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Annual Report 2001 Annual Report Report of the Central Bank of Ireland for the year ended 31 December 2001  Central Bank of Ireland 2002 Annual Report 2001 Originated and Printed by: Cahill Printers Ltd., East Wall Road, Dublin 3. Designed by: Keystrokes Ltd., Brunswick House, Brunswick Place, Dublin 2. Paper: 100% Chlorine Free Product. Enquiries relating to this Report should be addressed to: Central Bank of Ireland (Publications), P.O. Box No. 559, Dame Street, Dublin 2. Telephone 4344000; Telex 31041; Fax 6716561; www.centralbank.ie ISSN 0069-1542 Annual Report 2001 Central Bank of Ireland 4 June 2002 Dear Minister, I have the honour to enclose herewith the Proceedings and Annual Accounts of the Central Bank of Ireland for the year ended 31 December 2001. Yours faithfully, John Hurley, Governor The Minister for Finance 3 Annual Report 2001 The Board of Directors and Management of the Bank John Hurley, Governor David Begg Gerard Danaher Michael McBennett Donal Byrne Friedhelm Danz Jim Nugent Tom Considine Roy Donovan Martin O’Donoghue Liam Barron, Director General Deputy Director General and Secretary Brian Halpin Assistant Director General Vacant Assistant Director General Louis O’Byrne Assistant Director General Michael Casey Assistant Director General Liam O’Reilly Assistant Director General Gerry McGrath Function Head of Function — Financial Control — Financial Markets — Payments and Securities Settlements — Pat Treanor — Tony Grimes — Dermot Maher — European Monetary Affairs and International Relations — John O’Leary — Currency Issue — Currency Production — Engineering — Vacant — Daragh Cronin — Declan O’Brien — Economic Analysis, Research and Publications — Monetary Policy and Statistics — Tom O’Connell — Frank Browne — — — — Banking Supervision Securities and Exchanges Supervision IFSC and Funds Supervision Retail Investments and Insurance Supervision — Regulatory Enforcement and Development — Adrian Byrne — Pat Neary — Michael Deasy — Corporate Services — Human Resources and Planning — Information Systems — Hugh O’Donnell — Jim Cummins — Pádraig Ó Conaill Internal Audit — Con Horan — Mary O’Dea — Peter Charleton Donal Cahalane is currently on secondment to the World Bank as Advisor. 5 Annual Report 2001 Contents Page Foreword 9 Economic Overview 13 Brollach 17 Activities of the Central Bank of Ireland 19 Introduction 19 Governance Board Procedures Codes of Practice for Directors and Staff Accountability Bank Management Internal Audit European System of Central Banks 19 Monetary Policy 29 ECB Governing Council Decision Making Monetary Policy Implementation 31 Monetary Policy Operations Main Refinancing Operations Longer-Term Refinancing Operations Response to Terrorist Attack in US Minimum Reserves Eligible Collateral Interbank Market Developments Liquidity Forecasts 32 The Changeover to the Euro 37 Introduction The Role of the Central Bank The Cash Changeover Collateral in respect of Euro Notes and Coin Completing the Non-Cash Changeover The Bank’s involvement in Public and Business Preparations Public Information Campaign Participation in Other International Activities 44 EU Economic and Financial Committee EU Economic Policy Committee International Monetary Fund Management of Official External Reserves Bank’s Official Reserves Portfolio Restructuring in EMU ECB Pooled Reserves Risk Management 6 46 Page Economics, Research and Stastistics Economics and Research Economic Intelligence and Forecasting Inflation and Price Stability Monetary Issues Econometric Modelling Public Finance Statistics — Monetary, Financial and Balance of Payments Data Other Work/Activities 51 Payments and Settlements Real-time Gross Settlements/TARGET Credit Operations Securities Payment Systems Policy and Regulation Objectives Statutory Basis for Regulation Systemic Risk Domestic Clearing Arrangements Settlement Accounts Bank of England/ CREST DVP Project Electronic Money Projects Review of the Organisation of Retail Payment Systems Payment Systems Development 55 Currency Production and Issue Introduction Euro Banknote Production Irish Pound Banknote Production Coin Production Distribution of Euro Notes and Coin Withdrawal of Irish Banknotes and Coin Counterfeits Banknote Exchange 62 Supervision of Financial Institutions 68 Introduction Scope of the Bank’s Supervisory Remit Policy Developments Credit Growth Capital Adequacy Review Prevention of Money Laundering Auditing and Accounting Related Issues Client Money Rules Financial Stability Coordination Committee Consumer Protection 74 Unauthorised Activities and Complaints Foreign Firms Providing Services to Irish Clients Advice to Consumers Deposit Protection Investor Compensation Annual Report 2001 Page Supervision of Financial Institutions — continued Supervision of Credit Institutions Inspections and Reviews Licence changes Codes of Conduct 76 Supervision of Non-Credit Institutions 78 Collective Investment Schemes Approval and Supervision of Exchanges Authorisation and Revocation of Firms Inspections and Reviews Money Laundering Reports Retail Intermediaries Registration of Intermediaries Inspections Handbooks Approved Professional Bodies International Issues International Committees Memoranda of Understanding Page Management and Support Services Human Resources Remuneration Policies Training and Development Equal Employment Opportunities Employment of People With Disabilities Work/Life Balance Safety, Health and Welfare at Work Act, 1989 Technical Assistance Strategic Planning and Organisation Structure Media and External Communications Legal Services Information Systems 85 Financial Operations Accounting Policies Auditing and Reporting Standards Sharing of Monetary Income Prompt Payment of Accounts Financial Results Balance Sheet Developments Redemption of Irish Banknotes Proceeds of Euro Coin 91 Statement of Accounts 95 Financial Stability Report 123 Appendices 179 7 Annual Report 2001 Foreword During 2001, the Central Bank of Ireland continued to be involved in economic policy and financial activities pertaining to its core objectives. These objectives include contributing to the formulation and implementation of monetary policy as well as economic policy generally in order to ensure stable prices, the promotion of financial stability through oversight of the Irish financial system and institutions, and meeting the public’s requirements of banknotes and coins. The adoption of the euro in January 1999 has meant that, since then, there has been a single monetary policy for countries participating in Economic and Monetary Union. Decisions on monetary policy are taken by the Governing Council of the European Central Bank (ECB), which comprises the Executive Board of the ECB and the governors of the twelve participating National Central Banks. The Central Bank participated fully during the year in the activities that membership of the European System of Central Banks entails under the Maastricht Treaty. The previous Governor attended the twice-monthly meetings of the ECB Governing Council. The principal issues for the Governing Council in the past year were the assessments and decisions regarding monetary policy for the euro area, and the review and oversight of the production and distribution of euro banknotes and coin which were made available to the public on 1 January 2002. (A summary of the environment in which monetary policy decisions were made is given in the Economic Overview.) Bank staff participated with staff from other National Central Banks in the committee structure established by the Governing Council to assist it in its work. There are fourteen such committees and a number of related working groups and task forces that span diverse fields pertinent to the activities of the Governing Council. A major area of attention for the past year was the continued preparation for the launch of euro banknotes and coin on 1 January 2002. Planning for this has gone on for some considerable time. Production of banknotes began in April 2000, while coin production has been under way since September 1999. By the end of 2001, over 282 million euro banknotes and over 1.1 billion euro coin were available for issue to the public. More than two-thirds of the banknotes and about half of the coins were produced in 2001. The Bank was also responsible for the logistical planning of the distribution of euro banknotes and coin prior to the changeover date. The scale of this task called for the development of systems for distributing the currency in advance to banks and to their 9 Annual Report 2001 agents and customers. This process of frontloading and subfrontloading began last September. In addition, one million starter packs of euro coin were made available for purchase by the general public at post offices and financial institutions from 14 December. The withdrawal of Irish banknotes and coin after 1 January 2002 presented a bigger logistical issue than frontloading as the quantities involved were greater and the timescale was shorter, since 9 February was the last day of legal tender status for the Irish currency. By that date, 83 per cent of banknotes by value and 45 per cent of coin by value had been withdrawn from circulation. The Bank was also involved in a range of other issues related to the changeover. These included participation in the work of the Euro Changeover Board of Ireland, legal issues, training programmes regarding security features of the new banknotes, issues for the vending-machine sector and ATM operators, and various other practical aspects of the changeover. During the year, the Bank assumed further responsibilities in the area of supervision of financial institutions. In particular, the Bank’s role was expanded under the Insurance Act, 2000, to include the supervision of insurance intermediaries. The Bank’s supervisory responsibilities now extend across a broad range of almost 3,000 financial institutions, of which 87 are credit institutions. The objectives of supervision are to protect the stability of the banking and financial system as a whole and to provide a degree of protection to consumers of financial services. Issues relating to the stability of the financial system were kept under review during the year with assessments published in the Bank’s Bulletins. The high level of credit growth and strong lending growth to house-buyers and the property sector remained a concern in the first half of 2001; credit growth has eased more recently. The Bank was also involved in wide-ranging discussions relating to the development of a new capital adequacy framework for financial institutions. Other areas where significant developments occurred included the prevention of money laundering, auditing and accounting matters, and rules pertaining to the treatment of client money. In January 2001, the Government decided to restructure arrangements for the supervision of the financial sector by setting up a single regulatory authority within the Central Bank framework. The Bill to give effect to this, the Central Bank and Financial Services Authority of Ireland Bill, was published on 16 April 2002. The Bank welcomed the Bill and looks forward to working with the interim board of the new regulatory authority and its Chairman, Mr. Brian Patterson, in the establishment of these new structures. 10 Annual Report 2001 The Annual Accounts are presented later in this Report. The Bank‘s profits from its operations during the year amounted to \563 million compared to \521 million in 2000. This increase reflected a small increase in net interest income and a sizeable increase in gains from portfolio investment activities. Operating costs increased by \22 million with raw material costs and operating expenses, related to the euro changeover, accounting for \18 million of this. Increased staff costs amounted to \4 million or 13 per cent, reflecting pay increases and staff number increases primarily in the supervisory area. The Bank had a successful year in the management of its investment portfolio of \8.5 billion. The return on these assets was 6.74 per cent, not much below the 6.84 per cent return in 2000. The return in 2001 was marginally in excess of that on the benchmark portfolio used for performance measurement. I would like to pay a special tribute to my predecessor, Maurice O’Connell. He played a major role in the progress of the Bank during his tenure of eight years. This included preparation for EMU membership at the start of 1999, the large scale expansion of the financial supervision function and, early this year, a most successful currency changeover. He joins with me in extending sincere thanks to all the staff of the Bank for their diligence, application and expertise during a year of great change. I look forward to their continuing support in the coming year. John Hurley, Governor 11 Annual Report 2001 Economic Overview The year 2001 was characterised by a marked slowdown in the pace of economic growth in the world economy as well as Ireland. The principal factors contributing to the slowdown, which dates from around mid-2000, were the contraction in the Information Communications and Technology (ICT) sector, following a long period of very rapid expansion, the effect of the large increase in oil prices, and the synchronised nature of the economic slowdown across most of the advanced countries of the world. During 2001, the economic climate worsened due to the measures deemed necessary to limit the risk of foot-andmouth disease, together with the adverse effects of the 11 September terrorist attacks on the US. The Irish economy could not be insulated from these developments, especially in view of its openness and relatively large dependence on the ICT sector. In the event, Ireland’s Gross National Product (GNP) is now estimated to have grown by about 5 per cent in 2001. This is a creditable performance by international standards, although it does represent a substantial easing of growth from the rate of 10.4 per cent realised in 2000 and the average of 8.7 per cent experienced over the five years to 2000. These years of extremely rapid growth were associated with substantial employment increases, which averaged more than 5 per cent a year. Even without the external shocks, it was inevitable that Ireland’s economic growth would fall back in 2001 from the exceptionally high rates of previous years. Pressure on resources and capacity constraints were becoming increasingly evident through 2000 with unemployment falling to a very low rate of 3.7 per cent in the early part of 2001. While growth for 2001 as a whole was 5 per cent, it is important to note that there was a strong carryover effect from 2000. More specifically, export volumes were severely affected by the sharp deterioration in the international environment, in particular by much weaker demand growth in the country’s main trading partners. Information technology and the tourism sector were especially affected. As was to be expected at a time of a weaker economy and much greater uncertainty, the growth in capital formation was much reduced. Machinery and equipment investment recorded negative growth in 2001 reflecting the downturn in the external environment and a reduced flow of inward foreign direct investment. Construction investment continued to be positive, however, assisted by public capital 13 Annual Report 2001 expenditure. Although down on the large increases in recent years, consumer demand growth remained reasonably strong. This helped to realise some employment increases in the relatively labour intensive services sector, as did increased public sector provision of services, mainly in the health and education sub-sectors. The macroeconomic policy environment remained expansionary. In Ireland, monetary conditions were actually easier than in the euro area as a whole. Low nominal interest rates combined with Ireland’s relatively high inflation rate last year meant that real interest rates were lower in Ireland than in the euro area generally. Equally, the relatively weak exchange value of the euro has meant that Irish exporters to markets outside the euro area were placed in a relatively favourable position. The high, though decelerating, rates of increase in the monetary aggregates in the Irish economy are also indicative of accommodating monetary conditions. Fiscal policy last year was also quite expansionary. This evoked a recommendation from the EU Commission, ratified by the Council of Economic and Finance Ministers (ECOFIN), to take countervailing measures in order to comply with the EU Commission’s (Broad Economic Policy Guidelines for 2000) recommendation to use budgetary policy to limit the risks of overheating in the economy. In the event, following weaker economic growth than was initially anticipated and the occurrence of a number of negative shocks, the EU Commission and ECOFIN accepted in the autumn of 2001 that the changed circumstances had removed the need to take such countervailing action. The General Government Surplus for the year amounted to 1.7 per cent of GDP, considerably less than the 4.3 per cent of GDP surplus envisaged in the 2001 Budget. Along with other EU countries, Ireland continued to pursue the structural reform agenda in 2001. The purpose of reform is to increase employment and growth potential, to enhance the economy’s capacity to cope with various shocks and to promote competition. A more competitive environment helps to improve resource allocation and to benefit consumers. Perhaps reflecting a reaction to weaker economic growth, the impetus to reform seemed to be less strong across the EU generally in 2001. Ireland, however, is relatively advanced in the structural reform process, as was confirmed by an OECD report on regulatory reform published in April 2001. The principal developments last year related to new competition legislation, measures to promote liberalisation of utilities and network industries, and the examination of professional services and certain other subsectors identified by the OECD as areas where more competition was needed. Constraints on free entry in a number of instances were among the negative factors noted by the OECD. 14 Annual Report 2001 While the Irish economy is still being affected by the various adverse developments of the past year or so, there is no strong reason why, in the near future, the country should not be able to see a pick-up in growth, from about 3 per cent this year, to its potential of 41⁄2 to 5 per cent a year. The timing of such a recovery will, of course, depend on the pace and strength of the international upturn as well as appropriate domestic developments. A significant risk to the resumption of trend growth is inflation. As the economy began to encounter capacity constraints and as the euro weakened in the latter part of 1999, Ireland’s inflation rate began to pick up. Consumer price inflation has been consistently higher than in the euro area generally for the past two and a half years. This excess has been of the order of 2 percentage points a year, whether one considers headline or underlying inflation. Some commentators have taken the rather benign view that excess inflation in Ireland is an equilibrating mechanism for slowing down the economy through limiting the growth of net exports. However, as the Bank has stated previously, this would be a high-risk remedy for overheating. Inflation tends to have a momentum of its own — driven by expectations — which could give rise to significant overshooting. In the Irish economy the difficulties arising from this could be substantially exacerbated for exporters to non-euro area markets if the euro were to appreciate from what is generally believed to be an undervalued level at present. To undo excess inflation at a time when macro-economic policy in Ireland’s principal export markets is focused, inter alia, on ensuring low inflation would be a formidable task. For example, if excess inflation of 5 per cent needed to be rolled back to recover competitiveness, it would call for a 1 per cent lower inflation rate here than elsewhere for five years. With euro area and UK inflation of about 2 per cent a year, this would imply that Ireland’s inflation rate should be no more than 1 per cent a year for five years. Such a target would be extremely difficult to achieve. As stated before, monetary policy is no longer available as an instrument of domestic anti-inflationary policy. This puts the onus back on prudent fiscal policy and appropriate wage and other cost developments to ensure stability. Fiscal policy was strongly expansionary last year to the extent of 21⁄2 to 3 per cent of GDP. Total government spending increased by 171⁄2 per cent, while total revenue growth of 73⁄4 per cent was much less than expected as a result of lower economic growth and discretionary fiscal action. This resulted in a substantial fall in the General Government Surplus from 4.5 per cent in 2000 to 1.7 per cent of GDP last year. Into the early months of 2002, strong expenditure growth and relatively weak growth in revenue continued to be evident. It is important in the interests of stability and the 15 Annual Report 2001 avoidance of deficits that fiscal policy should aim to ensure a neutral stance in terms of its impact on the macro-economy. While higher productivity growth can justify somewhat higher nominal wage growth than in the euro area, nominal per capita wage increases of almost 9 per cent a year, as seen for the past two years, cannot be sustained without seriously undermining competitiveness and employment prospects. This also applies to wage developments in the more sheltered sector where expectations are not subject to the discipline of external competition. Moderation in wage developments in the public sector is also necessary in order to preserve stability in the public finances. Given the high wage increases of the past three years, it is necessary to bring normal wage increases more into line with those of our trading partners. If these risks to competitiveness can be moderated it should be possible for the Irish economy to revert to a sustainable growth path of 41⁄2–5 per cent per annum. This would facilitate the maintenance of employment in the present uncertain climate. 