revaluation Accounts.

Unrealised losses are accounted for through the Profit and Loss account to the extent that they exceed revaluation gains since 1 January 1999. Unrealised losses accounted for through the Profit and Loss account in this manner may not be reversed in subsequent years against future unrealised gains.

As all gains and losses are recognised through the Profit and Loss account it is not considered necessary to include a separate Statement of Total Recognised Gains and Losses.

Prior to 1 January 1999, gains and losses arising from the sale or valuation of foreign currency assets and gold were taken directly to reserves. At 1 January 1999, a transfer was made from the General Reserve to the Revaluation Accounts representing realised and unrealised gains and losses previously accounted for through that Reserve.

(j) Repurchase Agreements Under a Sale and Repurchase Agreement the Bank sells securities from its portfolio for cash and simultaneously agrees to repurchase them at an agreed price on a set date. These agreements to repurchase are reflected on the liability side of the Bank’s balance sheet and also lead to an interest expense in the Profit and Loss account (Note 2). At all times the Bank remains the beneficial owner of the securities which remain on its balance sheet. As at 31 December 2006 there were no Sale and Repurchase Agreements outstanding.

Under a Reverse Repurchase Agreement the Bank buys securities for cash and simultaneously agrees to sell them back to the counterparty at an agreed price on a set date. These agreements to sell are recorded on the asset side of the balance sheet (Note 13 & 15), but are not included in the Bank’s holdings of securities. At no time during the term of the agreement does the Bank acquire beneficial ownership of the underlying securities. These agreements give rise to interest income in the Profit and Loss account (Note 1).

Repurchase agreements may be transacted in both euro and other currencies.

(k) Intra-ESCB Balances All NCBs of the Eurosystem maintain accounts with each other for the purpose of making bilateral payments including cross-border payments through the TARGET3 system. All bilateral balances at the close of business each day are netted by means

3 Trans-European Automated Real-time Gross settlement Express Transfer system.

80 Annual Report 2006

of a multilateral netting process and replaced by a single outstanding debt-obligation to the ECB by each NCB or vice versa as appropriate. At end-2006, three of the non- participating countries (U.K., Denmark and Sweden) were included in the multilateral netting process. Intra-Eurosystem balances arising from the allocation of euro banknotes within the Eurosystem are included as a liability under Intra-Eurosystem liabilities (net): ‘‘Liabilities related to the allocation of euro banknotes within the Eurosystem’’ (Accounting Policy (m)) (Note 27).

(l) ESCB Capital Key The capital key is essentially a measure of the relative national size of member countries and is a 50:50 composite of GDP and population size. The key is used as the basis of allocation of each NCBs’ share capital in the ECB and must be adjusted every five years under ESCB statute. On 1 January 2004, the Bank’s key was 1.0254 per cent. Following the accession of ten countries on 1 May 2004, the key changed to 0.9219 per cent and remained so at year-end. The Bank’s share of the total key held by Eurosystem members was 1.2895 per cent at 31 December 2006 and 2005 and this is used as the basis of allocation for a series of important items including monetary income, banknotes in circulation and the sharing of the ECB’s profit/loss.

(m) Banknotes in Circulation The ECB and the 12 participating NCBs, which together comprise the Eurosystem, have issued euro banknotes as from 1 January 20024. The total value of euro banknotes in circulation is allocated on the last working day of each month in accordance with the banknote allocation key5. From the beginning of 2002, the ECB has been allocated a share of 8 per cent of the total value of euro banknotes in circulation, whereas the remaining 92 per cent has been allocated to NCBs according to their weightings in the ESCB key (Accounting Policy (l)). The share of banknotes allocated to each NCB is disclosed under the balance sheet liability item ‘‘Banknotes in circulation’’ (Note 22). The difference between the value of euro banknotes allocated to each NCB in accordance with the banknote allocation key and the value of the euro banknotes that it actually puts into circulation gives rise to remunerated intra-Eurosystem balances. These claims or liabilities, which incur interest6, are disclosed in the Balance Sheet under ‘‘Intra-Eurosystem: Liabilities (net)’’ (Accounting Policy (k)). From 2002 until 2007 the intra-system balances arising from the allocation of euro banknotes are adjusted in order to avoid significant changes in NCBs’ relative income positions as compared to previous years7. The adjustments are effected by taking

4 Decision of the European Central Bank of 6 December 2001 on the issue of euro banknotes (ECB/2001/15), OJ L 337, 20.12.2001, pp. 52-54. 5 The banknote allocation key refers to the percentages that result from taking into account the ECB’s share of the total euro banknote issue and applying the ESCB capital key to the NCBs’ share of such total. 6 Decision of the European Central Bank of 6 December 2001 on the allocation of monetary income of the National Central Banks of participating Member States from the financial year 2002 (ECB/2001/16), OJ L 337, 20.12.2001, pp. 55-61. 7 Decision of the European Central Bank of 6 December 2001 on the issue of euro banknotes (ECB/2001/15), OJ L 337, 20.12.2001, pp. 52-54.

81 Annual Report 2006

into account the differences between the average value of banknotes in circulation of each NCB in the period from July 1999 to June 2001 and the average value of banknotes that would have been allocated to them during that period under the ESCB capital key. The adjustments will be reduced in annual stages until the end of 2007, after which income on banknotes will be allocated fully to the NCBs according to their weighting in the ESCB capital key. The interest income and expense on these balances is cleared through the accounts of the ECB and is disclosed under ‘‘Net interest income’’. The Governing Council of the ECB has decided that the seigniorage income of the ECB arising from the 8 per cent share of euro banknotes allocated to the ECB shall be distributed separately to the NCBs in the form of an interim distribution of profits8 (Note 5). From 2006 onwards, the Governing Council has decided that this income is due to the NCBs in the financial year in which it accrues, but is to be distributed on the second working day of the following year9. It is distributed in full unless the ECB’s net profit for the year is less than its income earned on euro banknotes in circulation and subject to any decisions by the Governing Council to make transfers to a provision for foreign exchange rate, interest rate and gold price risks and to charge costs incurred by the ECB in connection with the issue and handling of euro banknotes against this income.

(n) Off-Balance Sheet Items Profits and losses arising from off-balance sheet instruments are recognised and treated in a similar manner to on-balance sheet instruments. Unrealised (valuation) gains are not recognised as income but are accounted for through the Profit and Loss account and transferred therefrom to a Revaluation Account. Unrealised (valuation) losses are taken to the Profit and Loss account when exceeding previous revaluation gains registered in the Revaluation Account. Unrealised trade date gains/losses on foreign exchange forward contracts are recorded under ‘‘other assets/ liabilities’’ in accordance with ESCB guidelines having been accounted for through the Profit and Loss account as outlined above. This method is used for foreign exchange forwards and these techniques cover the most significant off- balance sheet financial instruments which have been identified for possible use by the ESCB i.e. foreign exchange forwards, foreign exchange swaps, interest rate futures, interest rate swaps and forward rate agreements.

8 Decision of the European Central Bank of 21 November 2001 on the distribution of the income of the European Central Bank on euro banknotes in circulation to the National Central Banks of the participating Member States (ECB/2002/9) the Official Journal of the European Union L 323, pp. 49-50. 9 Decision ECB/2005/11 of 17 November 2005 on the distribution of the income of the European Central Bank on euro banknotes in circulation to the national central banks of the participating Member States, OJ L 311, 26.11.2005, p.41. This Decision repealed Decision ECB/2002/9.

