The Central Bank of Ireland () is the national central bank for Ireland within the Eurosystem. From 1943 to 1998, it was the monetary authority responsible for issuing and controlling the Irish pound. It is also the country's primary financial supervisory authority.
The Central Bank of Ireland was founded on 1 February 1943, succeeding the Currency Commission of Ireland, a currency board established in 1922. Since 1 January 1972, it has operated under the Central Bank Act 1971, which completed the transition from the strict post-independence currency peg to the pound sterling to a fully autonomous central bank.Previously the commercial Bank of Ireland, established in 1783, had been the government's banker.
In addition to its monetary role, the Central Bank is also a financial supervisory authority. In that capacity, it increasingly implements policies set at the European Union level. It is the national competent authority for Ireland within European Banking Supervision. It is a voting member of the respective Boards of Supervisors of the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and European Securities and Markets Authority (ESMA). It is Ireland's designated National Resolution Authority and plenary session member of the Single Resolution Board (SRB). It provides the permanent single common representative for Ireland in the Supervisory composition of the General Board of the Anti-Money Laundering Authority (AMLA). It is also a member of the European Systemic Risk Board (ESRB).
History
From Currency Commission to Central Bank (1920–1942)
On the independence of the Irish Free State in 1922, the new state's trade was overwhelmingly with the United Kingdom (98% of Irish exports and 80% of imports in 1924), so the introduction of an independent currency was a low priority. British banknotes (British Treasury notes, Bank of England notes), and notes issued by Irish trading banks circulated (but only the first were legal tender) and British coins remained in circulation for many years after independence.
Under the terms of the Coinage Act 1926, the Finance Minister was authorised to issue coins of silver, nickel, and bronze of the same denominations as the British coins already in circulation however, the Irish silver coins were to contain 75% silver as compared to the 50% silver coins issued by Britain at the time. These coins entered circulation on 12 December 1928.
Under the terms of the Currency Act 1927, a new unit of currency, the Saorstát Pound (Free State Pound) was created, which was to be maintained at parity with the British Pound Sterling by the Currency Commission of Ireland, a currency board. This would hold British government securities, Pounds Sterling cash and gold, so as to keep a 1:1 relationship between the Irish and British currencies. Thus, from 1928 to 1979, Ireland was in the UK-controlled Sterling area.
Foundation of the Central Bank to decimalisation (1942–1971)
Although the Central Bank Act 1942 (effective 1 February 1943) renamed the Currency Commission, the new institution initially lacked traditional central banking functions:
it was not given custody of the cash reserves of the commercial banks it had no statutory power to restrict credit, though it could promote it the Bank of Ireland remained the government's banker the conditions for influencing credit through open-market operations did not yet exist Ireland's external monetary reserves were largely held as external assets of the commercial banks
The mid-1960s saw the Bank take over the normal day-to-day operations of exchange control from the Department of Finance. The Central Bank broadened its activities over the decades, but it remained in effect a currency board until the 1970s. Economist Patrick Honohan evaluates the success of the movement from a currency board to the central bank as follows: 'in contrast to many other post-colonial cases, (the currency board's) demise was not followed by a rapid depreciation and slide into semi-permanent high inflation and lack of convertibility.
Such was the proliferation of small industrial banks and hire purchase firms in the late 1960s, the 1971 Central Bank Act was introduced to enhance authorisation and supervision standards significantly.
Decimalisation to European integration (1971–1978)
The 1970s was a decade of change, which began with the decimalisation of the currency which came into effect on 15 February 1971, when the decimal coinage was released into circulation, concurrently with the same process in the United Kingdom.
In 1972, the Bretton Woods system of fixed exchange rates broke down and, in the wake of the 1973 oil crisis, inflation in Britain increased dramatically. As economic theory would suggest that a smaller economy whose currency is pegged to a larger one will suffer the larger economy's inflation rate, the option to discontinue the link with sterling began to be considered. Simultaneously, the creation of a Dublin money market and the 1968 transfer of commercial banks' Pound Sterling assets to the Central Bank created the technical capacity to break the sterling link. In the mid to late 1970s, opinion within the bank was moving toward breaking the link with the Pound Sterling and devaluing the Irish currency in order to limit inflationary effects from abroad.
The EMS and movement toward a single European currency
In April 1978, the European Council meeting in Copenhagen decided to create a "zone of monetary stability" in Europe, and European Economic Community institutions were invited to consider how to create such a zone. At the following Council meeting in Bremen (Germany) in June 1978, the basic features of the European Monetary System (EMS) were outlined, including the creation of the European Currency Unit (ECU), a basket of the Community's currencies used as a unit of account used to price some international financial transactions and capital transfers, and the forerunner of the Euro.