16 Annual Report 2001 Brollach I rith 2001, lean an Banc Ceannais de bheith páirteach i bpolasaı́ eacnamúil agus gnı́omhaı́ochtaı́ airgeadais maidir lena phrı́omhaidhmeanna. I measc na n-aidhmeanna seo tá cur le foirmiú agus le cur i ngnı́omh polasaı́ airgeadaı́ochta mar aon le polasaı́ eacnamúil i gcoitinne d’fhonn praghsanna seasmhacha a chinntiú, cur chun cinn seasmhachta airgeadais trı́ fheighil chóras agus fhorais airgeadais na hÉireann, agus éileamh an phobail ar bhancnótaı́ agus boinn a shásamh. Ciallaı́onn glacadh an euro in Eanáir 1999, ó shin i leith, go bhfuil polasaı́ airgeadaı́ochta amháin do na tı́ortha atá páirteach san Aontas Eacnamúil agus Airgeadaı́ochta. Déanann ArdChomhairle an Bhainc Ceannais Eorpaigh (BCE), ina bhfuil Bord Feidhmeannach an BCE agus gobharnóirı́ den dá bhanc ceannais déag atá páirteach, cinnı́ faoi pholasaı́ airgeadaı́ochta. Ghlac an Banc Ceannais páirt iomlán i rith na bliana sna gnı́omhaı́ochtaı́ a gceanglaı́onn ballraı́ocht sa Chóras Eorpach Banc Ceannais faoi Chonradh Maastricht air. D’fhreastail an Gobharnóir ar chruinnithe faoi dhó sa mhı́ d’Ard-Chomhairle an BCE. Ba iad prı́omhcheisteanna don Ard-Chomhairle anuraidh ná na measúnóireachtaı́ agus na cinnı́ maidir le polasaı́ airgeadaı́ochta don limistéar euro, agus athbhreithniú agus feighil tháirgiú agus sheachadadh bancnótaı́ agus bonn euro a cuireadh ar fáil don phobal an 1 Eanáir 2002. Ábhar mór cainte anuraidh ná an t-ullmhúchán leanúnach do sheoladh na mbancnótaı́ agus na mbonn euro roimh an dáta athraithe, 1 Eanáir 2002. Rinneadh mórán pleanála chuige seo ar feadh i bhfad. Thosaigh táirgiú na mbancnótaı́ in Aibreán 2000, agus bhı́ táirgiú na mbonn faoi lán seol ó Mheán Fómhair 1999. Faoi dheireadh 2001, bhı́ os cionn 282 mhilliún bancnóta euro agus os cionn 1.1 billiún bonn euro ar fáil le heisiúint go dtı́ an pobal. Táirgı́odh nı́os mó ná dhá thrian na mbancnótaı́ agus timpeall leath na mbonn i 2001. Bhı́ an Banc freagrach as pleanáil loighistice sheachadadh na mbancnótaı́ agus na mbonn euro roimh an dáta athraithe. Mar gheall ar scála na hoibre bhı́ gá le córais a fhorbairt chun an t-airgeadra a sheachadadh roimh ré go dtı́ na bainc, go dtı́na n-ionadaithe agus a gcustaiméirı́. Thosaigh próiseas seo an túsualaithe agus an fho-thúsualaithe Meán Fómhair seo caite. Anuas air sin, cuireadh milliún pacaı́ tosaithe ar fáil le ceannach ag an bpobal in oifigı́ poist agus institiúidı́ airgeadais ón 14 Nollaig. Ceist loighistice nı́os mó ná túsualú ab ea aistarraingt bhancnótaı́ agus bhoinn na hÉireann tar éis 1 Eanáir 2002 mar bhı́ na cainnı́ochtaı́ nı́ ba mhó agus an scála ama nı́ ba ghiorra, ó ba é 9 Feabhra lá deiridh stádas dlithiúil airgeadra na hÉireann. Faoin dáta sin, aistarraingı́odh 83 faoin 17 Annual Report 2001 gcéad de bhancnótaı́ ó thaobh luacha agus 45 faoin gcéad de bhoinn ó thaobh luacha as cúrsaı́ocht. I rith na bliana, ghlac an Banc breis cúram chuige i gcás institiúidı́ airgeadais a fheighil. Go háirithe leathnaı́odh ról an Bhainc faoin Acht Árachais, 2000, chun feighil idirghabhálaithe institúidı́ airgeadais árachais a áireamh. In Eanáir 2001, chinn an Rialtas socruithe a athstruchtúrú d‘fheighil na hearnála airgeadais trı́ údarás rialacháin amháin a bhunú laistigh de chreatlach an Bhainc Ceannais. Tá obair maidir leis an reachtaı́ocht faoi lán seoil. Tugtar na Cuntais Bhliantúla nı́os déanaı́ sa tuarascáil seo. Bhı́ \563 milliún i gcomparáid le \521 milliún i 2000 mar bhrabús ag an mBanc óna ndéileálacha i rith na bliana. Léirigh an méadú seo méadú beag i nglanioncam úis agus méadú suntasach ó thaobh brabach ó ghnı́omhaı́ochtaı́ infheistı́ochta punainne. Mhéadaigh costais oibrithe \22 milliún; costais amhábhair agus caiteachais oibrithe, a bhain le hathrú an euro, faoi deara \16 milliún de seo. Chosnaigh costais méadaithe foirne \4 mhilliún nó 13 faoin gcéad, a léirı́onn arduithe pá agus méaduithe i lı́on foirne go prı́omha i limistéar na feighle. John Hurley, an Gobharnóir. 18 Annual Report 2001 Activities of the Central Bank of Ireland Introduction This chapter presents an account in some detail of the Bank’s proceedings or activities in 2001. The Bank is required, in accordance with section 20 of the Central Bank Act, 1989 to prepare and send to the Minister for Finance, within six months of the end of the year, a report of its proceedings during the year. The report is laid by the Minister before each House of the Oireachtas. Reporting Requirement The report of these proceedings or activities for 2001 opens with an account of the Governance and Management of the Bank. The Bank’s role in the process of monetary policy formulation in Economic and Monetary Union (EMU) is then outlined; this is followed by a review of monetary policy implementation and operations in 2001 as well as a special section covering the Bank’s role in completing the changeover to the euro. Various areas which support monetary policy formulation and implementation are described, including Management of the Official External Reserves, Economic Analysis and Research, Statistical Developments, and Payments and Settlements activities. Currency Production and Issue matters are subsequently reviewed, in particular, the production and distribution of euro banknotes and coin in advance of the cash changeover. The Bank’s supervisory functions and activities are then presented and are followed by a review of Management and Support Services for the Bank as a whole. Structure of Report Governance The Bank is a statutory body established by the Central Bank Act, 1942, and regulated by that Act as amended by subsequent Acts passed in 1961, 1964, 1971, 1989, 1997 and 1998. Statutory Body The statutory objectives of the Bank, as laid out in Section 6 of the Central Bank Act, 1998, are as follows: Bank Objectives ‘‘6. (1) In discharging its functions as a part of the European System of Central Banks, the primary objective of the Bank shall be to maintain price stability, and without prejudice to the generality of the aforesaid, the Bank may perform such functions and exercise such powers and carry out such duties as are conferred or imposed on it by the Treaty [on European Union 1992 — the Maastricht Treaty] the Statute [of the European System of Central Banks and the European Central Bank], or any Act of the Oireachtas or instrument made thereunder. 19 Annual Report 2001 (2) In addition to the objective referred to in subsection (1) of this section, the objectives of the Bank shall include contributing to the stability of the financial system, promoting the efficient and effective operation of payment and settlement systems and discharging such other functions, duties and powers as are conferred or imposed on it by the Treaty, the Statute or any Act of the Oireachtas or instrument made thereunder.’’ Board Structure Responsibility for the management of the Bank is vested in the Board which comprises a Governor and nine non-executive Directors. The sole shareholder is the Minister for Finance. Governor Mr. Maurice O’Connell, who was appointed for a second term as Governor from 1 May 2001, retired with effect from 10 March 2002. The President, on the advice of the Government, appointed Mr. John Hurley as Governor with effect from 11 March 2002. The Governor is, ex-officio, a member of the Governing Council of the European Central Bank (ECB). Since the start of Stage Three of Economic and Monetary Union on 1 January 1999, the Governor has sole authority and responsibility for the performance by the Bank of European System of Central Banks (ESCB) functions and duties and the exercise of ESCB powers. All other functions, duties and powers of the Bank are vested in the Board. Total remuneration payable to the Governor for service during 2001 was \230,975. Superannuation benefits attaching to the Governor‘s salary are in accordance with the terms of the Civil Service Superannuation Scheme. Directors 20 Directors are appointed by the Minister for Finance for renewable fixed terms of five years except in the case of service Director(s) who may be removed by the Minister at any time. Two of the Directors may be service Directors (i.e. in the permanent service of the State) but the practice of successive Ministers for Finance has been to appoint one. The Governor and Board have no role in the nomination or appointment of Directors. Total fees due to Directors in 2001 amounted to \101,584. Annual Report 2001 Members of the Board, as at 31 December 2001, were: Name Occupation Date first Appointed Maurice O‘Connell David Begg Governor General Secretary, Irish Congress of Trade Unions Company Chairman Senior Counsel Company Chairman Member of the Economic & Social Committee of the EU Secretary General, Department of Finance Company Chairman University Professor 01.05.94 Donal Byrne Gerard Danaher Friedhelm Danz Roy Donovan John Hurley Jim Nugent Martin O‘Donoghue 12.05.95 28.06.94 15.10.98 01.02.96 01.12.89 10.03.00 12.02.98 01.07.98 The Bank records with deep regret the death on 14 December 2001 of Mr. Eoin Ryan. Since his appointment to the Board of the Bank by the Minister for Finance on 14 September 1992, he made major contributions to the work of the Board. Throughout his nine years as a Director, he served on the Board with distinction and brought the fruits of his expertise and long experience to the Bank. Mr. Michael McBennett was appointed on 22 February 2002 to replace the late Mr. Ryan. Following Mr. Hurley’s appointment as Governor on 11 March 2002, Mr. Tom Considine, Secretary General of the Department of Finance, was appointed to the Board. Board Procedures The Governor is Chairman of the Board which meets on a monthly basis with the exception of August. By law, a quorum is four and the Governor may exercise a casting vote. Chairman Agendas and Board papers are approved by the Governor for circulation to the Directors one week in advance of meetings. Additional Board meetings may be called by the Governor at short notice either on his own initiative or at the request of any two Directors. Minutes of all Board meetings are kept by the Secretary of the Bank. The agenda for meetings typically includes: (i) Reports on monetary and financial developments; (ii) Reports on various issues relating to the Irish economy, the European economy and the international economy; (iii) Regulatory issues requiring decision by the Board or for the purpose of keeping the Board fully informed of developments at a general policy level or relating to specific institutions; 21 Annual Report 2001 (iv) Management of the official external reserves; (v) Substantial financial contracts to be placed by the Bank with suppliers; (vi) General management and budgetary issues. Powers delegated to Governor The Governor is the only executive member of the Board. As provided for in the Central Bank Act, 1942, it is the Board’s practice to generally delegate powers to the Governor for the exercise and performance of all functions, powers and duties of the Bank with the exception of those powers which it would either not be possible or appropriate to delegate. These include provisions relating to the Governor’s position or which are specified to be Board responsibilities or which require the forming of an opinion by the Bank. Board Sub-Committees The Board established three sub-committees on 30 June 1994 as follows: ● The Audit Committee ● The Remuneration and Budget Committee ● The Investments Committee Board regulations detail the terms of reference of each subcommittee and membership in each case comprises three Directors, of whom one is appointed as Chairman. The Secretary of the Bank, or a nominee, minutes all meetings of the subcommittees and, when approved, these minutes are circulated to the full Board. The members of the sub-committees, as at 31 December 2001, were as follows: Audit Committee Investments Committee Remuneration and Budget Committee David Begg (Chair) Roy Donovan Martin O’Donoghue Vacant* (Chair) Gerard Danaher Jim Nugent Roy Donovan (Chair) Donal Byrne Friedhelm Danz *Mr. Friedhelm Danz was appointed chairman of the Investments Committee by the Board at its meeting of 28th February 2002 in succession to the late Mr. Eoin Ryan. Codes of Practice Codes of Practice for Directors and Staff The Governor is prohibited by law from holding shares in or being a Director of any bank or other credit institution, financial institution or insurance undertaking. 22 Annual Report 2001 Following consideration of guidelines for State Bodies, the Bank adopted the following Code of Practice for disclosure of interest by members of the Board on 23 April 1992: (a) On appointment to the Board, each Director shall furnish to the Secretary of the Bank details relating to his/her employment and all other business interests including share holdings (not quantified), professional relationships, etc.; (b) If a Director has any doubt as to whether this code requires the disclosure of an interest, he/she should consult the Governor; (c) Details of the above interests shall be kept by the Secretary in a special confidential register to be updated on a half yearly basis. Changes in the interim should be notified to the Secretary as soon as possible. Only the Governor, Director General and Secretary of the Bank shall have access to the register; (d) A Director should consult the Governor about absenting himself/herself or disclosing his/her interest and any other sources of conflict that he/she is aware of to the other Board members, when the Board is deliberating or deciding on matters in which the Director has an interest or connection. The Ethics in Public Office Regulations, 1997, have prescribed membership of the Board of the Bank as a designated directorship for purposes of the Ethics in Public Office Act, 1995 and the Standards in Public Office Act, 2001. Statements of Interest Members of the Board submit annual statements of interests to the Secretary of the Bank and to the Public Offices Commission. The Regulations also prescribe the positions of Director General in the Bank and executive positions at or above the grade of manager as designated positions. Accordingly, the Director General and the Secretary of the Bank submit annual statements of interests to the Governor and the other holders of designated positions submit annual statements of interests to the Secretary of the Bank. All members of the Board and Staff of the Bank are subject to the provisions of the Prevention of Corruption Acts, 1906 and 1916. The Bank has a written code of conduct for staff. Accountability As required by the Central Bank Act, 1989, the Bank submits a report on its proceedings to the Minister for Finance every year and this report, together with the accounts of the Bank, which are audited by the Comptroller and Auditor General, is laid before each House of the Oireachtas and published. Reports and Accounts 23 Annual Report 2001 The accounts of the Bank are also audited by an independent commercial firm of auditors as required by the Statute of the ESCB. Within the terms of the Central Bank Act, 1998, the Governor meets with the Minister from time to time to keep him informed regarding the Bank’s performance of its statutory duties. Oireachtas Committees Subject to the requirements of the Maastricht Treaty and the confidentiality provisions imposed by law, the Governor appears before Joint Committees of the Oireachtas on request. This practice was put on an obligatory statutory basis in the Central Bank Acts, 1997 and 1998. The Governor appeared before Oireachtas Committees on a number of occasions during 2001. He appeared before the committee of Public Accounts (Sub-Committee on Certain Revenue Matters) on 22 February, the Joint Committee on European Affairs on 7 March, and the Joint Committee on Finance and the Public Service on 18 July and 7 November. Bank Management Management Board The Director General is the senior member of Management reporting to the Governor. The Director General chairs meetings of the Bank’s Management Board which comprises the Deputy Director General/Secretary of the Bank and four Assistant Directors General. The Management Board co-ordinates the planning, budgeting, resourcing and management review processes of the Bank and the Director General reports to the Governor on these matters. The meetings of the Management Board are held on a monthly basis and are minuted. Members of the Management Board also attend informal weekly meetings with the Governor for briefing and consideration of current and anticipated issues. Briefing meetings are also held prior to each meeting of the Governing Council of the ECB. Internal Audit Internal Audit Internal Audit work undertaken in 2001 was generally in accordance with the department’s audit workplan for the period and with the 2001 audit plan established by the ESCB Internal Auditors Committee (IAC). The plans were largely fulfilled despite modifications to the IAC workplan programme and some resource shortfalls. In conjunction with the Internal Audit functions of other ESCB central banks, the department undertook reviews of ESCB systems in operation in the Bank including the TARGET payment 24 Annual Report 2001 system, Banknotes, Foreign Reserve Management, Information Systems Security Policies, Monetary Policy Operations and Accounting. The IAC has established an ad hoc working group to prepare a draft audit manual to be used by auditors in carrying out and reporting on ESCB audits. During 2001 the Internal Audit function reported on audits of the Bank’s Euro conversion arrangements, business continuity planning, payroll system, recruitment and RTGS/TARGET, as well as audit checks on Vault and Treasury stocks. The function formally reported to the Audit Committee of the Board on six occasions during the year. Regular briefing meetings with the Governor were also held. European System of Central Banks The Bank is a member of the European System of Central Banks, which comprises the European Central Bank and the National Central Banks (NCBs) of the fifteen Member States. ESCB Objectives The Governor is a member of the Governing Council, the central decision-making body of the ECB, which comprises the Governors of the euro area NCBs and the six members of the Executive Board. The Treaty ascribes certain basic tasks to the ESCB, which, in the event are performed by the Eurosystem, that is, the ECB and the twelve euro area NCBs. These basic tasks comprise defining and implementing monetary policy, conducting foreign exchange operations, managing the external reserves and promoting the smooth operation of payment systems. Contributing to the smooth conduct of policies relating to prudential supervision and the stability of the financial system is also an important function. The Governor, or in his absence, the Director General, has sole authority and responsibility for the performance of the tasks conferred on the Bank by the Treaty. During 2001 the Governing Council of the ECB continued to meet regularly to review the overall economic, monetary and financial situation and to take decisions on monetary policy. In November 2001 it was decided that monetary policy discussions, which had formerly been conducted twice monthly, would thereafter, as a rule, take place at the first meeting of the month, and that interest-rate decisions would normally be taken at that meeting. Interest-rate decisions taken during 2001 are referred to in the section on Monetary Policy. Governing Council Activities As regards its other basic tasks, the Governing Council continued to monitor the performance of the foreign reserves managed on its behalf by euro area NCBs, while also reviewing the strategic benchmark portfolio. In addition, in order to facilitate the functioning of financial markets in the aftermath of the terrorist 25 Annual Report 2001 Governing Council of the European Central Bank Back row (left to right): Y. Mersch, L. D. Papademos, J. Caruana, A. Fazio, M. Vanhala, G. Quaden, E. Welteke, N. Wellink, J.