82 Annual Report 2006

Profit and Loss and Appropriation Account for year ended 31 December 2006

2006 2005

Note \000 \000

Interest income 1 1,077,729 693,280

Interest expense 2 (817,616) (485,056)

NET INTEREST INCOME 260,113 208,224

Net realised (losses)/gains arising from financial operations 3 (4,473) 10,207

Write-downs on financial assets and positions 3 (43,576) (13,207)

Net result of financial operations, write-downs and risk (48,049) (3,000) provisions

Income from fees and commissions 4 1,743 1,581

Income from equity shares and participating interests 5 2,432 2,276

Net result of pooling of Monetary Income 6 (11,744) (5,697)

Other income 7,41 5,190 7,676

TOTAL NET INCOME 209,685 211,060

Staff expenses 8 (71,013) (61,361)

Other operating expenses 8 (20,279) (18,633)

Depreciation 8 (6,442) (5,929)

Banknote raw materials 8 (1,796) (3,166)

PROFIT FOR THE YEAR BEFORE UNREALISED GAINS 110,155 121,971

Net movement in unrealised gains 31 (6,861) 11,952

Transfers (to)/from revaluation account 31 6,861 (11,952)

Transfers from Reserves/Revaluation Accounts 31,32 15,156 95,917

Transfers to Reserves 32 (11,659) (12,790)

Transfers to Pension Liability 34 (15,156) (95,917) SURPLUS INCOME 9 98,496 109,181

The accounting policies together with Notes 1 to 42 form part of these accounts.

Banc Ceannais agus U´dara´s Seirbhı´sı´ John Hurley, Governor Airgeadais na hE´ireann

13 June 2007 Brian Halpin, Deputy Director General

83 Annual Report 2006

Balance Sheet as at 31 December 2006

ASSETS 2006 2005

Note \000 \000

Gold and gold receivables 10 93,203 83,967

Claims on non-euro area residents in foreign currency 11 566,114 658,182

Claims on euro area residents in foreign currency 12 58,636 51,426

Claims on non-euro area residents in euro 13 3,243,335 2,408,936

Lending to euro area credit institutions related to monetary policy operations in euro 14 27,043,763 20,990,407

Other claims on euro area credit institutions in euro 15 1,060,477 949,303

Securities of euro area residents in euro 16 7,137,455 6,778,802

Intra-Eurosystem claims 570,283 570,283 Participating interest in ECB 17 57,276 57,276 Claims equivalent to the transfer of foreign reserves 18 513,007 513,007

Items in course of settlement 19 47,204 76,091

Other assets 20 432,588 395,371

Total Assets 40,253,058 32,962,768

The accounting policies together with Notes 1 to 42 form part of these accounts.

Banc Ceannais agus U´dara´s Seirbhı´sı´ John Hurley, Governor Airgeadais na hE´ireann

13 June 2007 Brian Halpin, Deputy Director General

84 Annual Report 2006

Balance Sheet as at 31 December 2006

LIABILITIES 2006 2005

Note \000 \000

Banknotes in circulation 22 7,454,068 6,706,288

Liabilities to euro area credit institutions related to monetary policy operations in euro 23 12,915,313 8,252,363

Liabilities to other euro area residents in euro 24 5,462,612 4,239,926

Liabilities to non-euro area residents in euro 25 9,387 10,714

Counterpart of special drawing rights allocated by the IMF 26 99,615 105,581

Intra-Eurosystem liabilities (net) 11,933,408 11,447,830 Liabilities related to the allocation of euro banknotes within the Eurosystem 27 9,388,407 6,939,066 Other Liabilities within the Eurosystem (net) 28 2,545,001 4,508,764

Other liabilities 29 783,588 631,078

Pension liability 34 428,447 387,644

Provision 30 11,580 16,982

Revaluation accounts 31 58,206 65,067

Capital and reserves 32 1,096,834 1,099,295

Total Liabilities 40,253,058 32,962,768

The accounting policies together with Notes 1 to 42 form part of these accounts.

Banc Ceannais agus U´dara´s Seirbhı´sı´ John Hurley, Governor Airgeadais na hE´ireann

13 June 2007 Brian Halpin, Deputy Director General

85 Annual Report 2006

Notes to the Accounts

Note 1 Interest Income 2006 2005 \000 \000 Deposit Income 83,036 64,212 Coupons on Securities 243,008 250,416 Reverse Repurchase Agreements (i) 4,030 10,102 (Premiums)/Discounts on Securities (ii) 12,051 (47,863) Monetary Policy Operations (iii) 732,498 412,045 Income from Transfer of Foreign Reserve Assets to ECB (Note 18) 12,448 9,158 Other (9,342) (4,790) Total 1,077,729 693,280

(i) See Accounting Policy (j). (ii) See Accounting Policy (g). (iii) This relates to lending to credit institutions by the Bank as part of the Eurosystem’s monetary policy operations (Note 14).

Note 2 Interest Expense 2006 2005 \000 \000 Government 177,774 112,265 Credit Institutions 234,466 136,256 Intra-Eurosystem Balances (i) 183,372 114,654 Remuneration of Liability in respect of Euro Banknotes in circulation (ii) 221,854 119,311 Repurchase Agreements (iii) 150 2,570 Total 817,616 485,056

(i) The interest income/expense on these balances, which are remunerated at the short-term refinancing rates of the Eurosystem, is calculated by the ECB at the end of each day. (ii) See Accounting Policies (k) and (m). (iii) See Accounting Policy (j).

Note 3 Net Result of Financial Operations, Write Downs and Risk Provisions

Net Realised Gains Arising from Financial Operations

2006 2005 \000 \000 Net Realised Price (Losses)/Gains on Securities (4,251) 12,964 Net Realised Exchange Rate Losses (222) (2,757) Total (4,473) 10,207

Write Downs on Financial Assets and Positions

2006 2005 \000 \000 Unrealised Price Losses on Securities (42,980) (13,200) Unrealised Exchange Rate Losses (596) (7) Total (43,576) (13,207)

86 Annual Report 2006

Note 4 Income from Fees and Commissions 2006 2005 \000 \000 Service Fees and Charges 864 772 Securities Lending 771 694 Other 108 115 Total 1,743 1,581

Note 5 Income from Equity Shares and Participating Interests

This item represents the dividends received on shares in the Bank for International Settlements (Note 20).

As in 2005, there were no dividends received in respect of Ireland’s share of the ECB’s distributable profit (Note 17).

Note 6 Net Result of Pooling of Monetary Income

The amount of each Eurosystem NCB’s monetary income is determined by measuring the actual annual income that derives from the earmarkable assets held against its liability base.

The liability base consists of the following items: banknotes in circulation; liabilities to credit institutions related to monetary policy operations denominated in euro; intra-Eurosystem liabilities resulting from TARGET transactions; intra-Eurosystem liabilities related to the allocation of euro banknotes within the Eurosystem. Any interest paid on liabilities included within the liability base is to be deducted from the monetary income to be pooled.

The earmarkable assets consist of the following items: lending to euro area credit institutions related to monetary policy operations denominated in euro; intra-Eurosystem claims equivalent to the transfer of foreign reserve assets to the ECB; intra-Eurosystem claims resulting from TARGET transactions; intra-Eurosystem claims related to the allocation of euro banknotes within the Eurosystem; a limited amount of each NCB’s gold holdings in proportion to each NCB’s capital key. Gold is considered to generate no income. Where the value of a NCB’s earmarkable assets exceeds or falls short of the value of its liability base, the difference shall be offset by applying to the value of the difference the average rate of return on the earmarkable assets of all NCBs taken together.

