Central Banking to 1990

Central Bank Established

The Central Bank of Ireland was established in 1943 (1942 Act)  following a Commission Report from 1938.  The Central Bank took over the functions of the Currency Commission in 1942, although it did not act as a Central Bank at first.  It was given powers to guard the purchasing power of the country and control credit.

From the 1950s onwards, the Central Bank played an increasing role in maintaining the value of the power of the currency. Balance of payments difficulties emerged in the 1950s, which required the Central Banks to take steps to implement monetary policy.

It provided temporary accommodation to clearing banks when there was a sharp contraction in their foreign liquid asset.  This was the first time the domestic banks could not rely on their own liquidity.

Regulation of Lending

The State attempted to keep Irish interest rates artificially low in the 1950s.  Bank lending increased at a non-sustainable rate in 1950.

The Central Bank took on a role for the first time.  Liquidity standards for banks were introduced in 1958.  A minimum level of external assets and Central Bank balances were required relative to their domestic current and deposit account.

From the mid-’60s to the mid-’80s, interest rates reflected the international developments.  There were quantitative credit guidelines.

In the late 1960s deposits were changing character from representing long-term holdings of wealth to being the equivalent of money for transactions.  The Central Bank focused on the total level of lending by all banks.  Quantitative limits were extended.  Quantitative limits were also put on inflows from abroad.

The bank charged penal interest rates for excessive borrowing and reliance on the Central Bank.

Increased Regulation of Lending

Balance of payments problems re-emerged in the 1960s and the Central Bank took on more extensive powers to restrict lending.  The Central Bank had relied on the voluntary cooperation of the clearing banks to manage their liquid reserves.

In trying to grips with external payments difficulties, the Central Bank advised banks a about the by the appropriate level of increases in domestic lending.  It also consulted with individual banks on their contribution to  overall credit policies objectives.

There was rapid inflation in the early 1970s and a growth in the domestic budget deficits  substantially after 1972.  Credit guidelines were suspended in 1974.

The Irish pound deteriorated rapidly internationally in line with sterling and inflation continued Inflation increased towards 20 percent in late 1970s with unsustainable budgetary and imbalances over 15 percent of GDP  and increases of 30 percent in domestic bank credit.

In the late 1970s bank credit guidelines were reintroduced and applied with greater rigour than before Penalties were imposed on the banks with respect of excessive lending over that advised, in order to incentivise and place quantitative limits on lending.

The credit guidelines were applied through the mid-’80s by which time  oil prices and inflation had lowered substantially and balance of payments was in better condition.

After the late ’80s, Central Bank stopped using direct credit limits and recommenced indirect controls to manage credit policy. This reflected increased mobility of capital and the growing  differentiation of financial institutions domestically.

Currency Management

In the late 1950s, the clearing  grew to maintain their domestic clearing accounts with the Central Bank rather than at London. By late 1950s, a third of the external monetary reserves of the country or about one-fifth of domestic accounts were held in the form of foreign liquid assets.

In late 1960s, banks and inflation in the sterling as well as the 1967 devaluation against the dollar saw steps to diversify Sterling external reserves by transferring them to Central Bank for investment in a wider range of currencies. The remaining reserves were transferred in the late 1960. The banks converted their external assets into Irish Pound  denominated liquid fund.

Government & Interbank

The Irish gilts market developed from the late 1960s and Central Bank assumed responsibility for issue of bills.  Originally gilts were generally held to  maturity rather than traded to any significant extent.  The Central Bank took steps to develop the domestic financial markets seeking to develop an interbank market in Irish pounds.

A greater range of government debt  from middle, short and long dated gilts were introduced through the ’70s.  The domestic gilt market increased further with greater secondary market by the mid-1980s.

The exchequer account was transferred from the Bank of Ireland to  the Central Bank in 1972.  The Central Bank made arrangements with the government to provide overdraft facilities to bridge short-term gaps in the exchequer year. The registers of government securities were transferred in the mid-1970s.

Liquidity ratios was established in 1972. They  required the banks to hold a portion of their accounts at Central Bank and in Irish government paper.

Foreign Exchange

The Dublin foreign exchange market was developed.  In the late 1960s the Central Bank commenced purchasing surplus  foreign currencies other than sterling directly from the banks and met their demand for foreign currency.  This enabled the final rate of exchange to be negotiated in foreign currencies.

The banks took steps to promote interbank dealing in foreign currencies.  The foreign exchange market making activities developed in the late 1970.

ERM & Break with Sterling

The EEC Exchange Rate Mechanism became operative in 1979.  The break with  sterling occurred in March 1979 and the Central Bank adopted a range of methods of intervening and influencing the foreign markets to manage liquidity and assistance.

Following the  break with  sterling in March 1979, the Central Bank established an overnight facility for banks settle the  transfer at the end of each day through the Central Bank. The daily interbank settlement facility was established in 1980.

The Central Bank placed mechanisms for contracting or expanding domestic liquidity asset through the use of temporary swaps of foreign currency.  Domestic gilt sales and repurchase arrangement were initiated in 1983 to purchase, provide or absorb liquidity thought the extension or cancellation of short term loan.

Central Bank Licensing

After 1972, the existing banks were licensed by the Central Bank.  They were obliged to meet a range of standards and requirements set out by the Central Banks.  They have been revised and updated from time to time to reflect the banking environment at home and abroad

In 1989, building societies and trustee savings banks were placed under the control of the Central Bank. The bank set prudential  standards with a view to minimising concentration of lending risk requiring it to hold certain liquid assets and be adequately capitalized and managed.

The Central Bank carried out inspections twice yearly onsite to  review control systems and performance of management.