The Irish government had to decide whether or not to participate in the EMS. If the EMS had included all the European Economic Community's currencies, it would have provided stability for 75% of Ireland's external trade, but Britain, which still accounted for 50% of Ireland's external trade, decided to stay out of the EMS. Despite this, on 15 December 1978, the government announced that Ireland would participate in the EMS. Countries were given the option of either a 2.25% or 6% margin of fluctuation within the EMS' Exchange Rate Mechanism (ERM), and Ireland took the narrower margin. The EMS started on 13 March 1979, and towards the end of the month the Pound Sterling started to appreciate against the EMS currencies because of rising oil prices. By 30 March the Pound Sterling breached the upper fluctuation band limit of the Belgian franc and the Irish currency could no longer both track Sterling and remain in EMS. After over 50 years, the parity of the Irish and British currencies was broken, and the Irish currency became known as the Irish pound (or in Irish).
The initial experience of the EMS was disappointing. It had been expected that the Irish Pound would appreciate in value against the Pound Sterling, and hence reduce inflation in Ireland, but in practice, Sterling appreciated considerably in value thanks to its status as a petrocurrency and to the tight monetary policies of the new British government of Margaret Thatcher. By late 1980 the Irish Pound had fallen in value to less than 80 British pence, and Irish inflation was higher than British. Economic policy in Ireland was inconsistent with a "hard currency" policy, and the Irish Pound also failed to hold its value against the central rate of the Deutschmark, although it did appreciate against some of the other EMS currencies.
Eventually, the EMS settled down (notwithstanding a crisis in 1992 when the Irish Pound was devalued by 10%), and Irish inflation was the same or lower than Britain's inflation rate from 1987 onwards.
Towards the Euro
The idea of a single European currency goes back to the Schumann Plan of 1950. The first blueprint for how to go about implementing the currency, the Werner Report of 1970, was not proceeded with but the ultimate aim was always kept in mind. The Delors Report endorsed by the Madrid Summit of June 1989 envisaged a three-stage process to monetary union, and this was given legal authority by the Maastricht Treaty of 1992 (enacted into Irish law as the Eleventh Amendment to the Constitution of Ireland by 70% of those voting in a referendum on 18 June 1992). This envisaged the start of monetary union on 1 January 1999 and the introduction of notes and coins on 1 January 2002.
The Central Bank began production of euro coins in September 1999 in the Currency Centre (Irish Mint) in Sandyford, producing over a billion coins, weighing about 5,000 tons, with a value of €230 million before the introduction into circulation of the euro coins in January 2002. Production of euro banknotes began in June 2000, with 300 million notes worth €4 billion being produced in denominations of 5, 10, 20, 50, and 100 euros. Euro banknotes produced for the Central Bank are identified by having the serial number beginning with the letter T. The Bank did not initially issue €200 or €500 notes but subsequently began to do so.
Domestic banking crisis
The Central Bank noted in November 2005 that an overvaluation existed of 40% to 60% in the Irish residential property market. Minutes of a meeting with the OECD indicated that while the Central Bank agreed that Irish property was overvalued it was fearful of precipitating a crash by "putting a number on it". Senior Allied Irish Bank officials expressed concerns in 2006 that Central Bank stress tests were "not stressful enough". Management ignored warnings from the Bank's financial stability unit and from the Economic and Social Research Institute, regarding excessive lending to property speculators and developers. A parliamentary inquiry later questioned the credibility of this former staff member's testimony. Also ignored was key information from the Economic and Social Research Institute about the scale of bank loans to property speculators and developers, It was reported that the Central Bank sought to prevent a prominent economist from talking about the fragile state of the nation's banks in relation the Irish branch of Northern Rock. The same sources stated that the Central Bank "watered down" economic warnings about the property bubble in the run-up to the crash, blocked internal communication reaching board level due to the political interests, and "rigorously" concealed data from the relevant external supervisors on the large exposures of Irish banks to individual developers.
In November 2007, they stated: "The Irish banking system continues to be well-placed to withstand adverse economic and sectoral developments in the short to medium term. The underlying fundamentals of the residential market continue to appear strong and the current trend in monthly price developments does not imply a sharp correction. The central scenario, therefore, is for a soft landing."Central Bank of Ireland- Financial Stability Report November 2007
After the bubble burst, Irish banks faced mounting losses which exposed them to a collapse of confidence following the Lehman Brothers bankruptcy in September 2008; they then suffered acute liquidity pressures which had to be met by Central Bank support, including emergency lending. Management abuses were also revealed at Anglo Irish Bank, which had to be nationalised in January 2009.