The monetary income pooled by the Eurosystem is allocated between NCBs according to the subscribed capital key. The difference between the monetary income pooled by the Bank (EUR 204,506,000) and that reallocated to the Bank (EUR 192,762,000) constitutes the net result arising from the calculation of monetary income recorded in the Profit and Loss.

In the event of the ECB incurring a loss, the loss can be offset against the ECB’s general reserve fund, and if necessary, by a decision of the Governing Council, against the monetary income of the relevant financial year in proportion and up to the amount allocated to the NCBs.

Note 7 Other Income 2006 2005

\000 \000 Financial Regulator Levies 21,394 20,366 Interest on Pension Liabilities (16,835) (13,150) Other 631 460 Total 5,190 7,676

87 Annual Report 2006

Note 8 Expenses

\000 Currency Centre Total Dame Street* (Excl. Coin) (i) (Excl. Coin) (i)* Coin (i) Total (i)

2006 2005 2006 2005 2006 2005 2006 2005 2006 2005

Salaries/Allowances (ii) 45,098 40,823 9,576 9,073 54,674 49,896 578 692 55,252 50,588 PRSI 2,888 2,503 590 530 3,478 3,033 36 49 3,514 3,082 Pensions (Note 34(b)) 11,097 7,223 1,764 1,209 12,861 8,432 98 94 12,959 8,526 Staff Expenses 59,083 50,549 11,930 10,812 71,013 61,361 712 835 71,725 62,196

Training, Recruitment & Other Staff Costs 2,132 2,103 398 386 2,530 2,489 9 7 2,539 2,496 Maintenance of Premises 1,162 1,285 1,018 1,093 2,180 2,378 3 2 2,183 2,380 Energy 599 549 572 513 1,171 1,062 — — 1,171 1,062 Rent & Rates 908 976 460 448 1,368 1,424 — — 1,368 1,424 Equipment, Stationery and Requisites 1,398 1,559 155 140 1,553 1,699 2 5 1,555 1,704 Post and Telecommunications 513 477 156 93 669 570 2 3 671 573 Investment Services and Bank Charges 1,356 1,285 19 15 1,375 1,300 — — 1,375 1,300 Business Travel 1,606 1,577 209 182 1,815 1,759 30 13 1,845 1,772 Publishing & Media Relations 3,316 2,838 45 67 3,361 2,905 1 — 3,362 2,905 Professional Fees (iii) 2,613 1,593 21 41 2,634 1,634 9 14 2,643 1,648 Works Machine Maintenance — — 711 516 711 516 172 166 883 682 RTGS System Costs 407 452 — — 407 452 — — 407 452 Miscellaneous 430 433 75 12 505 445 — — 505 445 Other Operating Expenses 16,440 15,127 3,839 3,506 20,279 18,633 228 210 20,507 18,843

Depreciation 3,145 2,581 3,297 3,348 6,442 5,929 156 320 6,598 6,249

Raw Materials — — 1,796 3,166 1,796 3,166 7,546 4,519 9,342 7,685

Total Expenses 78,668 68,257 20,862 20,832 99,530 89,089 8,642 5,884 108,172 94,973

(i) Expenses relating to the provision and issue of coin are charged directly to the Currency Reserve under the provisions of the Coinage Act, 1950, the Decimal Currency Acts 1969- 1990 and the Economic and Monetary Union Act, 1998 and not to the Profit and Loss account (Accounting Policy (e)). (ii) Total fees paid to Directors of CBFSAI and members of the Financial Regulator in respect of 2006 were \309,166 (2005: \247,764). This is allocated as follows: 2006(\) 2005(\) CBFSAI 137,083 101,579 Financial Regulator 172,083 146,185 (iii) Auditors fees for 2006 in respect of both the Comptroller and Auditor General and Deloitte & Touche amounted to \283,494 (2005: \195,033) of which \26,015 were for non-audit services by Deloitte & Touche. *The expenses of the Financial Regulator are included in this section. Details of the Financial Regulator’s income and expenses in 2006 are shown in Note 41.

Note 9 Surplus Income Surplus Income of \98.5 million was payable to the Exchequer in respect of the year ended 31 December 2006. The amount paid to the Exchequer in respect of 2005 was \109.2 million. A payment on account of \40.6 million (2005: \40.6 million) of Surplus Income was made during 2006 leaving a balance of \57.9 million (2005: \68.6 million) (Note 29). These arrangements are in accordance with Section 6G of the Central Bank Act, 1942 (as inserted by Section 7 of the Central Bank and Financial Services Authority of Ireland Act, 2003), which provides that the Bank may at any time pay into the Exchequer such sums on account of Surplus Income as may be agreed upon by the Minister for Finance and the Bank. Under Section 6J of the Central Bank Act, 1942, (as inserted by Section 7 of the Central Bank and Financial Services Authority of Ireland Act, 2003) the Bank is exempt from Corporation Tax, Income Tax and Capital Gains Tax.

88 Annual Report 2006

Note 10 Gold and Gold Receivables With the exception of coin stocks held in the Bank, gold holdings consist of deposits with foreign banks. The change in value is due mainly to the change in the market value of gold during the year.

Note 11 Claims on Non-Euro Area Residents in Foreign Currency

2006 2005 \000 \000 Receivables from the IMF (i) 171,665 223,700 Balances with banks and security investments, external loans and other external assets (iv) 394,449 434,482 Total 566,114 658,182

(i) Receivables from the International Monetary Fund (IMF)

2006 2005 \000 \000 Quota 957,077 1,015,563 Less IMF Holdings of euro (857,450) (866,449) Reserve Position in IMF (ii) 99,627 149,114

SDR Holdings (iii) 72,038 74,586 Total 171,665 223,700

(ii) Reserve Position in IMF: This asset represents the difference between Ireland’s Quota in the IMF and IMF holdings of euro. Ireland’s Quota is its membership subscription, twenty five per cent of which was paid for in foreign currencies and the balance in euro. The holdings of euro by the IMF, which initially were equal to seventy five per cent of the Quota, have changed from time to time as a result of instructions received from the IMF regarding its lendings to member countries. (iii) Special Drawing Rights (SDRs): The SDR is an international reserve asset which was created by the IMF and allocated to member countries in the early 1970s and the early 1980s in order to increase international liquidity. The SDR is defined in terms of a basket of currencies. Its value is determined as the weighted sum of exchange rates of four currencies (US dollar, sterling, yen and euro). (iv) Balances with Banks and Security Investments, External Loans and Other External Assets

2006 2005 \000 \000 Balances with Banks 24,470 291,128 Security Investments 369,979 143,354 Total 394,449 434,482

Maturity Profile 2006 2005 \000 \000 0-3 months 40,387 310,172 3 months-1 year 10,833 66,385 1-5 years 343,229 57,925 Total 394,449 434,482

89 Annual Report 2006

Note 12 Claims on Euro Area Residents in Foreign Currency 2006 2005 \000 \000 Balances with Banks 24,202 24,582 Security Investments 34,434 26,844 Total 58,636 51,426

Maturity Profile 2006 2005 \000 \000 0-3 months 24,205 1,687 3 months-1 year 3,929 32,561 1-5 years 30,502 17,178 Total 58,636 51,426

Note 13 Claims on Non-Euro Area Residents in Euro 2006 2005 \000 \000 Balances with Banks 1,909,450 1,180,913 Security Investments 1,009,885 957,663 Reverse Repurchase Agreements (i) 324,000 270,360 Total 3,243,335 2,408,936

Maturity Profile 2006 2005 \000 \000 0-3 months 2,353,562 1,496,179 3 months-1 year 115,584 119,104 1-5 years 613,562 696,213 5-10 years 160,627 97,440 Total 3,243,335 2,408,936

(i) See Accounting Policy (j).