-C. Trichet, M. O’Connell, K. Liebscher, V. M. Constâncio. Front row (left to right): O. Issing, T. Padoa-Schioppa, C. Noyer, W. F. Duisenberg, S. Håmålåinen, E. Domingo Solans. attacks in the United States on 11 September 2001, the Governing Council and the US Federal Open Market Committee agreed on a swap arrangement whereby liquidity in dollars was made available to euro area market participants. The Governing Council and the Committee of European Securities Regulators agreed to conduct joint work on issues of common interest in relation to securities clearing and settlement systems with a view to the establishment of standards and/or recommendations for securities settlement systems and for central counterparties at the European level. Moreover, a Memorandum of Understanding was entered into on arrangements for cooperation and information-sharing in relation to large-value payment systems between the ESCB and the banking supervisory authorities of EU Member States. A major aspect of the Governing Council’s work in 2001 was overseeing the arrangements for the introduction of euro notes and coins and finalisation of the non-cash changeover. A detailed account of these developments is given later in the report. The Governing Council is supported in its work by a range of Committees — and related sub-committees, working groups and task forces — in which the Bank participates fully. The Director General chairs the Budget Committee, having been confirmed in that position during 2001 for a further three years. Committee Structure and Output The main output of the ESCB Committees during 2001 was as follows: Accounting and Monetary Income Committee: achievement of a consensus on the allocation of monetary income post-2003 and commencement of work on its accounting treatment; and 26 Annual Report 2001 agreement on the accounting treatment of the issue of euro notes by the ECB and the twelve euro area NCBs. Banknote Committee: completion of the preparations for the production, packaging, storage, issue and distribution of euro notes for launch on 1 January 2002; completion of the practices and procedures related to the collateral, debiting model and final payment for frontloaded euro notes and coin; and agreement of the arrangements for production of banknotes in 2002. Banking Supervision Committee: exploration of macroprudential issues, including the implications of the slowdown in the US and the effects of the terrorist attacks on 11 September 2001; review of new developments in banking and financial systems; consideration of cooperation between the Eurosystem and EU banking supervisors; and examination of crisis management arrangements and exchange of views on supervisory policies and practices. Budget Committee: monitoring of budgeted expenditure and evaluation of budgetary plans of the ECB. Cash Changeover Co-ordination Committee: completion of the logistical arrangements for the euro changeover; agreement of the arrangements for the weekly disclosure of information and data covering the changeover; and monitoring of events and incidents connected with euro notes and coin. External Communications Committee: implementation of a major publicity campaign on the introduction of the euro notes and coin; and coordination of media relations and publications of the ECB and NCBs, with a view to enhancing public understanding of monetary policy and related activities. Information Technology Committee: preparation for the implementation of a counterfeit monitoring system; the introduction of a system for the exchange of information about stocks and production of euro notes and coin; the implementation of a major upgrade to the ECB external reserves management system; and the enhancement of the ESCB network infrastructure, to provide greater performance and security. Internal Auditors Committee: implementation, within the annual audit plan endorsed by the Governing Council, of audit assignments in the main risk areas of the ESCB, including banknotes, TARGET, foreign reserves management and IS security policies. International Relations Committee: keeping under close consideration key international economic and financial issues/developments; preparation of Eurosystem position on IMF 27 Annual Report 2001 issues, including proposals in relation to the International Financial Architecture and the implementation of internationally agreed standards and codes; consideration of issues relating to the accession process for prospective new members of the European Union; and monitoring the international role of the euro. Legal Committee: preparation of legal arrangements relating to euro notes and coin production, frontloading/subfrontloading and anti-counterfeiting; provision of legal input into the ongoing review of the monetary policy implementation framework and of the list of assets eligible as collateral and into the allocation of the monetary income of the Eurosystem; and the legal preparation of accession countries. Market Operations Committee: completion of the annual review of the instruments and procedures of the Eurosystem’s monetary policy operational framework; further examination of the financial market structure of EU accession countries; regular analysis of the liquidity implications of euro cash changeover; and review of the framework used in the management of the ECB’s foreign reserves. Monetary Policy Committee: review of the monetary policy strategy of the Eurosystem; preparation of the bi-annual economic forecasts of the euro area; production of an annual structural issues report; preparation of a public finance report for the euro area; and the coordination of monetary policy between the euro area and the other EU member states. Payment and Settlement Systems Committee: continued consideration of the long-term strategy for the TARGET system; on-going development of the framework for the oversight of payment systems; monitoring of progress in the improvement of cross-border retail payment systems (particularly in the light of the EU Regulation issued in this regard); and further assessment of securities settlement systems used in ESCB credit operations. Statistics Committee: continuation of the development of the statistical framework for the Eurosystem, including two new ECB regulations on money and banking statistics (for balance sheet and interest rate data); expansion of the geographical breakdown of balance of payments and international investment position statistics; and commencement of work on the setting up of a centralised securities database. These committees were supported by a wide range of working groups and task forces, which carried out much of the detailed work. 28 Annual Report 2001 Monetary Policy ECB Governing Council Decision Making Monetary Policy in the euro area is determined by the Governing Council of the ECB (the Council). The primary objective of monetary policy is the maintenance over the medium-term of price stability, defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2 per cent. Objectives and Strategy The Council has adopted a stability-oriented monetary policy strategy, which consists of two pillars. The first pillar assigns an important role to money. In this context, the Council has adopted a reference value for the annual growth rate of euro area broad money stock (M3) and it monitors the actual growth of M3 relative to this value. An initial reference value of 4.5 per cent annual growth adopted in December 1998 has been reaffirmed by the Council in each year since then, most recently in December 2001. The value is derived on the basis of medium-term assumptions for trend or potential output growth (2.25 per cent), a trend decline in income velocity of M3 (0.75 per cent) and an inflation rate of 1.5 per cent.1 The reference value is a medium term concept and, accordingly, temporary deviations of M3 growth from the reference value do not necessarily have implications for future price developments. Thus, the Council has stressed that such deviations do not automatically require a policy response. During 2001, the Council approved adjustments to the measurement of M3 to exclude non-euro area resident holdings of negotiable instruments (i.e., money market fund shares/units, money market paper and debt securities with an initial maturity of up to two years from the euro area’s broad money stock). The second pillar is a broadly based assessment of the outlook for price developments and the risks to price stability in the euro area as a whole. This is based on an examination of macroeconomic projections (including inflation projections) prepared by ECB and national central bank staff and a wide range of indicators, including wages, the exchange rate, bond prices and the yield curve, measures of real activity, fiscal policy indicators, price and cost indices and business and consumer surveys. The Governor is fully briefed by Bank staff for all meetings of the Council. For the monetary policy discussions, the briefing includes an assessment under both pillars of the monetary policy 1 The inflation rate is consistent with the Eurosystem definition of price stability. The point estimates for potential output growth and velocity deceleration are mid-points of estimated ranges. 29 Annual Report 2001 strategy leading to a judgement on the appropriate interest rate stance for the euro area. Information is also supplied relating to other monetary-policy related matters addressed by the Council, including issues concerning the financial statistics of the Eurosystem and the implementation of monetary policy. In this regard, in 2001 the Council considered issues relating to, for example, the conduct of the main refinancing operations (including bidding behaviour), the minimum reserve regime, new statistical regulations and eligible collateral for borrowing from central banks. 30 Interest Rate Decisions Between May and November of 2001, the Council reduced ECB interest rates on four occasions by a cumulative one and a half percentage points. These cuts brought the minimum bid rate for main refinancing operations to 3.25 per cent, the deposit rate to 2.25 per cent and the marginal lending facility rate to 4.25 per cent. The Council’s actions reflected an assessment that inflationary pressures in the euro area had diminished. Retail interest rates in Ireland fell in 2001 as a result of the lowering of ECB rates. The standard variable mortgage rate fell to an average of 4.63 per cent at end-December compared with 5.99 per cent a year earlier. The clearings banks’ personal overdraft rate ranged from 11 to 12.1 per cent at the end of last year, compared with 12.15 to 12.75 per cent at end-2000. The prime rate, on which the lending rate for much commercial lending is based, fell from 5.53 per cent to 3.98 per cent over the year. Domestic Money and Credit Developments The Bank continued to monitor developments with respect to monetary aggregates in Ireland. During 2001, the rate of growth of Ireland’s contribution to euro area M3 and of credit to nongovernment Irish residents, while remaining high, showed signs of moderating. The adjusted annual rate of private-sector credit growth slowed from around 20 per cent at the end of 2000 to just over 15 per cent at the end of 2001. Residential mortgage lending, which is a substantial component of private sector credit, also exhibited a declining rate of growth: the adjusted annual growth rate slowed from around 25 per cent in late-2000 to below 18 per cent in December 2001. Annual Report 2001 Monetary Policy Implementation The implementation of monetary policy in the euro area is conducted on a decentralised basis (i.e. by the individual NCBs). Within this framework, institutions in Dublin submit tenders for Main Refinancing Operations and Longer-Term Refinancing Operations direct to the Bank and allotments of liquidity (the amounts having been determined by the ECB) are carried out by the Bank and reflected in its balance sheet. Overnight standing deposit and lending facilities are also provided by the Bank, while the minimum reserve deposits of credit institutions in Ireland are also maintained at the Bank. Decentralised Structure In addition, the Bank assesses the liquidity requirements of the domestic market and the Bank’s forecasts of liquidity requirements are incorporated in the ECB’s liquidity allotment decisions. The views of the domestic market are also transmitted to the ECB on a daily basis and, together with the views of the rest of the euroarea market, play a part in the ECB’s management of the euro money market. The Bank also participates in foreign-exchange intervention vis-a-vis the euro, as and when this arises. The main monetary policy instruments used by the Eurosystem to manage liquidity in the money market are open market operations, standing facilities and minimum reserve requirements. Monetary Policy Instruments Open Market Operations Open market operations can be divided into the following four categories: (i) Main refinancing operations (MROs) which are conducted by way of repurchase agreements (repos) on a tender basis with a weekly frequency and a maturity of two weeks. They are liquidity providing operations and are used for the bulk of refinancing to the financial sector. (ii) Longer-term refinancing operations (LTROs) which are conducted by way of repos on a tender basis with a monthly frequency and a maturity of three months. They are also liquidity providing operations. (iii) Fine-tuning operations which are ad hoc operations that may be carried out in order to smooth the effects on interest rates of unexpected liquidity fluctuations. Finetuning operations can be conducted either on a bilateral basis (i.e. direct with individual counterparties) or on a tender basis. They can provide or absorb liquidity. (iv) Structural operations which may be carried out (on a regular or non-regular basis) whenever the ECB wishes to adjust the structural liquidity position of the money market. These operations can be liquidity providing or liquidity absorbing. 31 Annual Report 2001 Standing Facilities Two standing facilities are available to eligible counterparties on their own initiative subject to the fulfilment of certain operational access conditions: (i) The marginal lending facility which can be used by credit institutions to obtain overnight liquidity from the Bank against eligible collateral. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate. (ii) The deposit facility which can be used by credit institutions to make overnight deposits with the Bank. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate. Minimum Reserves Credit institutions in the euro area are required to hold deposits on account with their respective national central banks called minimum or required reserves. The purpose of these reserve requirements is to create (or enlarge) a structural liquidity shortage and to stabilise money market interest rates by smoothing the effect of day-to-day liquidity fluctuations. The former increases the demand for central bank refinancing making it easier for the ECB to steer money-market interest rates. The latter is facilitated by way of an averaging provision, which means that institutions in effect can draw on their minimum reserve holdings on a day-to-day basis if they are short of liquidity, provided they offset these drawings by ensuring that on average their daily holdings meet the reserve requirement. Institutions can also add to their holdings on a day-to-day basis if they have surplus liquidity. The minimum reserve requirement for each credit institution is calculated on the basis of selected liabilities (the reserve base). Balances in the minimum reserve account with the national central bank are remunerated at a rate which is an average of the main refinancing operations and thus close to market rates. Where an institution fails to meet its minimum reserve obligations, sanctions may be imposed by the ECB. Monetary Policy Operations in 2001 Main Refinancing Operations (MROs) Variable Rate Tenders used in MROs MROs continued to provide the bulk of the refinancing needs of the euro-area financial sector during the year with the Eurosystem providing on average \79 billion each week. All MROs during 2001 were conducted using a variable rate tender system with a minimum bid rate pre-announced by the ECB. The intention of the minimum bid rate is to signal the Eurosystem’s monetary policy stance. Under the variable rate 32 Annual Report 2001 tender procedure participants bid for the amount of liquidity they require as well as the rate they are prepared to pay for funds. Bids in excess of the lowest (‘‘marginal’’) rate accepted by the ECB in a given MRO are satisfied in full while bids at the lowest rate accepted are filled on a pro-rata basis. A multiple rate allotment system is applied.2 The cost of funds (i.e. the weighted average interest rate for successful bids) in MROs in 2001 was on average 0.035 percentage points above the minimum bid rate (Chart 1). This relatively narrow gap, which persisted over almost the entire year, occurred in an environment of declining official interest rates: the Governing Council of the ECB reduced official rates on four occasions in 2001 by a cumulative 1.5 percentage points. MRO Rates Close to Minimum Bid Rates Chart 1: Minimum Bid Rate and Weighted Average Rate of MRO's in 2001 5.0% 4.5% 4.0% 3.5% 3.0% January 2001 April Minimum bid rate July October December Weighted average rate The number of counterparties participating in MROs in the Eurosystem as a whole declined in 2001. A number of factors can be identified as having contributed to this decline: the switch from fixed-rate to variable-rate tenders (in June 2000) which removed the opportunity for counterparties to take advantage of the positive spread that had existed from time to time between short-term market rates and fixed tender rates; the consolidation process in the banking industry; and the downward pressure on short-term market interest rates during 2001 — amid ongoing expectations of reductions in official interest rates — which led to some participants satisfying their liquidity requirements in the market rather than through MROs. This latter trend was also Counterparties 2 In a multiple rate allotment, participants pay the rate at which they bid; in a single rate allotment, participants pay only the lowest accepted rate, regardless of the level of their own bid. 33 Annual Report 2001 evident in Ireland although it was offset, in Ireland’s case, by the emergence during 2001 of new MRO participants. Underbidding A notable feature of money market activity in 2001 was that ongoing market expectations of reductions in official interestrates resulted on four occasions in underbidding at MRO tenders, that is, the total amount bid by euro area counterparties fell short of the liquidity needs of the financial sector (as estimated by the ECB). On each occasion bidding at the subsequent MRO was correspondingly higher and the ECB was able to replenish the liquidity shortfall. This, in turn, led to an imbalance in the volume of the