Note 14 Lending to Euro Area Credit Institutions related to Monetary Policy Operations in Euro

2006 2005 \000 \000 Main Refinancing Operations (i) 10,822,237 10,099,000 Longer Term Refinancing Operations (ii) 16,221,526 10,891,407 Total 27,043,763 20,990,407

These consist of advances to local credit institutions and reflect the Bank’s participation in Eurosystem monetary policy operations. All the advances are fully secured by collateral approved by the Eurosystem. (i) The Main Refinancing Operations comprise weekly tenders for funds with a maturity of one week and at rates close to market rates. (ii) The Longer Term Refinancing Operations comprise monthly tenders with a maturity of three months and at rates close to market rates.

90 Annual Report 2006

Note 15 Other Claims on Euro Area Credit Institutions in Euro

2006 2005 \000 \000 Balances with Banks 805,477 550,303 Reverse Repurchase Agreements (i) 255,000 399,000 Total 1,060,477 949,303

These items have a maturity of less than 3 months.

(i) See Accounting Policy (j).

Note 16 Securities of Euro Area Residents in Euro

These securities comprise debt issued by specified euro area and supranational issuers.

Maturity Profile 2006 2005 \000 \000 0-3 months 1,101,267 1,214,221 3 months-1 year 2,080,212 1,899,353 1-5 years 3,020,450 2,701,779 5-10 years 897,618 963,449 More than 10 years 37,908 — Total 7,137,455 6,778,802

Note 17 Participating Interest in ECB

This represents the Bank’s contribution to the capital of the European Central Bank.

Note 18 Claims Equivalent to the Transfer of Foreign Reserves

The Treaty on European Union, 1992 and Section 5A of the Central Bank Act, 1942, (as inserted by Section 4 of the Central Bank Act, 1998) as substituted by Section 5B(o) of the Central Bank and Financial Services Authority of Ireland Act, 2003 provides that the Bank has the power to ‘‘transfer assets, income or liabilities to the European Central Bank where required under the ESCB Statute’’. Accordingly the Bank transferred an amount equivalent to \424.8 million to the ECB in January 1999 and received in turn a corresponding claim on the ECB equivalent to this amount. As a result of Capital Key changes an additional \87.9 million was transferred on 1 January 2004 and \0.3 million was transferred on 1 May 2004. There were no such changes in 2006. The resulting claim on the ECB is remunerated at rates based on euro short-term market rates (Note 1).

Note 19 Items in Course of Settlement

Items in the course of settlement represent a claim on credit institutions in respect of cheques lodged in the Bank by its customers on the last business day of the year and presented to the banks on the first business day of the new year.

91 Annual Report 2006

Note 20 Other Assets

2006 2005 \000 \000 Shares in the Bank for International Settlements (i) 16,487 17,250 Stocks of Materials for Note Production 1,883 1,700 AIB plc/ICAROM Interest Bearing Loan (ii) 97,383 123,020 Accrued Interest Income 213,447 152,787 Prepayments 439 718 Fixed Assets (Note 21) 65,371 66,153 Other 37,578 33,743 Total 432,588 395,371

(i) The Bank holds 8,564 shares (2,564 paid up) in the Bank for International Settlements (BIS).

(ii) Under arrangements, which commenced in 1993 for the financing of the administration of ICAROM plc (formerly Insurance Corporation of Ireland plc), \11.1 million per annum until 2012 is being collected from Allied Irish Banks plc and passed on to the Administrator of ICAROM plc. The mechanisms used to collect these monies are (i) a back-to-back loan and deposit arrangement between Allied Irish Banks plc and the Bank and (ii) the reduction of interest paid on the minimum reserve balances held with the Bank. The matching back- to-back deposit is shown in Other Liabilities (Note 29).

Note 21 Fixed Assets

\000 Furniture Plant and Computer Other Fixtures & Total Premises Machinery Equipment Equipment Fittings Fixed Assets

2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005

At Cost — 1 January 49,814 49,409 47,014 46,761 11,650 11,016 7,788 6,109 8,976 8,252 125,242 121,547 Acquisitions (+) 3,224 405 5 253 925 634 1,271 1,679 407 724 5,832 3,695 Disposals — — (15) ——————— (15) —

At Cost — 31 December 53,038 49,814 47,004 47,014 12,575 11,650 9,059 7,788 9,383 8,976 131,059 125,242 Accumulated Depreciation at 1 January 10,275 9,283 28,165 24,959 8,586 7,598 5,330 4,906 6,733 6,093 59,089 52,839 Depreciation for Year (i) 1,016 992 2,971 3,206 1,088 988 808 424 716 640 6,599 6,250 Disposals —————————— — —

Accumulated Depreciation at 31 December 11,291 10,275 31,136 28,165 9,674 8,586 6,138 5,330 7,449 6,733 65,688 59,089

Net Book Value at 31 December 41,747 39,539 15,868 18,849 2,901 3,064 2,921 2,458 1,934 2,243 65,371 66,153

(i) Of the total of \6.6 million (2005: \6.2 million) depreciation charge, \0.16 million (2005: \0.3 million) in respect of Mint machinery was charged to the Currency Reserve (Accounting Policy (e)).

92 Annual Report 2006

Note 22 Banknotes in Circulation

This item consists of the Bank’s share of euro banknotes issued in the Eurosystem. The total value of euro banknotes in circulation is allocated on the last working day of each month in accordance with the banknote allocation key (Accounting Policy (m)).

Note 23 Liabilities to Euro Area Credit Institutions related to Monetary Policy Operations in Euro

Credit institutions in the euro area are required to hold minimum average reserve deposits with their respective NCBs. The purpose of these reserve requirements is to maintain a structural liquidity shortage. Interest is paid on these deposits at rates close to short-term market interest rates (Note 14). These accounts are also used as current/settlement accounts through which transactions across the Irish RTGS/TARGET system are settled.

Note 24 Liabilities to Other Euro Area Residents in Euro

2006 2005 \000 \000 General Government (i) 5,462,514 4,239,828 Other 98 98 Total 5,462,612 4,239,926

These items have a maturity of less than one year.

(i) Included under this heading are deposits totalling \216,159 held by the Official Assignee in Bankruptcy under the provisions of the Bankruptcy Act, 1988.

Note 25 Liabilities to Non-Euro Area Residents in Euro

2006 2005 \000 \000 Central Banks 93 60 International Financial Institutions 3,919 14 EU Agencies 5,375 10,640 Total 9,387 10,714

These items have a maturity of less than one year.

93 Annual Report 2006

Note 26 Counterpart of Special Drawing Rights Allocated by the IMF

This is the liability of the Bank to the IMF in respect of the allocation of SDRs to Ireland. The Bank’s SDR assets can change as a result of IMF lending operations or exchanges of SDRs for foreign currency with the IMF itself, IMF members and other official holders of SDRs. SDR holdings may also change as a result of interest payments made by the IMF on the Bank’s Reserve Position in the IMF and on the Bank’s SDR holdings net of SDR allocations.

Note 27 Liabilities related to the Allocation of Euro banknotes within the Eurosystem

This item consists of the liability of the Bank vis-a`-vis the Eurosystem in relation to the allocation of euro banknotes within the Eurosystem (Accounting Policies (k) and (m), Note 22).

Note 28 Other Liabilities within the Eurosystem

This item represents the net liability to the ECB as a result of euro cross-border payments transacted over the TARGET system by all NCBs participating in the ESCB (Accounting Policy (k)).

Note 29 Other Liabilities

2006 2005 \000 \000 AIB plc/ICAROM Deposit (Note 20) 97,383 123,020 Profit & Loss Appropriations (i) 57,864 68,549 Deposit Protection Accounts (ii) 460,570 337,207 Interest Accruals 160,102 84,276 Other Accruals 2,860 3,747 Other 4,809 14,279 Total 783,588 631,078

(i) See Note 9 on Surplus Income. (ii) These are balances placed by credit institutions with the Bank as part of the Irish Deposit Protection Scheme (IDPS). The IDPS is funded by credit institutions which are authorised by the Financial Regulator.

Note 30 Provision

Irish banknotes ceased to be legal tender with effect from 9 February 2002. As at 31 December 2002, notes to the value of \299.7 million were outstanding. A provision of \60 million was created to meet obligations in respect of unredeemed Irish pound banknotes. At 31 December 2006, the provision stood at \11.6 million (2005: \16.9 million) (Note 33).

94 Annual Report 2006

Note 31 Revaluation Accounts 2006 2005 \000 \000 At 1 January 65,067 78,183 Revaluation Surplus/Deficit (6,861) 11,952 Actuarial Loss on Pension Liability — (25,068) Total 58,206 65,067

Prior to 1 January 1999, gains and losses from the sale or valuation of foreign currency assets and gold were taken directly to reserves. At 1 January 1999, a transfer was made from the General Reserve to the Revaluation Accounts representing realised and unrealised gains and losses previously accounted for through this reserve. Since 1999, the Bank has adopted the approach of retaining these net gains in the revaluation reserve, even though some of these net gains have been realised.

In accordance with ESCB guidelines, foreign exchange realised gains and losses are calculated by reference to average cost, commencing 1 January 1999, with the foreign currency valuation at that date becoming opening cost.

The foreign exchange rates used vis-a`-vis the euro for the end-year valuations are as follows:— 2006 2005 Currency Rate Rate US dollar 1.3170 1.1797 Japanese yen 156.93 138.90 Australian dollar 1.6691 1.6109 Sterling 0.6715 0.6853 Swiss franc 1.6069 1.5551 Norwegian krone 8.2380 7.9850 Danish krone 7.4560 7.4605 Swedish krona 9.0404 9.3885 Cyprus pound 0.5782 0.5735 Canadian dollar 1.5281 1.3725 SDR 0.8760 0.8265

The gold prices used were:

EUR per fine ounce 482.688 434.856

95 Annual Report 2006

Note 32 Capital and Reserves

\000 General Currency Capital Reserve Reserve (a) (b) (c) Total At 31 December 2005 30 747,373 351,892 1,099,295 Retained profit for the year 11,659 11,659 Transfer to Pension Liability (i) (138) (138) Net Proceeds of Coin Issue 40,674 40,674 Transfer to the Exchequer (39,500) (39,500) Actuarial loss on Pension Liability (15,156) (15,156) At 31 December 2006 30 743,876 352,928 1,096,834

(i) The transfer to the pension liability account of \138,000 is in respect of interest on pension liability for staff involved in the production of coin. The current service cost of \98,000 for such staff is included in the mint operating costs (see Note 8). (a) Capital: The authorised capital of the Bank is fixed under Section 9(1) of the Central Bank Act, 1942 at \50,790. Issued and paid up capital is \30,474 all of which is held by the Minister for Finance. The balance is payable as agreed by the Board and the Minister. (b) General Reserve: Under the Central Bank of Ireland (Surplus Income) Regulations, 1943, the Board approved a transfer from the Profit and Loss Appropriation account to the General Reserve of \11.7 million and a transfer from the General Reserve to the Pension Liability Account of \15.2 million in respect of an actuarial loss on the pension liability for 2006 (Note 34 (c)). (c) Currency Reserve: Under the provisions of the Coinage Act, 1950, the Decimal Currency Acts, 1969-1990 and the Economic and Monetary Union Act, 1998, income and expenses related to coin are transferred directly to the Currency Reserve (Accounting Policy (e), Note 8). As a result of the Finance Act, 2002 and directed by the Minister for Finance, the Bank is permitted to transfer the net proceeds from the issue of coin directly to the Exchequer. In 2006, net proceeds of coin issue amounting to \39.5 million were transferred to the Exchequer. Details of net proceeds for the year are included in the table below:

Net Proceeds of Coin Issue 2006 2005 \000 \000 Coin issued into circulation 47,803 51,332 Specimen Coin Sets 1,996 1,071 Withdrawn Irish coin (821) (1,175) Proceeds from smelted coin 338 23 Total 49,316 51,251

Less Operating Costs (Note 8) (8,642) (5,884) Net Proceeds 40,674 45,367

96 Annual Report 2006

Note 33 Contingencies

The Bank hold 8,000 shares in the Bank for International Settlements, 25 per cent of which are paid up. The Bank has a contingent liability in respect of the balance. (Note 20(i)).

Under Article 28 of the Statute of the ESCB the Bank may be called upon in the future, along with all other participating NCBs, to provide further injections of capital to the ECB (Note 17).

The Bank has a contingent liability in relation to Irish pound banknotes that are no longer legal tender and that may be presented at a future date (\299.7 million was outstanding at 31 December 2002). At 31 December 2006, there was \251.3 million of Irish pound banknotes still outstanding (Note 30).

Note 34 Superannuation Liabilities

The pension entitlements of past and current permanent Bank staff arise under a defined benefit pension scheme. Under the scheme Bank staff receive the same entitlements as established civil servants. The Scheme is operated on a non-contributory basis for staff employed before 6 April 1995, with the exception of contributions made to the Spouses’ and Children’s Pension Scheme and payments received from eligible staff for the purchase and transfer of notional added service. In the case of staff employed on or after 6 April 1995 contributions are also payable in respect of the main scheme. The Bank operates a pay-as-you-go system in that assets are not separately identified to provide for the Bank’s pension liabilities.

The Bank discloses the cost of providing benefits in accordance with Financial Reporting Standard (‘‘FRS’’) 17 ‘‘Retirement Benefits’’.

The Central Bank and Financial Services Authority of Ireland Act, 2003, included a provision for the Bank to establish the pension scheme on a funded basis. In 2006, preliminary work progressed on the establishment of such a funded arrangement. It is intended that a funded pension scheme will be in place by end 2007 subject to approval by the Minister for Finance.

The policy of the Bank is to arrange an independent actuarial valuation of superannuation liabilities every three years. The latest valuation to take account of the requirements of FRS 17 was carried out as at 31 December 2005 by independent actuaries Coyle Hamilton Willis using the Projected Unit Method.

An update of the actuarial review was completed as at 31 December 2006 to comply with disclosure requirements under FRS 17.