support under the two outstanding MROs. To rectify this, the ECB carried out supplementary operations on two occasions, 27 April and 27 November, in parallel with the regular weekly MROs. These structural reverse operations with a one-week maturity were conducted as standard variable rate tenders with the same minimum bid rate as in the parallel regular MROs. Longer Term Refinancing Operations (LTROs) During 2001 the Eurosystem provided \20 billion to the financial sector each month through LTROs. LTROs continued to be conducted using the variable rate tender procedure with a multiple rate allotment system. The lowest rate at which funds were allotted was on average around 0.08 percentage points below the prevailing three-month Euribor3 reflecting ongoing market expectations for reductions in official interest rates in the euro area. Eleven domestic counterparties participated in LTROs during 2001 compared with 15 in 2000 and 12 in 1999. The mix of counterparties changed somewhat during 2001 as six institutions that had taken part in at least one operation in 2000 ceased participation in 2001 while two participated for the first time. As in 2000, Irish financial institutions’ average share of the total euro area LTRO allotment was higher than their share of the total euro area MRO allocation. Response to terrorist attack in the US on 11 September Following the attacks in the US, the ECB issued a statement (on the afternoon of 11 September) indicating that the Eurosystem stood ready to support the normal functioning of markets and would provide additional liquidity if needed. Provision of Euro Liquidity On the morning of 12 September, the overnight rate in the money market opened higher and quickly increased to the level of the (official) marginal lending rate (then at 5.25 per cent), amid market nervousness over possible settlement or payment-related problems. In addition, the bid/ask spread in the market widened considerably. Against this background the Eurosystem moved 3 Euro Interbank Offered Rate. 34 Annual Report 2001 quickly to conduct an overnight liquidity-providing fine-tuning operation without a pre-specified allotment amount. A total of \69.3 billion was provided in this operation and both the level of the overnight market rate and the bid/ask spread subsequently fell back to normal levels. A second fine-tuning operation was conducted on 13 September, at which liquidity amounting to \40.5 billion was provided, again on an overnight basis. Following this second operation the euro area money market stabilised and no further fine-tuning operations were necessary. The Bank fully participated in these fine-tuning operations, providing liquidity to local market participants. Difficulties also emerged on 12 September with regard to US dollar liquidity in the euro area. Thus, despite ready availability of dollar liquidity to banks in the US from the Federal Reserve at 3.50 per cent, overnight rates for dollar liquidity rose to over 8 per cent in Europe as US banks were cautious in recycling dollar liquidity to European banks. In order to address this issue, the ECB and the Federal Reserve agreed on a temporary swap arrangement under which up to US$50 billion could be made available to help meet the dollar liquidity needs of banks in the euro area. The swap facility was utilised on three occasions — 12, 13 and 14 September — for amounts of US$5.4, US$14.1 and US$3.9 billion respectively for the Eurosystem as a whole. The swaps conducted on 12 September matured on 17 September while the swaps on the two following days were for overnight maturity. As with the fine-tuning operations, the Bank fully participated in these swap operations, providing dollar liquidity to local market participants. US Dollar Swap Facility On 17 September, the Governing Council of the ECB and the Federal Open Market Committee reduced official interest rates by 50 basis points. In announcing the move, the Governing Council expressed the view that the events in the US, by increasing uncertainty about the US and the global economy, were likely to weigh on confidence in the euro area and on the short-term outlook for economic growth. Reductions in Official Interest Rates Minimum Reserves The average level of minimum reserve requirements of credit institutions in Ireland during 2001 was \3,951 million. On average, minimum reserve accounts were \11.4 million in excess of requirement. The actual daily balance fluctuated during the year, as institutions made use of the averaging facility to smooth liquidity fluctuations. While there were no changes to the main features of the minimum reserve system in 2001, a new ECB regulation on the consolidated balance sheet of the MFI4 sector (ECB/2001/13) clarified that liabilities with respect to branches located outside the euro area are included in the reserve base. Number of Breaches Declined 4 Monetary and Financial Institutions. 35 Annual Report 2001 The Bank continued to monitor compliance of credit institutions in Ireland with the minimum reserve requirement system on behalf of the ECB. In 2001, there were fourteen occasions on which institutions incurred sanctions for breach of their obligations, compared with sixteen in 2000. In the majority of cases the sanction imposed (which is linked to the extent of the breach) was under \1,000. Eligible Collateral All Eurosystem credit operations must be fully collateralised by assets approved by the ECB. Two Categories of Eligible Asset A distinction is made between two categories of asset eligible for these operations. Tier One collateral encompasses a very broad spectrum of high-quality assets denominated in euro and issued (or guaranteed) by entities established in the European Economic Area. A substantial part of Tier One assets is made up of general government bonds, i.e. assets issued by central, regional and local governments. Other types of assets in Tier One include securities issued by international and supranational institutions. Tier Two collateral consists of assets which are of particular importance for national financial markets and banking systems and for which eligibility standards are established by the NCBs subject to ECB approval. Tier Two assets may be marketable or non-marketable debt instruments or they may be equities. In the event of a default by a counterparty, the Eurosystem as a whole bears the risk in relation to Tier One assets while exposure arising from Tier Two assets is borne by the sponsoring NCB. In 2001 domestic credit institutions collateralised Eurosystem operations mainly through the use of Tier One eligible assets. While Irish government bonds — which form the bulk of eligible Irish Tier One collateral — were widely used during the year, the use by domestic institutions of Tier One assets issued in other member states increased significantly. Irish mortgage-backed promissory notes which are included on the Tier Two list continued to be used actively, underlining their importance to the local market. Interbank Market Developments Increased Liquidity in Repo Market 36 Unsecured transactions continued to account for the bulk of activity in the euro area money market. Liquidity in the secured (repo) market increased, albeit from a relatively low level, and further development in this segment of the money market should be facilitated by the establishment in March 2002 of a repo market reference rate (Eurepo). Instruments such as interest rate swaps, in particular EONIA swaps, and futures also became more liquid, both domestically and across the euro area, as market Annual Report 2001 participants became more comfortable in using these products. Foreign exchange swaps also remained an important instrument in satisfying liquidity needs. Liquidity Forecasts The Bank provided forecasts of the liquidity needs of the domestic market as an input to the ECB’s liquidity management decisions. The arrangements for managing the Exchequer account, which were put in place in May 2000, continued to work well and to contribute to a more accurate forecasting of domestic money market liquidity conditions. Forecasts of banknotes in circulation received additional attention, particularly before and during the euro currency changeover period. More Accurate Liquidity Forecasting The Changeover to the Euro Introduction The completion of the changeover to the euro and the introduction of banknotes and coin in January 2002 marked the culmination of several years of preparation within the Bank. While the Bank’s main contribution to the changeover was the production and distribution of banknotes and coin on an unprecedented scale, it was also involved in public and business information campaigns and in the financial sector’s preparations. The careful planning, detailed preparations and widespread dissemination of information paved the way for the swift acceptance of the euro by the Irish public and underpinned the success of the changeover. Culminations of Preparations The role of the Central Bank There are four main areas in which the Bank was involved in preparations for the euro. First, and most significantly, the Bank produced and organised the distribution of almost 300 million euro notes and over one billion euro coins. In a process known as frontloading, a large proportion of this euro cash was distributed in advance directly to bank branches and to retailers so as to ensure that adequate supplies were available in all parts of the country before 1 January. Bank’s Role Second, the Bank contributed to the financial sector’s planning for the non-cash changeover through its representative on the Irish Bankers Federation/Irish Mortgage & Savings Association (IBF/IMSA) EMU Steering Committee (EMUSC). The Bank also monitored the plans of individual credit institutions for the conversion of their retail customers’ accounts and payments systems to euro. 37 Annual Report 2001 Third, the Bank participated in public and business information activities through its representatives on the Euro Changeover Board of Ireland (ECBI) and its Cash Changeover Working Group (CCWG) and on the Management and Consultative Committees of the Forfás EMU Business Awareness Campaign. Finally, as part of the ECB Information 2002 Campaign, the Bank conducted a public information campaign on euro notes and coin, with particular emphasis on security features. Enormous Logistical Exercise 38 The Cash Changeover Planning for the enormous logistical task of changing banknotes and coins commenced in the mid-1990s. The total volume of banknotes and coins required for the changeover was estimated at almost 300 million banknotes and over one billion coins. Both the Printworks and the Mint were upgraded to enable all denominations of both notes and coin to be produced in Ireland and new shift working arrangements were put in place to increase production output to the required level. Banknote Production Production of banknotes commenced in 2000. The targeted output was 241 million banknotes. The task of producing banknotes in eleven different EU Printworks which could be successfully used in all countries required the implementation of very stringent quality control procedures. The Bank procured some banknotes from another EU Printworks as a contingency measure and also procured a small volume of \200 and \500 banknotes from other Printworks as the demand for such high value notes in Ireland did not warrant large scale production. Coin Production Coin production commenced in September 1999 with a targeted output of 944 million coins by E-Day. The required output was revised upwards to 1,078 million during 2001, as a result of the continued increase in demand for coin in Ireland. By December 2001, 1,100 million coins were available for issue. This included a small contingency stock of coin which was purchased from another EU Mint. The Bank also prepared and distributed one million starter packs, each containing 19 coins, which were sold to the general public from 14 December 2001. The principal purpose of these packs was to familiarise the public with the new coins in advance of E-day. Distribution The system of advance distribution of banknotes and coins to financial institutions and to their agents and customers became known as frontloading and sub-frontloading, respectively. It was necessary to develop a system whereby the currency was distributed in advance to banks and retailers while at the same time protecting the currency from the high risk of counterfeiting. This was achieved in part by prohibiting the release of the security features on the banknotes until 1 September 2001. In Ireland, frontloading of banknotes commenced in early Annual Report 2001 November while coin distribution commenced on 1 September 2001. In line with other NCBs, the Bank established a centre for testing of vending and other currency operated equipment. The currency did not become legal tender until 1 January 2002. The payment by financial institutions for the full amount of frontloaded currency on 1 January, while the withdrawal and value dating of national currencies would be spread over a number of weeks, could have had a severe liquidity impact on the banking system throughout Europe. The ECB provided for a debiting model to be applied to frontloaded euro currency. Under this arrangement, one third of the total value frontloaded to each financial institution would be paid to the Bank on three dates: 2 January, 23 January and 30 January. As legal ownership of the currency did not transfer from the NCBs until 1 January, each financial institution had to provide the Bank with collateral. Collateral in respect of Euro Notes and Coin Credit institutions, which had been provided with euro notes and coin by the Bank prior to the introduction of such notes and coin on 1 January 2002, were required to provide collateral to the Bank in the form of either Tier One or Tier Two assets or alternatively in the form of a cash deposit with the Bank. If euro notes provided by the Bank to such credit institutions were, following receipt, delivered to a third party, the relevant credit institutions were required to provide the required collateral to the Bank at the time of — or prior to — receipt of those banknotes by the credit institutions. In contrast, collateral in respect of any banknotes retained by such credit institutions at 28 December 2001 or in respect of coin supplied to them by the Bank (whether retained by the credit institutions or provided to a third party) was required to be provided to the Bank by close of business on 28 December 2001. The withdrawal of Irish banknotes and coin was a more difficult logistical exercise to plan and execute as the volume and speed of the return of the national currency depended on public behaviour in the immediate aftermath of E-day. The total value of Irish banknotes in circulation at 31 December 2001 was \4,343.8 million while coin was valued at \387.9 million. Over 50 per cent of the banknote circulation was withdrawn in the first two weeks after the changeover with this figure rising to 83.4 per cent by 9 February, the last day of legal tender status for the Irish currency. Coin withdrawal has been somewhat slower, with the total value of coin withdrawn by 9 February at 45 per cent. Irish Currency Withdrawal Completing the Non-Cash Changeover As well as being the launch date for euro notes and coins, 1 January 2002 was also the final date for the conversion of financial transactions from Irish pounds and other euro area Conversion of Accounts 39 Annual Report 2001 legacy currencies to euro. The most important aspect for credit institutions was the changeover of their customers’ accounts and the associated conversion of payment and electronic fund transfer systems. The approach by euro area central banks to the non-cash changeover varied from country to country. In some cases, the central bank became quite involved in the detailed planning, while in others a more decentralised approach was taken. In Ireland, the detailed planning was left to individual credit institutions but their progress was monitored on a continuous basis. During the final quarter of 2002, the Bank requested details of non-cash changeover plans from all institutions and sought assurances from chief executives regarding their ability to complete the work in the time allotted. In addition, the Central Bank participated in preparations at industry level through its representative on the IBF/IMSA EMUSC. ‘Big Bang’ Approach Although banks in most euro area countries commenced the conversion of their customers’ accounts during the second half of 2001, Irish credit institutions considered that the balance of advantage lay in a ‘‘big bang’’ conversion of all accounts at year end. In order to facilitate this, it was agreed that 31 December 2001 should be a ‘‘non-value’’ day. This meant that four days were available for conversion and testing between 28 December 2001 and 2 January 2002, during which no transactions were posted to accounts. Smooth Transition A detailed framework for monitoring account conversion during the changeover weekend and managing problems which could impact on banks’ operating systems was drawn up by the IBF/IMSA EMUSC, which was also the body through which any industry response would be coordinated. The Central Bank established a system of contact numbers through which advice and assistance could be provided while the Bank’s EMUSC representative remained on call and received progress reports from the main retail institutions on the changeover of their core systems and the conversion of retail accounts. In the event, the non-cash changeover went extremely smoothly; none of these contingency arrangements were called upon and all institutions completed their conversions well within the available time. Participation in Euro Changeover Board of Ireland 40 The Bank’s involvement in Public and Business Preparations The ECBI was established by the Minister for Finance in May 1998, with two main tasks: to oversee the detailed implementation of the changeover to the euro; and to provide public and consumer information. The Bank participated actively in the work of the ECBI during 2001; its representative was Vice-Chairperson of the Board, while Currency Centre management discussed the detailed planning for the cash changeover with credit institutions, retailers and other interested parties in the CCWG. Annual Report 2001 The ECBI’s Public Information Campaign was stepped up through 2001, with the most concentrated messages being provided in the final quarter. The ECBI also distributed a ‘‘Euro Handbook’’ to all households in October/early November and a euro converter to every household in November/early December. Information on the changeover directed towards the business sector was provided by the Forfás EMU Business Awareness Campaign. During 2001, the focus was mainly on small and medium-sized enterprises and on the retail sector in particular. A Retail Training Kit was distributed to every retailer in the country in November. These kits made a significant contribution to retailer training and received favourable comment from the EU Commission and from other euro area countries. People examining their first euro banknotes outside the Central Bank. Public Information Campaign The Bank was involved in the preparation and implementation of various information activities relating to the euro changeover. Some of these activities were co-ordinated through the following: ● Regular meetings with the ECBI, Forfás EMU Business Awareness Campaign and Office of the Director of Consumer Affairs (ODCA); ● Participation in the ECBI’s Information Sub-Committee; ● Participation in the Euroystem’s euro information working group; ● Participation in the Eurosystem’s External Communications Committee. Informing the Public The Bank participated in the Eurosystem’s Euro 2002 Information Campaign, involving the ECB and the 12 euro area NCBs. The main aspects of this campaign were: 41 Annual Report 2001 ● Advertising Campaign: Launched on 30 August 2001 with the unveiling of the final designs of the euro notes, the campaign focused on the appearance and security features of the notes and coins and their denominations. The campaign was featured on TV and print media in Ireland from September 2001 through to February 2002. ● Partnership Programme: More than 30 partners — including state agencies, financial institutions and large retailers — participated in this programme which involved the distribution of various information materials to their staff and customers. The Bank distributed more than 100 videos, 31,200 information sheets, 1,000 posters and 40,000 training brochures through this programme. ● Public Information Leaflet: A leaflet detailing the security features of the banknotes was distributed to every household in Ireland. A total of 1.4 million leaflets was distributed including 25,000 in the Irish language, which were distributed through Foı́nse newspaper and the banking system. ● Children’s Competition and Poster: The Bank distributed 120,000 euro information posters aimed at primary school children through the school system. The poster also included a competition with two Irish prizewinners travelling to Frankfurt on 31 December for an ECB event to mark the launch of the currency. ● Euro Information Conference: As part of a series of similar events hosted by other euro area NCBs, the Bank held a major euro information press conference on 20 June 2001. Speakers included the Governor, the Tánaiste, the Minister for Finance, the Minister for Consumer Affairs and the President of the ECB. Irish pupils filling in a questionnaire about the euro at European Union House, Dublin. 42 Annual Report 2001 In addition to the Eurosystem campaign, the Bank’s Press Office undertook a number of other activities as part of its euro public information campaign. These included: ● Campaign on hoarded coins: In order to dislodge hoarded Irish coin in advance of the changeover, the Bank undertook an advertising and public relations campaign. This involved the publication of survey results and media briefings in December 2000 followed by radio and press advertising campaigns in June/July and October/ November 2001. In addition, the Bank distributed ‘Cash that Stash’ posters to 3,500 primary schools. ● Other Advertising: On 30 and 31 December 2001, the Bank advertised the security features of the banknotes in all Sunday and daily national newspapers as part of a campaign also involving the ECBI, Forfás and the ODCA. ● Information Service: The Press Office provided an information service for the public on euro related issues. Telephone and other enquiries varied from requests for information materials to specific questions about the changeover. ● Media Relations: In addition to providing an ongoing information and briefing service to Irish and international media, the Bank also organised a number of specific events and issued various press releases relating to the changeover. These included a series of media briefings on the appearance and security features of the banknotes and coins, issuing daily press releases on the changeover from 2 January to 8 January 2002 and weekly from 11 January to 8 February 2002; participation in various TV and radio programmes throughout the changeover period; photocalls on 1 January to mark the introduction of the euro in Ireland and the opening of the Bank to the general public on the same day; hosting an event to mark the end of the changeover on 9 February 2002 with the official handing over of the ‘Lady Lavery’ portrait, which featured on all Irish banknotes from 1928, to the National Gallery. Official handing over of ‘Lady Lavery’ portrait to Raymond Keaveney, Director, National Gallery. 43 Annual Report 2001 Training in Security Features The Bank was also involved in the provision of training to a variety of organisations in advance of the introduction of euro notes and coins. Staff from the Bank’s National Analysis Centre for counterfeits provided training on the security features of the banknotes and coins to various state agencies, government departments, financial institutions and retail organisations. The Bank provided this service to training experts from these organisations who in turn were able to train their own staff on the security features. Training packs were also supplied. In total, between August and December 2001, 1,220 trainers attended the Bank’s seminars. Participation in Other International Activities EU Economic and Financial Committee (EFC) European Union The Bank is also represented on the EFC, the successor to the Monetary Committee, which comprises representatives from Member States’ national administrations, NCBs, the Commission and the ECB. A core function of the Committee is keeping under review the economic and financial situation of Member States and the Community and reporting regularly to the Council and to the Commission. To this end it examines updates to Stability and Convergence Programmes and prepares the related Opinions for delivery by the Council of Ministers. The Committee also participates in the preparation of the Broad Economic Policy Guidelines of Member States and the Community, which are concerned, inter alia, with ensuring closer coordination of economic policies of Member States. Other important aspects of the Committee’s work during 2001 were monitoring the introduction of the single currency, financial sector issues, such as the Lamfalussy and Brouwer Reports and the Financial Services Action Plan, Community macrofinancial assistance and statistical requirements in EMU and preparing the economic policy dialogue with accession countries. The EFC also established a working group to analyse international economic and financial issues, particularly in relation to the role and operations of the IMF. The working group, which comprises representatives of all EU member states, advises the EFC and contributes to the drafting of EU positions and statements on IMF-related issues. EU Economic Policy Committee (EPC) The Bank continued to participate in the work of the European Union’s EPC. This dealt with a wide range of issues pertaining mainly to structural economic reform. The objective is to promote the improved functioning, including flexibility, of goods, labour and capital markets in order to maximise the growth potential and employment rate of the EU. The EPC conducted a country-by-country examination of progress with structural reform and the results of this were contained in the third Annual Report on Structural Reform. During the year, amongst the substantive issues considered were the progress with 44 Annual Report 2001 liberalisation of network industries, policies to promote research and development and the implications of the ageing of the EU population for the sustainability of the public finances. The EPC also contributed to the formulation of the structural aspects of the Broad Economic Policy Guidelines for 2001. The Bank was also represented on the Economic Policy Committee of the OECD, which discussed the appropriate policy responses to the slowdown in economic activity in the industrialised economies. International Monetary Fund (IMF) The role of the IMF is to promote international monetary cooperation and to facilitate international financial stability. Promoting Cooperation and Stability The IMF provides financial resources to member countries that require balance of payments assistance, drawing mainly on quota (i.e. membership) subscriptions from other IMF member countries. It also undertakes monitoring, research and surveillance functions, including the publication of reports on trends and developments in the world economy. Individual country surveillance occurs primarily through ‘‘Article IV’’ missions, whereby IMF staff visit a member country, usually annually, to monitor economic performance and review fiscal, monetary and regulatory policy. Each mission results in the presentation to the Executive Board of a report prepared in consultation with the member’s authorities, summarising the member’s economic situation and identifying policy issues. The Article IV mission to Ireland took place in May 2001. In addition to the Article IV process, the IMF also operates a Financial Sector Assessment Programme (FSAP), which focuses on financial sector stability in member countries. Along with twelve other countries, Ireland participated in the 2000 FSAP, which concluded that Ireland has a sound and highly developed financial sector. The Central Bank administers all financial transactions and operations between Ireland and the IMF, e.g. the payment of quota subscriptions, the supply of financial resources, when required, to assist other IMF members, and the receipt from the IMF of remuneration in respect of the use of Irish currency. Within the Canadian constituency5 at the IMF, Ireland provides the Alternate Executive Director, who plays an important role in representing the interests of members of the constituency and in providing a source of communication between them and the IMF Management. 5 The Canadian constituency consists of Antigua and Barbuda, The Bahamas, Barbados, Belize, Canada, Dominica, Grenada, Ireland, Jamaica, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines. 45 Annual Report 2001 Management of External Reserves Bank‘s Official Reserves Earnings on Investment Assets At end December 2001, the Bank owned an investment portfolio of almost \8.7 billion, comprising the Bank‘s foreign currency reserves amounting to \6,400 million and its euro-denominated assets which amounted to \2,250 million. The Bank‘s euro portfolio derives mainly from its holdings, prior to January 1999, of EMU legacy currencies. At end December 2000, foreign currency reserves and euro-denominated assets amounted to \5,807 million and \2,070 million respectively. Over the year, the Bank managed its investment assets (both foreign currency and euro denominated) by reference to benchmark portfolios compiled by Merrill Lynch on behalf of the Bank and modified to reflect the restructuring undertaken during the year. These portfolios incorporated the Bank‘s preferences for liquidity, risk and return. Total earnings (income and capital gains) on the investment portfolios amounted to \530.4 million in 2001 compared with \493.2 million in 2000. In rate of return terms, earnings on the investment portfolios in 2001 were 6.74 per cent compared with 6.84 per cent in 2000. A number of factors contributed to this outcome. The main influence was the sharp increase in bond prices in the US, UK and euro area capital markets in 2001 which produced significant capital gains. Moreover, the changed credit profile of the Bank’s assets meant that the portfolios benefited significantly from the sharp reduction in credit spreads during the year. Finally, active portfolio management in 2001 produced results somewhat in excess of the return on the benchmark portfolio. 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 the non-euro reserves, the choice of investment instruments and the overall degree of risk that the Bank considers appropriate for its investmentactivities. The risks inherent in managing the Bank’s investment portfolio are managed by a comprehensive system of controls, limits and procedures. The organisation of asset management activities at the Bank is as follows: 46 ● An Investments Committee of the Board reviews investment policy and performance. ● This is supported by the Bank’s External Assets Investment Committee which considers policy issues and strategy relating to the investment portfolio. This committee, under the chairmanship of the DeputyDirector General, consists of senior staff of the Financial Markets Department. Annual Report 2001 ● A Standing Investment Committee, comprising management of Financial Markets Department, senior dealers and senior analysts, meets weekly to formulate short-term policy. ● The Bank’s Investment Desk carries out the day-to-day dealing activities that are required to implement decisions and to ensure that the reserves are fully invested. ● Risk monitoring and performance measurement are carried out independently of the dealing function. The framework within which the Bank’s investment assets are managed changed with the establishment of the European System of Central Banks (ESCB) and the adoption of the single currency. Under the Statute of the ESCB, one of the basic tasks of the System is to hold and manage the official reserves of Member States. Thus, the Bank’s foreign currency reserves form part of the foreign reserves of the Eurosystem. In addition, the ECB holds foreign reserve assets including gold, which were contributed by NCBs in January 1999. Each NCB’s contribution to the ECB reserves was in proportion to its shareholding in the ECB, which, in turn, was a function of each Member State’s shares of the euro area’s GDP and population. The assets transferred to the ECB continue to be managed by the NCBs under agency arrangements. At end-2001 the Bank managed \469.9 million on behalf of the ECB. Moreover, under the EU Treaty, further calls of foreign assets may be effected by the ECB from NCBs‘ foreign exchange reserves. Portfolio Restructuring in EMU The Bank continued its programme of portfolio restructuring during 2001. As mentioned in previous annual reports, the Bank is no longer required (post EMU) to maintain a highly liquid shortmaturity portfolio for possible foreign exchange intervention. In recognition of this reduced liquidity requirement, changes were made to the composition of the Bank’s foreign currency reserves. These included an increase in the size of the Danish krone portfolio with a corresponding reduction in the size of the US dollar and Japanese yen portfolios. The credit risk profile of the portfolio was further modified by increasing holdings of bonds issued by US Federal Agencies and by a number of quasisovereign issuers, and by adding Jumbo Pfandbriefe and Danish mortgage bonds to the list of eligible instruments. Furthermore, bonds issued by virtually all euro area governments and by a number of quasi-government agencies were included in the euro portfolio. The objective of these changes is to use the somewhat greater risk tolerance, in the changed environment, to enhance the return on the Bank’s investment portfolio. Following the sharp increases in global bond prices, the duration of the US Continued Portfolio Restructuring 47 Annual Report 2001 dollar, sterling, euro and Danish krone portfolios was reduced towards the end of 2001, primarily to avoid some of the capital losses that would be associated with a reversal in this upward trend. The management of the investment portfolio follows a twostage approach: first, the currencies for inclusion in the portfolio are selected and, second, these currencies are invested in the major money and capital markets. In the second phase of the investment process, the investment portfolio is invested in a wide range of instruments — deposits, other money-market instruments, government bonds and other high-quality fixed-income securities. The objective here is to maximise return within pre-defined risk parameters. Within this framework, the Bank employs a number of strategic and tactical investment methodologies and techniques. On a day-to-day basis, the investment strategy involves positioning the portfolio to take advantage of opportunities to enhance returns in the international money and capital markets. Management of ECB Reserves ECB Pooled Reserves The basic objective of ECB investment policy is to protect the value of the ECB’s reserves in order to ensure that the assets are sufficiently secure and liquid to support the ECB’s monetary policy. The Maastricht Treaty provided for the initial transfer of up to \50 billion of foreign reserve assets to the ECB. In January 1999 the Governing Council of the ECB decided that \39.5 billion (that is \50 billion, adjusted downwards for the shares of the countries not participating in the euro area) should be transferred to the ECB at the commencement of EMU. When intervention takes place, as happened in 2000, the foreign reserve assets of the ECB are used. At the end of 2001, the ECB‘s net foreign reserve assets amounted to \46.7 billion compared with \43.7 billion at the end of 2000. This change reflects various factors such as transfer of foreign reserve assets by the Bank of Greece upon joining the euro at the beginning of the year, the interest income earned on the ECB foreign reserves and the revaluation at market prices of the foreign reserve assets. The external reserves transferred to the ECB are managed in a decentralised manner by the NCBs. A complex management framework is in place to implement this arrangement. The ECB determines the investment parameters; makes policy decisions including setting performance benchmarks, approving counterparties and setting permitted risk levels; and performs control and monitoring functions. The benchmarking framework is set at 48 Annual Report 2001 both strategic and tactical levels and each NCB’s performance is measured against the tactical benchmark. Within this framework each NCB undertakes management and settlement functions associated with their portion of the ECB reserves. NCBs act on behalf of the ECB on a disclosed agency basis so that market participants can differentiate between operations carried out on behalf of the ECB and those undertaken on NCBs’ own reserves. The Bank enters trades onto the ECB reserve management system, which permits the ECB to monitor positions and exposures and to carry out performance measurement. In 2001, as well as managing the reserves on behalf of the ECB, the Bank was actively involved in the testing and introduction of a new version of the ECB reserve management IT system. In addition, the Bank participated in the extensive preparatory work that was undertaken for the introduction of interest rate futures as an eligible instrument for the ECB reserves in early 2002. The size of the portfolio managed by the Bank on behalf of the ECB was \469.9 million at the end of 2001. Risk Management The risk control policy framework governing the Bank‘s asset management and operations is established by the Board of the Bank and is reviewed regularly. The framework consists of various risk policies, procedures and limits. Controlling Risk The Risk Control Unit in the Financial Markets Department 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 is independent of the dealing function in the Financial Markets Department and presents regular reports to the Audit Committee of the Board as well as having direct access to the Governor and Director General. The Unit also measures the return on the Bank’s investment portfolios. The measurement of performance involves the attribution of return across portfolios, sectors and instruments. The Bank’s performance in terms of the return achieved on its portfolios is measured against a notional benchmark portfolio compiled externally. As part of its risk management operations, the Bank has developed policies in relation to the following types of risk: currency risk, market risk, credit risk, liquidity risk and operational risk. Currency risk is managed by pursuing a policy of portfolio diversification so that a change in the value of an exchange rate in which investment assets are denominated does not significantly affect the value of the Bank’s investment assets. The currency distribution of the investment assets is 49 Annual Report 2001 reviewed periodically using quantitative techniques such as currency optimisation models as well as a variety of qualitative factors. At present the Bank manages portfolios denominated in US dollars, Japanese yen, sterling, Swiss francs, and Danish kroner. Market risk relates to the impact of changes in interest rates on the value of a portfolio. The management of market risk in the Bank is primarily based on duration although Value at Risk (VaR) techniques are also used. The duration of a portfolio determines its sensitivity to interest rate changes — the higher the duration the more risk is assumed. The target duration selected for the Bank’s portfolio reflects the Bank’s relatively conservative approach to market risk. Global economic conditions, bond yields, views of market participants, and liquidity requirements are all factors that are taken into account in setting the duration for the investment portfolios. Credit risk relates to the possible loss in asset value due to the default of counterparty banks, issuers of securities or other counterparties. Credit risk is managed by confining exposures to high quality instruments and to counterparties with high credit ratings. All approved counterparties and issuers must have a credit rating from at least one of the international credit rating agencies. For deposits, maximum