(a) FRS17 Disclosure The major assumptions used for FRS 17 purposes were:

2006 2005 2004 %%% Rate of increase in salaries 4.00 3.50 3.50 Rate of increase in pensions 4.00 3.50 3.50 Discount rate 4.75 4.25 4.75 Rate of price inflation 2.25 2.00 2.00

The following amounts were measured in accordance with the requirements of FRS 17 — Retirement Benefits:

2006 2005 2004 \000 \000 \000 Present value of the scheme liabilities (428,447) (387,644) (273,496)

97 Annual Report 2006

(b) Amount charged to Profit and Loss Account/Currency Reserve

Profit and Loss Account 2006 2005 2004 \000 \000 \000 Interest on pension scheme liabilities 16,973 13,286 11,400 Net charge debited to other income (Note 7) 16,835 13,150 11,400 Net charge debited to Currency Reserve (Note 32) 138 136 —

Current service cost 14,857 9,322 6,509 Past service cost — 899 3,646 Employee Contributions (1,898) (1,695) (1,353) Total 12,959 8,526 8,802 Net charge debited to Staff Expenses (Note 8) 12,861 8,432 8,737 Net charge debited to Currency Reserve (Note 32) 98 94 65 Total pension cost of defined benefit scheme 29,932 21,812 20,202

(c) Movement in deficit during the year 2006 2005 2004 \000 \000 \000 Deficit as at 1 January (387,644) (273,496) (203,439) Movement in year: Current service cost (14,857) (9,322) (6,509) Past service cost — (899) (3,646) Pensions paid 6,183 5,276 4,699 Interest on pension scheme liabilities (16,973) (13,286) (11,400) Actuarial Loss Recognised in Appropriation Account (15,156) (95,917) (53,201) Deficit at 31 December (428,447) (387,644) (273,496)

(d) History of experience losses and changes in actuarial assumptions 2006 2005 2004 \000 \000 \000 Experience losses arising on the pension scheme liabilities (14,817) (37,345) (972) Percentage of the scheme liabilities (3.4%) (9.6%) (0.4%) Changes in assumptions underlying the present value of the pension scheme liabilities (339) (58,572) (52,229) Percentage of the scheme liabilities (0.1%) (15.1%) (19.1%) Total amount recognised in the Appropriation Account (15,156) (95,917) (53,201) Percentage of the scheme liabilities (3.5%) (24.7%) (19.5%)

98 Annual Report 2006

Note 35 Management of Financial Risk The liabilities and assets of the Bank are primarily determined by the nature of the Bank’s statutory functions, rather than commercial considerations. At the same time the Bank actively manages the market risks associated with its investment portfolio (i.e. holdings of foreign currency and euro-denominated assets). The parameters within which the Bank’s investment portfolio is managed are determined by the Board of the Bank; these include the currency composition of assets, the choice of investment instruments and the overall degree of risk that the Bank considers appropriate for its investment activities. The risks (i.e. currency, market, credit, liquidity and operational) inherent in the investment portfolio are managed by a comprehensive system of limits and procedures. An Investment Committee of the Board reviews investment policy and performance, and is supported by the Bank’s Investment Assets Committee which considers policy issues and strategy relating to the investment of the reserves. This committee, under the chairperson of the member of Management Board responsible for Financial Operations, consists of management and senior staff of the Financial Markets, Payments and Securities Settlement and Financial Control Departments. A Standing Investment Strategy Committee, comprising Financial Markets management and dealers meet weekly to formulate short-term investment strategy. An Investment Desk comprising a team of dealers carries out the day-to-day dealing activities that are required to implement decisions and to ensure that the portfolios are fully invested. A separate Risk Management Unit is responsible for the measurement, monitoring and reporting of the Bank’s risk exposures and for monitoring and reporting compliance with limits, etc. The Unit also measures the return on the Bank’s investment portfolios. The Bank is exposed to operational risk, which is the possibility of direct or indirect losses, or of reputational damage, arising from inadequate or failed internal processes, people and systems or from external events. This risk is managed by the segregation of the dealing, settlement and risk management functions; by restricted physical access to the dealing and settlement areas; and by a comprehensive body of controls and procedures aimed at minimising the risk of unauthorised trading. Each business area has responsibility for management of its operational risk. The operations of each business area are reviewed regularly to ensure that potential exposures are identified and that appropriate controls are implemented. A high-level committee, chaired by the Deputy Director General, oversees the management of operational risk in the Bank.

Note 36 Investor Compensation Act, 1998 Under Section 10 of the Investor Compensation Act, 1998, the Bank has formed and registered ‘The Investor Compensation Company Limited’, a company limited by guarantee. The Company administers the investor compensation scheme to reimburse the clients of failed investment firms. The Bank provides administrative and other services to the Company, the costs of which are recovered from the Company. The Company prepares its own Annual Report and audited Statement of Accounts.

Note 37 Unmatured Contracts in Foreign Exchange Unmatured Foreign Exchange Contracts at 31 December 2006 were as follows:

Unmatured Unmatured Unmatured Purchases Sales Purchases less Sales ‘000s of currency units Euro 461,543 360 461,183 US dollar — 582,000 (582,000) Sterling — 672 (672)

Note 38 Unmatured Contracts in Securities As a result of commitments made in December 2006 there were unmatured net forward purchases of nominal US dollar 8.7 million and unmatured net forward sales of euro 292.9 million. All contracts had matured by 10 January 2007. Total net forward sales valued at mid-market closing exchange rates of 31 December had a nominal value of \286.3 million.

99 Annual Report 2006

Note 39 Related Parties (a) The Bank provides several services to the Minister for Finance, its sole shareholder, and to other government departments and bodies. The main services during the year to 31 December 2006 were: — provision of banking services including holding the principal accounts of Government; — provision and issue of coin; — holding and maintaining the register of Irish Government securities. (b) As a participating member of the ESCB, the Bank has ongoing relationships with the other NCBs and the ECB.

Note 40 Post-Balance Sheet Events There were no post-balance sheet adjusting events.

Note 41 The Irish Financial Services Regulatory Authority The Irish Financial Services Regulatory Authority (Financial Regulator) was established in May 2003 under the terms of the CBFSAI Act 2003. It is a constituent part of the CBFSAI and is responsible for the regulation of the financial services industry in Ireland. The following is a summary of the income and expenditure of the Financial Regulator for the year ended 31 December 2006 together with comparatives for the year ended 31 December 2005. Irish Financial Services Regulatory Authority — Statement of Income and Expenditure for 2006

Income

2006 2005 \000 \000 Industry Funding Credit Institutions 7,423 6,713 Insurance Undertakings 4,854 4,270 Intermediaries 2,888 2,954 Securities and Investment Firms 1,445 1,438 Collective Investment Schemes and Service Providers 3,529 3,963 Credit Unions 1,298 1,057 Moneylenders 158 109 Approved Professional Bodies 20 38 Exchanges 101 95 Bureaux de Change/Moneytransmitters 28 19 Total Funding 21,744 20,656 Less: Provision/Write Offs 350 290 Net Industry Funding (i) 21,394 20,366 Excess of Income over Expenditure from previous year 2,110 1,686 Subvention from Central Bank and Financial Services Authority of Ireland (ii) 24,364 20,364 47,868 42,416 Other Income (iii) 2,887 1,003 Total Income 50,755 43,419 Expenses Direct Expenses (iv) 31,469 26,630 Shared Services (v) 14,206 13,676 45,675 40,306 Other Expenses (iii) 2,887 1,003 Total Expenses 48,562 41,309