limits are set for each counterparty according to its credit rating and the maturity of the deposit. The Bank’s exposure to banks and issuers of securities analysed by credit rating is shown in Table 1 below. Table 1: Exposure of Investment Assets by Credit Rating — End 2001 Credit Rating Aaa Aa1 Aa2 Aa3 A1 A2 A3 Total % of investment portfolio 65 11 6 17 1 — — 100 Liquidity risk is managed by ensuring that reserves are invested in instruments for which deep and active markets exist, such as securities issued by governments and other high quality issuers and by applying maximum exposure limits. Operational 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. Investment management and monetary policy operations are reviewed regularly to ensure that potential 50 Annual Report 2001 exposures are identified and that appropriate controls are implemented. A Business Continuity Plan for the Financial Markets Department was reviewed and updated during 2001. In addition to the work performed by the Risk Management Unit, the Bank’s asset management and monetary policy operations are audited by the Bank’s Internal Audit Department, by the Bank’s external auditors — the Comptroller and Auditor General and PricewaterhouseCoopers and by the ECB’s external auditors — PricewaterhouseCoopers. A code of conduct for dealers and decision makers is also in place. This code covers issues such as authorisation of dealers, potential conflicts of interest, private financial accounts and insider trading. Economics, Research and Statistics Economics and Research The economics function continued to monitor and forecast shortterm developments in the Irish and wider international economy, as well as conducting research into longer-term structural and policy issues. Cooperation with other Eurosystem National Central Banks and the ECB, through a system of Committees and Working Groups, enabled similar tasks to be carried out for the euro area as a whole. This work provided support to the Governor of the Bank and other members of the ECB Governing Council in discharging their duties during 2001. It also helped the Bank to assess the overall stance of macroeconomic policy domestically, including fiscal policy, and other issues relating to the maintenance of price stability. Dual Focus — Domestic and Euro Area The work can be summarised under the following headings: economic intelligence and forecasting, inflation and price stability, monetary issues, econometric modelling and the public finances. Economic Intelligence and Forecasting The Bank continued to monitor developments in the domestic economy, assess the impact of shocks, analyse the risks to growth and inflation and make projections based on specific assumptions. Some of the developments that had to be assessed in 2001 included the impact on the economy of foot-and-mouth disease, as well as a series of external shocks: the slowdown in the world economy, the difficulties of the global high-technology sectors and the events of 11 September. A Year of Economic Shocks The techniques used to assess the impact of these developments included the use of economic models and detailed analysis of macro-economic data. These were supplemented, however, in 2001 by assessments of business sentiment, based on contact with leading companies across the main sectors of the economy. Assessments of Business Sentiment 51 Annual Report 2001 This allowed for an immediate evaluation of the impact on sentiment of particular events and the clearer identification of risks on a sector-by-sector basis. Contribution to Eurosystem Exercises Four forecasting exercises were conducted during the year. Two of these constituted the Bank’s contributions to the Eurosystem’s Broad Macroeconomic Projection Exercises. Following the decision by the Eurosystem to publish overall euro area projections at the end of 2000, these contributions were reproduced in the Bank’s Summer and Winter Bulletins during 2001. Inflation and Price Stability Inflation Issues Price developments, domestic costs and competitiveness were monitored closely during the year with assessments published in the Bank’s Quarterly Bulletin. Two medium-term inflation projections and four short-term forecasts for five sub-aggregates of the HICP, based on agreed assumptions, were produced as part of coordinated Eurosystem exercises. Research work in the area of price stability focused on the continued refinement of inflation forecasting methods. Research on the measurement of potential output and the use of the output gap for forecasting inflation was published. Work also continued in the area of productivity growth and the assessment of the implications of the ‘new economy’ both on an aggregate level and for different sectors of the economy. Monetary Issues Impact of Interest Rate Changes The main focus in this area was on the further evaluation of the monetary transmission mechanism, i.e. the impact of changes in monetary policy on inflation and the real economy and the various channels (e.g. interest rates, exchange rates and credit) through which these effects are transmitted. Results were published in the Summer 2001 Quarterly Bulletin. An article in the Autumn Quarterly Bulletin gave an outline of the results of a study into the speed and degree of pass-through of changes in official short-term interest rates to retail lending rates. Research in progress includes an evaluation of monetary policy rules and an assessment of the usefulness of monetary aggregates in inflation forecasting for the euro area. Staff participated in the work of the ESCB monetary transmission network and provided advice on these matters to the Irish representative on the ESCB Monetary Policy Committee. An assessment was also made of the effects of regulatory policies on asset prices and of how microeconomic factors, i.e. tax policies, regulatory policies and disclosure policies, may interact with the macro-economy and contribute to excessive asset price 52 Annual Report 2001 fluctuations. Work continued on the monitoring of asset prices, indebtedness and in testing asset prices for speculative bubbles. Econometric Modelling A small-scale model of the domestic economy, developed as part of a common ESCB exercise, is continuously being developed and refined. During the year, it was incorporated by the ECB into its system of linked country models, following extensive testing. It also continued to be used in ‘scenario analyses’, i.e. looking at the impact on the domestic economy of changes in a range of variables, such as external demand, exchange rates or interest rates. It was also used in ECB exercises looking at the impact of developments on the economy of the euro area as a whole, as well as examining the impact of changes in monetary policy on individual member states. Further Development and Linking of Models The model represents one phase in an ongoing project. The aim is to produce a more sophisticated model over time, including the incorporation of a more satisfactory modelling of expectations. The lack of long historical quarterly data on national accounts aggregates has also meant that the data on which the model is built have to be specially constructed and revised. A further exercise in constructing such a data set, over a longer time frame and using more advanced interpolation methods, was undertaken in the latter part of last year, with a view to estimating an improved version of the model during 2002. Public Finance Regular monitoring of domestic public finance developments and issues was maintained in 2001. This analysis, and related research, focussed on examining the appropriate stance of fiscal policy, given economic conditions. Other research work included the continued development of methods for identifying the effects of economic shocks on the public finances and distinguishing cyclical from structural influences on the budget balance. The issue of longer-term fiscal sustainability was also addressed in a published article in the Bank’s bulletin. Focus on the Policy Stance Statistics — Monetary, Financial And Balance Of Payments Data The Bank continued to collect, process, disseminate and publish a wide variety of monetary and financial statistics and to fulfil its statistical obligations at national and international level, including statistical reporting obligations to the ECB, BIS, IMF, Eurostat and OECD. In particular, the large and growing volume of ECB requirements for money and banking and balance of payments statistics continued to be met in a timely fashion thus ensuring the continuity of information needed to support the functioning of the Eurosystem. These data are delivered to the ECB in efficient electronic format. In addition, work began on the Further Extensions to Data 53 Annual Report 2001 development of statistics on other financial intermediaries (OFIs) and on a project to design and provide monetary union financial accounts (MUFAs) for Ireland. Entry of Greece to Euro Area Following the enlargement of the euro area to include Greece, with effect from 1 January 2001, all of the Bank’s statistics incorporated Greece as a euro area country and changed the composition of euro-denominated balances to include Greek drachma. A significant part of this project was the provision of backdata on Greek positions to the ECB for the years 1999 and 2000. Revised Reporting Framework There were a number of major developments in euro area money and banking statistics during 2001. The ECB and national central banks completed work on the design of a revised reporting framework for balance sheet data and a new harmonised reporting system for interest rate statistics. This culminated in the publication of two new legally binding regulations in late 2001. These new requirements, which involve a large increase in the range and volume of data to be supplied, will be implemented in 2003. In advance of designing and agreeing these requirements the Bank and other euro area NCBs undertook a cost-benefit exercise to evaluate the case for introducing the changes. Changes to Measurement of M3 Work was completed to exclude non-resident holdings of negotiable instruments, from the euro area broad monetary aggregate M3. Revised figures, excluding non-resident holdings of money market fund shares/units and debt securities with an initial maturity of up to 2 years (including money market paper), were published in May 2001 and November 2001, respectively. This work represented the completion of a large project involving the ECB and all NCBs in the euro area and brings the actual measurement of M3 into line with its conceptual definition. At a national level, in preparation for the statistical changes referred to above, the Bank held a number of meetings with the Irish Bankers’ Federation and reporting institutions to discuss implementation plans. More Reporting Institutions The number of institutions reporting to the Bank continued to grow, due largely to the number of money market funds beginning operations in the IFSC. At end-2001 the Bank collected money and banking statistics from approximately 250 institutions, compared with 200 a year earlier. Cooperation with CSO The Bank continued to assist the ECB and the Central Statistics Office (CSO) in developing the balance of payments framework for the euro area. Issues addressed during the year included the monetary presentation of balance of payments results, checking consistency with money and banking statistics and 54 Annual Report 2001 improvements concerning the measurement of portfolio investment flows. In addition, an agreement aimed at fulfilling the statistical standards and requirements of the ECB was discussed in depth between the CSO and the Bank. This agreement, which includes provision for the CSO to assume responsibility for the compilation of monthly balance of payments statistics, was scheduled to be finalised in early 2002. Other Work/Activities As regards the Bank’s publications, a revamped design and format was introduced into the Annual Report and Quarterly Bulletins. A review of the content and design of the Bank’s website was also initiated with a view to developing the site further. The Bank’s internal library service, located in the economics and research function, also entered a phase of rapid change during 2001. This involved the greater use of information technology, including a move towards online subscriptions to international working papers series covering the latest research in economics and finance. Payments and Settlements RTGS/TARGET A Real-Time Gross Settlement (RTGS) system has been operated by the Bank since March 1997. The number of institutions participating in the system fell by one during 2001 and stood at twenty-two at end-year. The system, which is known as IRIS (Irish Real-time Interbank Settlement), processes payment instructions received electronically from the participating institutions and settles the related payments between participants in real time throughout the day. The payments are effected across settlement accounts of the participating institutions at the Central Bank and can be made either on behalf of customers or on an institution’s own behalf. The system, which operates from 06.00 until 17.00, facilitates payments on behalf of customers until 16.00 with interbank payments processed until 17.00. Real Time Settlement System Since January 1999, IRIS has been linked to the domestic RTGS systems of the 14 other EU Member States and to the ECB Payment Mechanism. This linkage facilitates real-time processing of cross-border payments in euro between the 16 systems. The extended system is known as TARGET (Trans-European Automated Real-time Gross settlement Express Transfer) and can be accessed by over 34,000 banks (including branches and subsidiaries) across the EU. A total of nearly 550,000 payments was processed through IRIS during 2001 with the value of those payments amounting to approximately \4,550 billion. Domestic and cross-border payments represented approximately 56 per cent and 44 per cent, respectively, of all payments processed by IRIS in 2001. In Increasing Share of Cross-Border Transactions 55 Annual Report 2001 1999, the first year of operation of the TARGET system, comparable figures for domestic and cross-border payments were 65 per cent and 35 per cent, respectively. The average daily volume and value of cross-border and domestic payments made by IRIS participants in the three years since the introduction of monetary union are shown in Table 2 below. Table 2: Average Daily Payments via IRIS 1999 2000 2001 Number of payments per day Domestic Cross-border Total 1,065 569 1,634 1,157 748 1,905 1,204 933 2,137 Value of payments per day (\ billion) Domestic Cross-border Total 9.7 4.1 13.8 10.7 5.5 16.2 11.8 6.1 17.9 As indicated in Table 2, the average daily number of domestic and cross-border payments processed by IRIS during 2001was 2,137. This represents an increase of 31 per cent and 12 per cent on the average number processed in 1999 and 2000, respectively. The average daily value of \17.9 billion processed in 2001 reflects an increase of 30 per cent and 10 per cent on 1999 and 2000 values, respectively. Payments processed by IRIS represented 1.4 per cent by value and 1.0 per cent by volume of total payments processed by the TARGET system in 2001. Comparable figures for 1999 were 1.5 per cent and 1.0 per cent and for 2000 1.6 per cent and 1.0 per cent. Hardware Upgrade The increase in payment volumes in recent years, together with a change in the pattern of input of payment instructions by the participating institutions, necessitated a hardware upgrade for the IRIS system, which was effected during the first quarter of 2002. The Bank continues to participate in the ESCB’s Payment and Settlement Systems Committee (and its TARGET Management Working Group), which monitors system performance on a continuous basis and which is currently considering the appropriate long-term strategy for TARGET. Credit Operations Eurosystem Standing Facilities 56 Credit institutions which have entered into the necessary legal arrangements with the Bank may borrow from, or deposit with, the Bank on an overnight basis under the Eurosystem’s standing facilities (the overnight Marginal Lending and Deposit Facilities). To avail of these facilities, such credit institutions must notify the Bank of their requirement by 17.30 hours. The associated Annual Report 2001 transactions are processed across the settlement accounts which are used for RTGS payment processing. Under the terms of Article 18.1 of the ESCB statute, all credit operations conducted by counterparties with the Bank must be based on adequate collateral provided to the Bank by its counterparties. As described earlier, there are two categories of assets — Tier One and Tier Two. Assets on the Tier One list include Irish Government bonds, Exchequer notes and certain bonds issued by the Housing Finance Agency and the European Investment Bank for which the Bank acts as Registrar. The Tier Two list includes Irish mortgage-backed promissory notes. Risk control measures are applied to assets underlying monetary policy and intra-day operations in order to protect the Eurosystem against the risk of financial loss if underlying assets have to be realised in the event of default of a counterparty. The Bank applies margins in its liquidityproviding reverse transactions (the technique used for taking collateral). This implies that counterparties need to provide underlying assets with a value at least equal to the liquidity provided by the Bank plus the value of an initial margin. The Bank also applies ‘‘valuation haircuts’’ in the valuation of underlying assets with the value of the underlying asset being calculated as the market value of the asset less a certain percentage (haircut). The Bank requires a specified margin to be maintained over time on the underlying assets used in its liquidity-providing reverse transactions. If the value of the underlying assets falls below a certain level, the Bank will require the counterparty to supply additional assets (i.e. a margin call). Similarly, if the value of the underlying assets, following their revaluation, exceeds a certain level, the Bank returns excess assets to the counterparty on request. This entails the Bank valuing assets put forward by counterparties, both at the time of nomination of assets for a particular credit operation and subsequently on a daily basis until maturity of that operation. Counterparties may use eligible assets on a cross-border basis, i.e. they may obtain funds from the Bank by making use of eligible assets located in another member state. The Correspondent Central Banking Model (CCBM) was developed by the ESCB to ensure that all eligible assets may be used on a cross-border basis. Under this model, which has been operated by the Bank and its European counterparts since 4 January 1999, central banks act as custodians (‘‘correspondents’’) for each other in respect of 57 Annual Report 2001 securities accepted in their local depository or settlement system. Counterparties may also use links between securities settlement systems to transfer collateral to the Bank, subject to those links having been approved by the ECB. Across the Eurosystem, the use of links for delivery of collateral on a cross-border basis is very much less than the use of CCBM, which had originally been expected to be a short-term solution pending market developments to facilitate crossborder transfers. The Bank’s counterparties have used the CCBM quite extensively, availing of the opportunity to use foreign collateral in monetary policy and intra-day liquidity operations and the level of usage continued to increase in the last year. At any one time, up to ten NCBs acted as Correspondent Central Bank for the Bank during 2001. Securities Transfer of Settlement Function to Euroclear While the settlement function in respect of Irish Government — and other — bonds was transferred to Euroclear in December 2000, the Bank continued to maintain the register of bonds issued on the domestic market by the National Treasury Management Agency, the Housing Finance Agency, the European Investment Bank and Ulysses Securitisation plc. Ulysses Securitisation is a state-sponsored financing vehicle, which was incorporated following the passing of the Securitisation (Proceeds of Certain Mortgages) Act, 1995. The Bank, in its role as registrar, effects dividend