Excess of Income over Expenditure for Year (vi) 2,193 2,110

100 Annual Report 2006

(i) Net Industry Funding Net Industry Funding income is included in the Statement of Accounts under Other Income. This figure comprises income from levies imposed upon the above industry categories (net of appeals and adjustments) under the Central Bank Act, 1942 (Sections 33J and 33K) Regulations 2004 (as amended) and other income in respect of fees and charges. An amount of \350,000 in respect of provision/write-offs has been offset against total funding income to arrive at Net Industry Funding. Outstanding levy amounts are being pursued as part of the ongoing debt recovery process. The provision/write-offs are as follows: 2006 2005 \000 \000 Opening Provision for Unpaid Levy Notices 213 600 Less: Write-Offs 2004 Levy 68 325 Less: Write-Offs 2005 Levy 127 352 Less: Write-Offs 2006 Levy 182 — Add: Charge to Income & Expenditure Account — Provision/Amounts Written Off 350 290 Closing Provision for Unpaid Levy Notices 186 213

(ii) Subvention from Central Bank and Financial Services Authority of Ireland By agreement with the Minister for Finance in April 2004, over the three-year period 2004-2006 approximately 50 per cent of the total costs of the Financial Regulator have been met by the imposition of levies on the industry. The balance of the total annual costs is provided by the Board of the CBFSAI in accordance with Section 33(L) of the Central Bank Act, 1942 (as inserted by Section 26 of the Central Bank and Financial Services Authority of Ireland Act, 2003). In 2006, the CBFSAI, with the approval of the Minister for Finance, bore the full cost of certain securities market supervision activities carried out within the Financial Regulator. These costs totalling \1,393,835 were excluded from the Net Industry Funding levies issued to the industry. (iii) Other Income/Other Expenses In 2006, the Irish Stock Exchange collected \2.89 million in fees payable to the Financial Regulator in accordance with Regulation 109 of the Prospectus (Directive 2003/71/EC) Regulations 2005. In accordance with Part 17(h) of the Prospectus Directive and Market Abuse Directive, delegation agreements entered into by the Financial Regulator with the Irish Stock Exchange, the Financial Regulator confirmed to the Irish Stock Exchange that it could retain the sum of \2.89 million to put towards the costs that it had incurred in undertaking the delegated functions under the delegation agreements. (iv) Direct Expenses Direct expenses (excluding the pension provision of \3.121 million) are included in the Statement of Accounts as set out in Note 8 on Expenses. Direct Expenses 2006 2005 \000 \000 Salaries/Allowances 20,498 17,703 PRSI 1,484 1,239 21,982 18,942 Pension Provision* 3,121 2,595 Staff Expenses 25,103 21,537 Training, Recruitment & Other Staff Costs 449 313 Equipment, Stationery and Requisites 414 353 Business Travel 664 727 Publishing & Media Relations 3,016 2,563 Professional Fees 1,669 986 Miscellaneous 154 151 Non-Pay Operating Expenses 6,366 5,093

Total Direct Expenses 31,469 26,630

* This represents estimated actuarial pension costs of the CBFSAI in respect of Financial Regulator staff serving in 2006. This provision does not form part of the CBFSAI’s expenses for 2006.

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(v) Shared Services Shared services costs (excluding the estimated actuarial pension cost of \1.0 million) are included in the Statement of Accounts of the CBFSAI as set out in Note 8 to those accounts. The Financial Regulator receives various services including premises, human resources administration, accounting, internal audit, statistical and information technology services from the CBFSAI. The cost of these services in 2006 was \14.2 million (2005: \13.7 million). The costs involved have been determined by the application of a cost allocation methodology which has been reviewed by independent external consultants. Allocation is based on well- recognised industry practice including occupied floor space, PC numbers and headcount (staff numbers) as appropriate. The main components of the above costs are as follows:

2006 2005 \000 \000 Corporate Services incl. Premises 6,802 6,173 Information Technology Services 2,655 2,844 Human Resources 2,077 2,127 Other Services10 2,672 2,532 Total 14,206 13,676

(vi) Excess of Income over Expenditure This represents the amount of levies collected from industry in 2006 in excess of the 2006 funding requirement. The 2006 funding requirement is the total of direct expenses and shared services (\45.7 million) less the subvention from the CBFSAI. The excess of income over expenditure has been carried forward and the calculation of the amount of industry levies for 2007 has been adjusted to take account of this excess.

Note 42 Approval of Accounts The Board of Directors approved the Statement of Accounts on 13 June 2007.

10 This includes accounting and other administrative services (\1.3 million), statistical services (\0.4 million) and estimated actuarial pensions costs (\1.0 million) in respect of CBFSAI staff engaged in the provision of services to the Financial Regulator.

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Report of the Comptroller and Auditor General for Presentation to the Houses of the Oireachtas

I have audited the Statement of Accounts of the Central Bank and Financial Services Authority of Ireland (‘‘the Bank’’) for the year ended 31 December 2006 under the Central Bank Act 1942, as amended by the Central Bank and Financial Services Authority of Ireland Act 2003.

The Statement of Accounts, which has been prepared under the accounting policies set out therein, comprise the Accounting Policies, the Profit and Loss and Appropriation Account, the Balance Sheet and the related notes.

Respective Responsibilities of the Directors of the Bank and the Comptroller and Auditor General The Directors’ responsibilities for preparing the Statement of Accounts in accordance with applicable law are set out in the Statement of Directors’ Responsibilities. The Directors are also responsible for ensuring the regularity of transactions.

My responsibility is to audit the Statement of Accounts in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

I report my opinion as to whether the Statement of Accounts gives a true and fair view and has been properly prepared on the basis described in paragraph (a) of the Accounting Policies. I also report whether in my opinion proper books of account have been kept. In addition, I state whether the Statement of Accounts is in agreement with the books of account.

I report any material instance where moneys have not been applied for the purposes intended or where the transactions do not conform to the authorities governing them.

I also report if I have not obtained all the information and explanations necessary for the purposes of my audit.

I review whether the Statement on Internal Financial Control reflects the Bank’s compliance with the Code of Practice for the Governance of State Bodies and report any material instance where it does not do so, or if the statement is misleading or

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inconsistent with other information of which I am aware from my audit of the Statement of Accounts. I am not required to consider whether the Statement on Internal Financial Control covers all financial risks and controls, or to form an opinion on the effectiveness of the risk and control procedures.

I read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. I consider the implications for my report if I become aware of any apparent misstatements or material inconsistencies with the financial statements.

Basis of Audit Opinion In the exercise of my function as Comptroller and Auditor General, I conducted my audit of the Statement of Accounts in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board and by reference to the special considerations which attach to State bodies in relation to their management and operation. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures and regularity of the financial transactions included in the Statement of Accounts. It also includes an assessment of the significant estimates and judgments made in the preparation of the Statement of Accounts, and of whether the accounting policies are appropriate to the Bank’s circumstances, consistently applied and adequately disclosed.

I planned and performed my audit so as to obtain all the information and explanations that I considered necessary in order to provide me with sufficient evidence to give reasonable assurance that the Statement of Accounts is free from material misstatement, whether caused by fraud or other irregularity or error. In forming my opinion I also evaluated the overall adequacy of the presentation of information in the Statement of Accounts.

Opinion In my opinion, the Statement of Accounts, which has been properly prepared on the basis described in paragraph (a) of the Accounting Policies, gives a true and fair view of the state of the Bank’s affairs at 31 December 2006 and of its surplus income for the year then ended.

In my opinion, proper books of account have been kept by the Bank. The Statement of Accounts is in agreement with the books of account.

John Purcell Comptroller and Auditor General 13 June 2007

104 Annual Report 2006

Report of Deloitte & Touche

Independent auditors’ report to the Board of Directors of the Central Bank and Financial Services Authority of Ireland We have audited the Statement of Accounts on pages 73 to 102.

Respective responsibilities of directors and auditors The directors, as described on page 75, are responsible for preparing the Statement of Accounts.

Pursuant to the requirements of Article 27 of the Statute of the European Central Bank, we have been appointed to audit the Statement of Accounts of the Central Bank and Financial Services Authority of Ireland (‘the Bank’). Our responsibilities, as independent auditors, are established by Article 27 of the Statute of the European Central Bank and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Bank’s Board of Directors as a body in accordance with Article 27 of the Statute of the European Central Bank and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the Statement of Accounts gives a true and fair view and is properly prepared on the basis described in paragraph (a) of the accounting policies. We state whether we have obtained all the information and explanations we consider necessary for the purposes of our audit and whether the Statement of Accounts is in agreement with the accounting records. We also report to you our opinion as to whether the Bank has maintained proper accounting records. We are not required to form an opinion on the effectiveness of the Bank’s system of internal financial controls.

We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatement or material inconsistencies with the financial statements.

Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Statement of Accounts. It also includes an assessment of the

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significant estimates and judgements made by the directors in the preparation of the Statement of Accounts, and of whether the accounting policies are appropriate to the Bank’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Statement of Accounts is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Statement of Accounts, the basis of which is described in paragraph (a) of the accounting policies.

Opinion In our opinion the Statement of Accounts has been properly prepared on the basis described in paragraph (a) of the accounting policies and, on this basis, the Statement of Accounts gives a true and fair view of the state of the Bank’s affairs as at 31 December 2006 and of its profit for the year then ended.

We have obtained all the information and explanations we consider necessary for the purposes of our audit. In our opinion, proper accounting records have been kept by the Bank. The Statement of Accounts is in agreement with the accounting records.

Deloitte & Touche Chartered Accountants and Registered Auditors Dublin

13 June 2007

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Economic and Financial Papers Published by Bank Staff since 2006

Articles in Central Bank Quarterly Bulletin 1. ‘‘The Net Worth of Irish Households’’ by John Kelly, July 2006. 2. ‘‘A Look at Data Revisions in the Quarterly National Accounts’’ by Colin Bermingham, July 2006. 3. ‘‘Foreign Direct Investment: An Analysis of its Significance’’ by Mary Everett, October 2006. 4. ‘‘Export Activities of Irish-Owned Firms’’ by Martina Lawless, January 2007. 5. ‘‘Housing Wealth and Consumption’’ by Nuala O’Donnell, January 2007. 6. ‘‘Irish Retail Interest Rates: Why do they differ from the rest of Europe?’’ by Rory McElligott, January 2007. 7. ‘‘Ireland’s Competitiveness Performance’’ by Mark Cassidy & Derry O’Brien, April 2007. 8. ‘‘Residential Mortgages: Borrowing for Investment’’ by John Kelly & Aisling Menton, April 2007. 9. ‘‘The Bank Lending Survey for Ireland’’ by Rafique Mottiar & Allen Monks, April 2007.

Articles in Central Bank Financial Stability Report 2006 1. ‘‘Top-Down Stress Testing: The Key Results’’ by Allan Kearns. 2. ‘‘Bottom-Up Stress Testing: The Key Results’’ by Allan Kearns, Maurice McGuire, Anne Marie McKiernan and Diarmaid Smyth. 3. ‘‘Assessing the Role of Income and Interest Rates in Determining Irish House Prices’’ by Kieran McQuinn and Gerard O’Reilly. 4. ‘‘The Concentration in Property-Related Lending — A Financial Stability Perspective’’ by Allan Kearns and Maria Woods. 5. ‘‘Stylised Facts on Irish Corporate Balance Sheets’’ by Rebecca Stuart.

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Technical Papers

1. ‘‘Consumption and Expected Asset Returns Without Assumptions About Unobservables’’ by Karl Whelan, May 2006. 2. ‘‘(Un)Predictability and Macroeconomic Stability’’ by Antonello D’Agostino, Domenico Giannone & Paolo Surico’’, June 2006. 3. ‘‘The Real Interest Rate Spread as a Monetary Policy Indicator’’ by Frank Browne & Mary Everett, July 2006. 4. ‘‘Conditional Convergence Revisited: Taking Solow Very Seriously’’ by Kieran McQuinn & Karl Whelan, July 2006. 5. ‘‘Sectoral explanations of employment in Europe: the role of services’’ by Antonello D’Agostino, Roberta Serafini & Melanie Ward, July 2006. 6. ‘‘An Empirical Analysis of Transparency-Related Characteristics of European and US Sovereign Bond Markets’’ by Peter Dunne, Michael J. Moore & Richard Portes, August 2006. 7. ‘‘An Examination of Data Revisions in the Quarterly National Accounts’’ by Colin Bermingham, September 2006. 8. ‘‘How Useful is Core inflation for Forecasting Headline Inflation?’’ by Colin Bermingham, September 2006. 9. ‘‘Prospects for Growth in the Euro Area’’ by Kieran McQuinn & Karl Whelan, November 2006. 10. ‘‘Measuring Irish Capital’’ by Mary J. Keeney, November 2006. 11. ‘‘Comparing Alternative Predictors Based on Large-Panel Factor Models’’ by Antonello D’Agostino & Domenico Giannone, December 2006. 12. ‘‘Assessing the Role of Income and Interest Rates in Determining House Prices’’ by Kieran McQuinn & Gerard O’Reilly, December 2006. 13. ‘‘Commodity Prices, Money and Inflation’’ by Frank Browne & David Cronin, December 2006. 14. ‘‘A Segmented Markets Model of Inflation’’ by Frank Browne & David Cronin, December 2006. 15. ‘‘Solow (1956) as a Model of Cross-Country Growth Dynamics’’ by Kieran McQuinn & Karl Whelan, January 2007. 16. ‘‘Firm Export Dynamics and the Geography of Trade’’ by Martina Lawless, March 2007. 17. ‘‘Successful Factor Market Competition Pre-Privatisation? China’s eclectic.com’’ by Peter McGoldrick & P. Paul Walsh, May 2007.

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Journal Articles 1. ‘‘Do Multinational Enterprises Relocate Employment to Low-Wage Regions? Evidence from European Multinationals’’ by Jozef Konings and Alan Murphy, Review of World Economics, Volume 142, July 2006. 2. ‘‘House Prices and Mortgage Credit: Empirical Evidence for Ireland’’ by Trevor Fitzpatrick and Kieran McQuinn, The Manchester School, Volume 75, January 2007. 3. ‘‘Modelling Inflation Dynamics: A Critical Review of Recent Research’’ by Jeremy Rudd & Karl Whelan, Journal of Money, Credit, and Banking, Volume 39, February 2007. 4. ‘‘Staggered Price Contracts and Inflation Persistence: Some General Results’’ by Karl Whelan, International Economic Review, Volume 48, February 2007. 5. ‘‘Measuring Irish Capital’’ by Mary Keeney, Economic and Social Review, Volume 38, Spring 2007. 6. ‘‘Solow (1956) as a Model of Cross-Country Growth Dynamics’’ by Kieran McQuinn and Karl Whelan, Oxford Review of Economic Policy, Volume 23, Spring 2007. 7. ‘‘Conditional Convergence and the Dynamics of the Capital-Output Ratio’’ by Kieran McQuinn and Karl Whelan, Journal of Economic Growth, Volume 12, June 2007.

Annual Report 2005, July 2006 Compendium of Irish Economic Statistics, July 2006 Monthly Statistics

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