and redemption payments to account-holders, including Euroclear (on behalf of relevant participants in the Euroclear system). The total of all holdings of Euroclear participants in each bond is recorded in an omnibus account on the Bank’s Register in the name of Euroclear Nominees Limited. Transactions between Euroclear participants are effected within the Euroclear system without affecting the Bank’s Register, while transactions between the local market and Euroclear participants necessitate updating of the Register. Since May 2001, all Irish Government Bonds provided to the Bank as collateral have been delivered into its account in the Euroclear system. At the end of 2001, the nominal value of bonds on the Register amounted to \20.3 billion, which represented a decrease of \2.2 billion over the value outstanding at end 2000 and follows a decrease of \1.8 billion in 2000. Transfer of the settlement function for bonds on the Register to Euroclear resulted in a significant fall in the number of transfers effected by the Bank during 2001. A total of 2,698 transfers (including transfers into 58 Annual Report 2001 and out of Euroclear) were processed by the Bank during the year as compared to 24,785 during 2000. A significant reduction in the number of accounts on the Register took place during 2001, with the number falling from 7,189 at end-2000 to 5,547 at end-2001. This reduction can be attributed to the redemption during the year of three bonds, covering 1,131 accounts with a nominal value of \2,189 million and to the transfer to Euroclear during 2001 of balances on the Register held by credit institutions. A total of 42 dividend issues took place during 2001 involving approximately 9,700 individual payments. Table 3 below summarises the position in relation to issues and redemptions of Government Bonds during the course of 2001. Table 3: Issues and Redemptions of Government Bonds \ million 2000 2001 Bonds Issued Total 2,128.9 2,128.9 5,588.2 5,588.2 Bonds Redeemed Bonds Cancelled Total 2,869.2 1,054.1 3,923.3 2,188.7 5,551·9 7,740.6 −1,794.4 −2,152.4 Net Nominal Increase(+)/Decrease(−) On 25 October 2001, the ECB and the Committee of European Securities Regulators (CESR) announced agreement on the conduct of joint work on issues of common interest in the field of securities clearing and settlement systems. The Bank is represented on a joint ESCB/CESR working group, which is working to establish standards and/or recommendations appropriate for securities settlement systems and central counterparties in Europe, including possible adaptation of the CPSS/IOSCO Recommendations for Securities Settlement Systems to the European context. Common standards would contribute to creation of a level playing field for providers of securities clearing and settlement services and to overcoming the significant heterogeneity in the legislative frameworks of European countries. European Cooperation During 2001, the Bank also continued to participate in the deliberations of the ESCB’s Securities Settlement Working Group. Payment Systems Policy and Regulation The Objectives of Payment Systems Regulation The Eurosystem as a whole is concerned with the regulation of payment systems from the standpoint of defining and implementing a monetary policy which will ensure price stability, the stability of the financial system generally and also maintain Safe, Effective and Efficient Systems 59 Annual Report 2001 public confidence in a sound currency. In keeping with this overall policy, the general objectives of the Bank’s regulatory regime are to ensure that payment systems in the State are safe, effective and efficient, and that access to such systems is not restricted. In addition, the systems themselves should not cause, or add to, instability in the operation of financial markets. The Bank’s principal aim is to minimise systemic risk, i.e. the risk that the failure of one participant in a payment system to meet its obligations could result in other participants failing to meet theirs, thus leading to a chain reaction in payment systems. In extreme circumstances, an event of this type might have the potential to undermine the stability of financial institutions and markets. The Bank is also concerned with the efficiency of payment systems, as this is seen as complementary to systemic stability. Moreover, payment systems and instruments must be seen to be secure, in order to maintain public confidence in the currency that these systems and instruments support. Furthermore, since payment systems are an essential vehicle for the implementation of monetary policy, regulation is aimed at safeguarding the transmission channel for monetary policy operations. Statutory Basis for Regulation Authority to Regulate Under the Central Bank Act, 1997, the Bank is empowered to regulate payment systems. The Act provides for the Bank to authorise all payment systems in the State and to approve their rules. The Bank’s role in this area stems also from Article 105(2) of the Maastricht Treaty and Article 3 of the statute of the ESCB, which states that ‘‘The basic tasks to be carried out through the ESCB shall be ... to promote the smooth operation of payment systems’’. Systemic Risk Because of its systemic importance, the Bank’s primary concern in this regard continues to be the domestic Real-Time Gross Settlement system. This is known by the acronym IRIS and is operated and managed by the Bank. Minimising systemic risk in the payment system is addressed by encouraging system participants to effect all large-value interbank payments in Ireland, both on own account and on behalf of customers, in real-time (i.e. continuously throughout the day), gross (i.e. on an individual basis) and in central bank money via the IRIS system. All liquidity provided to participating banks in IRIS is fully collateralised in accordance with ECB regulations. The system does not permit negative balances; payments that 60 Annual Report 2001 would result in a negative balance if they were to settle are queued in the system. Unsettled payments are rejected by the system at the end of each business day. Monetary policy operations are settled via IRIS, with no funds being advanced prior to the transfer of ownership of collateral to the Bank. All monetary policy and intra-day liquidity transactions are governed by the terms of a Master Repurchase Agreement between each counterparty and the Bank. Participation by a credit institution in IRIS requires the approval of the Bank. In deciding whether or not to issue such approval, the Bank takes into account an applicant’s financial strength and also its technical ability to meet the requirements of the system. IRIS is linked to TARGET, thereby allowing payments to be made on a cross-border basis in the EU in real-time. The system is subject to regular ESCB risk analysis and its security features are also reviewed on a regular basis. Domestic Clearing Arrangements Work progressed during 2001 in relation to the legal and organisational arrangements of the three companies incorporated to manage the interbank clearing process in Ireland (i.e. the Irish Paper Debit Clearing Company Limited, the Irish Paper Credit Clearing Company Limited and the Irish Retail Electronic Payments Clearing Company Limited). The Rules for Clearing of the Irish Paper Debit Clearing Company Limited were approved on 5 April 2001and those for the Irish Paper Credit Clearing Company Limited on 24 May 2001. Clearing Companies In addition, from September 2001 onwards, the Bank has administered the daily interbank settlements for the three clearing companies, which takes place across the participating banks’ settlement accounts via the IRIS system. Settlement Accounts Terms and Conditions for the opening and operation of settlement accounts at the Bank were drawn up during the year, agreed with the ECB, and issued to settlement account-holders for signature. Terms and Conditions Bank of England/CREST DVP Project During 2001, the Bank continued to attend meetings in relation to a Bank of England/CREST DVP (delivery against payment) project. The Bank’s involvement in this process arose from the fact that trades in Irish equities are settled in the UK’s CREST settlement system. Changes to Settlement Arrangements 61 Annual Report 2001 Until late 2001, the underlying cash payments were effected on a net basis in the IRIS RTGS system across the settlement accounts of the three Irish CREST settlement banks. However, by August 2001, the Irish CREST settlement banks had decided to withdraw from performing this settlement function. Euro settlement of trades in Irish equities in CREST now takes place in real-time in the CHAPS euro system across the accounts of UK participants at the Bank of England. Electronic Money Projects Apart from a number of single-use schemes such as telephone cards, there are no electronic money (or ‘e-money’) schemes operating in Ireland at present. The Bank, however, participates in the work of an ESCB group examining e-money security issues, keeping abreast of developments in anticipation of future initiatives in the Irish payments industry. Review of the Organisation of Retail Payment Systems Retail Payments Review During 2001, the Bank carried out preliminary research in relation to the organisation of the Irish retail payment system in accordance with one of the recommendations contained in the ‘‘Report of the Department of Finance/Central Bank Working Group on Strategic Issues Facing the Irish Banking Sector’’, published in August 2000. Further research will continue in 2002. Payment Systems Developments Monitoring Role The Bank continued to monitor payment systems developments generally, both on the domestic front and internationally. With regard to the former, regular meetings were held with the Irish Payment Services Organisation, which acts as the representative body for the payments industry in Ireland. At the Eurosystem level, the Bank participated in the ESCB’s Payment and Settlement Systems Committee and associated sub-groups. Through these bodies, the Bank has contributed to the work of the ESCB’s Payment Systems Directorate. Currency Production and Issue Introduction Focus on Production of Euro Currency 62 The main task of the Currency function is to provide the public with banknotes and coin in the quantity, quality and denominations which best suits their needs. The function is also responsible for the receipt, processing and re-issue of good quality banknotes as well as the destruction of banknotes deemed unfit for circulation. The entire focus of production in 2001 was on the printing of euro notes, which had commenced in late 2000, and the minting of euro coin, which had commenced in 1999. During 2001, the Bank supplied the retail banks with 290 million banknotes and 90 million coins. With the exception of a relatively small number of £50 banknotes which Annual Report 2001 were printed in 2001, the new banknotes issued had been printed in previous years and stockpiled. No Irish coin was produced domestically in 2001. Stocks of coin had been builtup from previous years and where necessary some stocks were outsourced to augment supplies. The Currency Centre was responsible for the logistical planning of the distribution of euro notes and coin in advance of the changeover to the euro currency on 1 January 2002. In addition, the Centre ensured the implementation of the legal provisions associated with the changeover as laid down by the ECB; put in place training programmes on the security features of the new banknotes; operated a testing centre for euro notes and coin for the vending industry and for ATM users prior to the commencement of advance distribution of the euro currency (frontloading); and co-operated with the other national bodies on the practical arrangements for the introduction of the euro notes and coins. Distribution of Euro Euro Banknote Production The total number of banknotes produced during 2001 amounted to 194 million. These included \5, \10, \20, \50 and \100 banknotes. As the demand for \200 and \500 banknotes in Ireland was not considered sufficient to warrant large-scale production, a small supply of these denominations was procured from another euro area NCB. During 2001, tests on sample notes revealed a potential problem with the \5 and \20 banknote paper and thread combination being used by some European printing works including Ireland. Contingency arrangements were implemented for the provision of additional stocks of these denominations. In the event, the Bank was authorised to issue these notes following a full quality re-inspection. By the year-end the total number of banknotes available for issue for the launch of the new currency was as follows: 194 million Euro Banknotes Produced Table 4: Banknotes available for launch of new currency at end-year No. of Notes (m) \5 \10 \20 \50 \100 \200 \500 Total 57 45 128 44 8 0.1 0.1 282.2 Irish Pound Banknote Production During 2001, the Bank produced 14 million Irish £50 banknotes. These notes were required to meet the unexpectedly large demands of the banking sector’s ATM network. The remaining 104 million new Irish banknotes issued during 2001 had been produced and stockpiled in previous years. At the year-end, there was a remaining stock of 10 million Irish notes, 50 per cent of which were £5 notes for which there was little demand in the run-up to the currency changeover. New Irish Pound Notes Mainly Issued from Stockpiles 63 Annual Report 2001 During 2001, 316 million banknotes were withdrawn from circulation. Following processing, 187 million of these notes were classified as reissuable and 172 million notes were reissued. The greatest demand for banknotes was for the £20 note which was still the most frequently dispensed ATM note. There was, however, a marked growth in the circulation of the £50 note during 2001 when it became the second highest circulating note. At end-year, the value of the £50 notes accounted for 41 per cent of the circulation compared with 33 per cent at the end of 2000. Coin Production Euro Coin 1,100 million Coins Available for Launch The minting of coin at the Currency Centre during 2001 focussed solely on the production of euro coin. The euro coin requirement for the launch of the new currency had been estimated in 1997 at 944 million. This figure had been calculated based on forecasts of circulation as at end 2001 adjusted for coin wastage. The very heavy demand for Irish coin in the years 1999 and 2000 made it necessary to revise this estimate and, in early 2001, a new coin target of 1,078 million coins for the launch was agreed. A new production plan was put in place to strike the extra volume of coin. In addition, in order to ensure against any production/material delays a small contingency stock of 35 million was procured from another EU Mint. By the year-end a total of 1,065 million euro coin had been produced in the Mint, 533 million of which was produced in 2001 leaving a total of 1,100 million available for issue for the launch of the new currency. Irish student dressed up as a euro coin at a shopping centre in Dublin as part of a national initiative to promote the euro. 64 Annual Report 2001 Irish Coin The stock of Irish coin available for issue during 2001 was 136 million. There had been very significant demand for Irish coin in 1999 and 2000 with a total issue of 513 million coins in these two years. The Bank had given a commitment in the National Changeover Plan that adequate amounts of Irish banknotes and coin would be available in the run-up to the currency changeover as any shortage in supplies of national currency could have a negative impact on the changeover. Against this background, approximately 116 million coins were procured in the early part of 2001. At the same time the Bank engaged in two media campaigns during 2001, to encourage the public to dislodge hoarded coin back into circulation. The impact of these campaigns was particularly successful and the demand to issue coin lessened dramatically. In total the Bank issued 90 million Irish coins during 2001. Campaign to Dislodge Hoarded Coin Distribution of Euro Notes and Coin One of the major challenges of the changeover to the euro was the logistical operation of distributing the euro notes and coins. The scale of the task was such that it was necessary to develop systems for distributing the currency in advance to banks and retailers. The system of advance distribution of banknotes and coins to financial institutions, their agents and customers became known as frontloading and sub-frontloading. The Bank negotiated two separate agreements for the distribution of the banknotes and the coins with the cash-in-transit companies. The Garda and Army authorities provided the necessary security escorts. Frontloading of coin took place from 1 September, while frontloading of banknotes commenced on 30 October. Some small amounts of notes were frontloaded at earlier dates to facilitate training programmes. From April 2001 facilities were provided in the Currency Centre for testing vending and other currency operated equipment. The Distribution Challenge During 2001, it was decided that, in line with all other euro area countries, the Bank would prepare and distribute citizen starter packs of coin. These packs valued at £5 (\6.35) contained 19 coins of the different denominations and their principal function was to familiarise the public with the coins in advance of E-day. In total 1 million packs were prepared. They were put on sale to the general public from 14 December through Post Offices and financial institutions. The Bank also prepared retail packs of coin which were distributed to financial institutions for their smaller retail customers. Citizen Starter Packs The total amount of euro notes and coins frontloaded by the Bank was as follows: 65 Annual Report 2001 Table 5: Frontloading of Euro Notes and Coins Notes \5 \10 \20 No. of Notes (M) Value \M 31.8 159 29.1 291 Coins 1c No. of Coins (M) Value \M 230 2.3 \50 \100 \200 \500 Total 53.6 14.5 1,072 724 0.4 40 — 0.1 — 0.1 129.4 2,286.2 2c 5c 10c 20c 50c \1 \2 156 3.1 140 7.0 120 12.0 124 24.8 81 40.3 78 78.1 41 82.3 970 250 In addition, significant stocks of both notes and coins were issued to the Cash Centres of the main financial institutions to enable restocking of branches if necessary. As the euro did not become legal tender until 1 January 2002, legal ownership of the currency did not transfer from the NCBs until that date. Collateral The payment by financial institutions for the full amount of frontloaded currency on 1 January, while the withdrawal and value dating of national currencies would be spread over a number of weeks, could have had a severe funding impact on the banking system throughout Europe. To take account of this, the ESCB agreed a debiting model, whereby one-third of the total value frontloaded to each financial institution would be paid to the Bank on each of three dates: 2 January, 23 January and 30 January. The financial institution had to provide the Bank with collateral, equivalent to the total value of the frontloaded currency on 28 December 2001. The collateral was released in accordance with the payments received for the currency. Withdrawal of Irish Banknotes and Coin Another Major Logistical Exercise The agreements with the cash-in-transit companies for the changeover included the withdrawal of Irish banknotes and coin after 1 January 2002. In effect this was a bigger logistical exercise than frontloading as the quantities involved were higher and the timescale involved was much shorter. It was estimated that up to 50 per cent of the banknotes in circulation could be lodged with the banking system in the first two weeks of January 2002. Withdrawal plans were drawn up to meet this requirement. In the event, the lodgement of Irish banknotes by the public was faster than anticipated. By 9 February, the last day of legal tender status for the Irish currency, 83.4 per cent of banknotes by value had been withdrawn from circulation. The rate of withdrawal of coin was somewhat slower as the logistics were more cumbersome. Notwithstanding this, approximately 45 per cent of the total value of coins had been withdrawn by 9 February. The process of withdrawing Irish banknotes and coin will continue during 2002. 66 Annual Report 2001 Table 6: Irish Currency in Circulation Value \m Irish Banknotes in Circulation 31/12/2001 9/2/2002 Irish Coin in Circulation 31/12/2001 9/2/2002 No. (m) 4,343.8 719.7 165.8 46.3 387.9 214.2 2,742.2 2,056.1 Counterfeits A National Analysis Centre (NAC) was set up in the Bank during the second half of 2001. The ECB Euro training material, consisting of 150 training packs and 150,000 brochures, was distributed by the NAC in 2001. The Bank also provided extensive counterfeit detection training to personnel — mainly trainers, euro changeover officers and fraud prevention personnel from various institutions. Arrangements between the Bank, the Gardaı́ and the relevant bodies for a code of practice on counterfeit handling were advanced during 2001 and will be finalised in due course. Equipment for the Eurosystem’s Counterfeit Monitoring System was installed in 2001 and is due to be operational early in 2002. Counterfeit Detection Training Banknote Exchange Arrangements for the exchange of euro area national banknotes provided for under Article 52 of the ESCB Statute continued in 2001. The Bank paid \132.5 million to other Eurosystem countries for Irish banknotes exchanged by them and exchanged other Eurosystem banknotes to the value of \3.3 million during the year. These arrangements continued in operation until 31 March 2002. 67 Annual Report 2001 Supervision of Financial Institutions Introduction Expansion of Bank’s Role The Bank’s statutory supervisory responsibilities cover a wide range of institutions including banks and building societies, investment business firms, investment intermediaries, securities exchanges and collective investment schemes. In April 2001, the Bank’s role was expanded under the Insurance Act, 2000 to include the supervision of insurance intermediaries. There are now five departments involved in the supervision of financial institutions as follows: ● Banking Supervision; ● International Financial Services Centre (IFSC) and Funds Supervision; ● Securities and Exchanges Supervision; ● Retail Investments and Insurance Supervision; and ● Regulatory Enforcement and Development. The latter two departments were established during 2001 with responsibility for retail intermediaries and consumer issues (Retail Investments and Insurance Supervision) and regulatory development and enforcement issues (Regulatory Enforcement and Development). The legislation governing the Bank’s statutory functions is set out in Appendix 1. In accordance with this legislation the Bank has set out detailed supervisory standards and requirements in order to achieve a well-regulated financial sector. These are continuously reviewed to ensure that they continue to be in line with the best international practice and that they strike the right balance in providing a well-regulated environment while not imposing undue costs to end users of financial services. The full text of the Bank’s regulatory standards and requirements in the above areas is available on the Bank’s website: www.centralbank.ie. 68 Positive External Assessment by IMF The most recent external assessment of the Bank’s role as supervisor was carried out by the International Monetary Fund (IMF) in 2000. This concluded that the overall framework of the Bank’s prudential regulation and supervision was well developed and showed a high degree of observance of international standards and codes. A link to the full IMF report may be found on the Bank’s website. Supervisory Approach The objectives of supervision and a detailed description of the Bank’s supervisory practices with regard to authorisation and ongoing supervision are contained in the Bank’s Annual Report 2000. In summary, the supervisory regime comprises examination of applications for licence or authorisation, Annual Report 2001 submission of financial returns, conduct of on-site inspections, compliance with minimum capital requirements, holding of regular review meetings with senior management of the firm supervised and dealing with supervision issues as they arise on a day-to-day basis. Consumer protection measures have also been implemented. These include the imposition of conduct of business rules which require firms to disclose all relevant information, the imposition of advertising requirements which require that advertisements be designed in such a way as to make them easily understood and statements relating to risk warnings must not be obscured, the maintenance of registers against which consumers can check the authorisation status of individual firms and the maintenance of a helpline for enquiries from the public. The following pages contain a brief description of the Bank’s supervisory remit, an overview of the main policy developments in 2001, a detailed description of the activity in 2001 and an outline of international developments. Scope of the Bank’s Supervisory Remit The Bank’s supervisory responsibilities cover a broad range of financial institutions authorised in Ireland, as categorised and quantified6 in the following table as at 31 December 2001. Credit Institutions Investment Business Firms Retail Intermediaries Restricted Intermediaries Authorised Advisors Collective Investment Schemes Managers/Administrators of Collective Investment Schemes Trustees of Collective Investment Schemes Agency Fund Managers Authorised collective investment schemes (including sub-funds) The Irish Stock Exchange Stockbrokers 877 279 1,725 760 65 27 144 2,870 1 12 6 The total number of entities supervised by the Bank is less than the total number of the various categories outlined above because some firms appear in more than one category. For example, some credit institutions are trustees of collective investment schemes, while some managers/administrators of collective investment schemes are investment business firms. 7 This figure includes 32 branches of EEA credit institutions. 69 Annual Report 2001 Other Firms Supervised under Chapter VII of the Central Bank Act, 1989 FINEX8 Trading Members Futures & Options Exchanges9 Moneybrokers Approved Professional Bodies 4 22 2 7 5 In addition, at end-December 2001 there were 14 bureaux de change, for which the Bank’s role is limited to ensuring compliance with anti-money laundering legislation. Policy Developments Internal Committee A Financial Supervision Policy Committee, comprising management of the five supervision departments and chaired by the Assistant Director General responsible for financial services regulation, considers issues of supervision policy and ensures, to the extent appropriate, that a standard approach is adopted in relation to such issues. The Bank addressed a wide range of supervision policy issues during 2001 including: ● Concerns relating to credit growth and credit quality ● Capital review proposals ● Money Laundering Guidance Notes ● Auditing/accounting related issues ● Client Money Rules ● Codes of Conduct for the banking industry and retail intermediaries ● Supervisory regime for insurance intermediaries. Credit Growth Stress-Testing The high level of credit growth continued to be the main prudential concern in the first half of 2001. A third round of stress-testing was structured to allow detailed comparison of credit institutions’ responses. Issues arising from this analysis were the subject of a follow-up exercise. In addition, detailed analysis carried out on home mortgage lending policy and practice identified some areas where mortgage lenders could improve their lending assessment and a set of characteristics of prudent home mortgage loan assessment was circulated to the mortgage lenders in February and July 2001. 8 FINEX Europe is a futures and options exchange which is a branch of the Financial Instrument Exchange (FINEX), which in turn is the financial division of the New York Board of Trade. 9 FINEX and the NYFE which are sister exchanges owned by the New York Board of Trade. 70 Annual Report 2001 The slowdown in the global economy, the weakness of the technology, media and telecommunications industries and the events of 11 September 2001 all raised concerns about potential for a deterioration in credit quality and banks’ exposures to vulnerable industrial sectors. This was addressed through a detailed assessment of credit institutions’ exposure to the telecommunications sector. The impact of 11 September was assessed through a detailed survey of banks’ exposures to industries vulnerable to the aftermath of the terrorist attacks, namely airlines, aviation industry, insurance and tourism. Capital Adequacy Review Proposals by the Basel Committee on Banking Supervision and the EU Commission for a new capital adequacy framework to replace existing capital requirements will have a considerable impact not only on financial institutions themselves but also on supervisory practices over the coming years. New Proposal by Basel Committee The new proposals are based on three pillars: minimum capital requirements; supervisory review and market discipline. The proposals also recognise that the ‘‘one size fits all’’ approach of the 1988 capital accord is no longer appropriate and a menu approach, which comprises varying levels of complexity, is proposed. For banks and investment firms this means that institutions will be able to adopt the approach most suited to their management framework. On the credit risk side, three approaches are proposed; a standard approach, a foundation internal ratings based (IRB) approach and advanced IRB. For the first time operational risk is being specifically addressed. This too will have three potential approaches, basic indicator, standardised and advanced measurement. The proposals in relation to market discipline (whereby market analysts, investors and other information users can, potentially, influence the risk appetite of institutions) will also require institutions to disclose a wide range of information in relation to their capital adequacy. For supervisors, greater emphasis is being placed on qualitative aspects of supervision. While data in accordance with minimum capital requirements will continue to be the basis of satisfying minimum capital requirements, supervisors will be required to assess not only the risk management controls and procedures in place but also the quality and reliability of data used by institutions. As the complexity of the data and products used by institutions increases, so too will the need for supervisors to maintain an adequate level of supervisory expertise and resources to meet these new challenges. During the year, the Bank participated in a number of EU working groups to consider the proposed new framework and 71 Annual Report 2001 carried out a detailed consultation process in the industry in relation to the new proposals. At the same time, the Bank participated in a number of conferences, both national and international, aimed at ensuring that details of the proposals were discussed and analysed with a view to understanding and gauging the impact of the new proposals. The Bank also made a number of presentations to industry and representative bodies outlining the proposals and in order to ensure that, as these proposals were changed or modified, industry was kept fully up to date with developments. Prevention of Money Laundering New Guidance Notes The Criminal Justice Act, 1994 (the 1994 Act), which became effective from 2 May 1995, is designed to aid the prevention of money laundering in line with an EU directive in this area and in line with FATF (the Financial Action Task Force — an anti-money laundering group established under the auspices of the OECD) recommendations. The 1994 Act makes money laundering an offence. Definition Money laundering is broadly defined as the concealment, disguise, conversion or removal from the State of any property including money which is, or represents, the proceeds of drug trafficking or other criminal activity (including tax evasion), for the purpose of avoiding prosecution or the making or enforcement of a confiscation order. Providing assistance to a person engaged in money laundering is also an offence. The 1994 Act places an obligation on the Bank to report its suspicions that a financial institution under the Bank’s supervision may have committed an offence. In addition, institutions, their directors, employees and officers have specific obligations to report to the Garda Sı́ochána where they suspect that an offence of money laundering has been, or is being, committed in relation to their business or where an offence dealing with customer identification and record retention has been, or is being, committed. The supervision departments were involved in a review of the Money Laundering Guidance Notes for credit and financial institutions originally issued in April 1995. The revised Guidance Notes for Credit Institutions, which were approved by the Money Laundering Steering Committee, chaired by the Department of Finance, were issued by the Bank to all credit institutions in November 2001. The revised guidance notes reflect amendments to the anti-money laundering legislation which have been made since 1995 (e.g. regulations which have designated additional institutions which are subject to the legislation, provisions in the Criminal Justice Miscellaneous Provisions Act, 1997 on education and training obligations) as well as expanding on the guidance provided in certain areas. 72 Annual Report 2001 In the new Guidance Notes specific reference is made to tax offences as an example of a criminal activity frequently associated with money laundering. Guidance is provided on how such offences fit within the money laundering offence together with the obligation to report such suspicious transactions. In addition, a new identification form which contains photographic identification verified by the Gardai will be of benefit both to persons who do not hold a passport or driving licence and to credit institutions in the account opening process. Finally, guidance is provided on specific identification methods which can be used where business is conducted on a non face-to-face basis (including internet banking). Following the events of 11 September 2001 a number of initiatives occurred in the area of terrorist financing and money laundering. For example, institutions were requested to examine their records for the existence of relationships with any individuals who were under investigation in connection with these events with the aim of reporting them to the Garda Bureau of Fraud Investigation, the national financial intelligence unit to which all suspected money laundering transactions are reported. In addition, FATF held an extraordinary meeting in Washington in October 2001 to consider the appropriate action which should be taken following the events of 11 September. The Bank participated in this meeting at which a set of eight Special Recommendations on Terrorist Financing were agreed. A number of the recommendations relate to legal measures, specifically the implementation of the UN Convention on Suppression of Financing of Terrorism. The Bank wrote to institutions advising them of the new FATF recommendations on Terrorist Financing. Events of 11 September Auditing and Accounting Related Issues During 2001 the practical implementation of certain recommendations contained in the Report of the Review Group on Auditing was progressed in a number of areas. In particular there has been increased communication between the Bank and external auditors/the accountancy profession. The Bank provided assistance to the auditing profession in the development of guidance on the audit of banks and is providing similar assistance in the development of guidance on the audit of investment businesses. A Liaison Group has also been established between the Bank and the accountancy profession which will provide a forum for discussing matters of mutual interest regarding financial institutions. Implementation of Review Group Recommendations The Bank has nominated a representative to the interim Board of the Irish Auditing and Accountancy Supervisory Authority (IAASA). The establishment of this Oversight Board was one of the key recommendations contained in the Report of the Review Group on Auditing. It will supervise the regulation by the accountancy bodies of their members’ professional standards. 73 Annual Report 2001 New legislation is currently in progress to establish IAASA on a statutory footing. The Bank’s nominated representative to the Accountancy Foundation in the UK, which was established to provide nonstatutory independent regulation of the accountancy profession in the UK and the Republic of Ireland, continued to contribute to the workings of this body during 2001. Client Money Rules Updated Requirements In April 2001, a consultation paper setting out proposed updated client money requirements was published by the Bank. Comments received from industry representatives are under consideration by the Bank. It is anticipated that updated requirements will be issued during the course of 2002. Financial Stability Coordination Committee Identifying Areas of Fragility A Financial Stability Coordination Committee, chaired by the Bank’s Director General, monitors issues relating to financial stability. This requires input from the Supervision Division and the Monetary Policy and Economic areas of the Bank, which helps it to identify areas of fragility within the economy and the financial system which could impact on stability. Consumer Protection Continued Development A full description of the Bank’s consumer protection role is contained in the 2000 Annual Report. The Bank continued to develop the area of consumer protection over the last year including the extension of conduct of business rules, advertising requirements, client money requirements and complaints procedures. Unauthorised Activities and Complaints Thirteen Warning Notices Issues 74 It is an offence for any person or firm to provide investment business services without an appropriate authorisation. Prompt investigations are carried out by the Bank where there is reason to believe a person or firm is carrying out unauthorised activities. During the year ended 31 December 2001, thirteen warning notices concerning 22 firms carrying on unauthorised investment business were published, bringing the total to 41 notices concerning 82 firms since the power to publish such notices was given to the Bank in August 1998. Any complaints relating to firms under its supervision are dealt with by the Bank or referred to the appropriate ombudsman, where necessary. The Bank operates a Lo-call line (1890 200 469) providing a facility to the public to enquire whether or not a firm is authorised by the Bank. The register of authorised entities maintained by the Bank is also available for inspection by the public on the Bank’s premises. Annual Report 2001 Foreign Firms Providing Services To Irish Clients It is an offence for banks or firms not established in Ireland to take deposits from the public or to provide investment services to Irish consumers or to market units in collective investment undertakings without having the appropriate authorisation. EU legislation provides for a system of ‘passporting’ of services. This means that European Economic Area investment firms or banks authorised in their home jurisdiction may provide services in Ireland without the need to obtain a further authorisation from the Bank. A notification procedure is in place whereby the authorities in other Member States notify the Bank when an institution intends to provide services into Ireland. The Bank maintains registers of EU investment firms, banks and collective investment schemes for this purpose. If in any doubt, consumers are advised to contact the Bank to ascertain the status of any institution or scheme. Advice to Consumers The Bank’s Advice To Consumers Be aware of the danger signs when presented with an investment opportunity: ● be suspicious if the investment looks too good to be true; ● be wary of any firm which tells you the investment must be taken advantage of immediately; ● always check that the firm has been authorised; ● do not be pushed into hasty decisions; and ● remember that an investor who invests with an unauthorised firm will not be eligible for compensation under the Investor Compensation Act, 1998. ● Public Enquiries to the Bank: Lo-call 1890 200 469 Deposit Protection As described in the Bank’s 2000 Annual Report the Bank administers a deposit protection scheme funded by credit institutions (banks and building societies). No compensation has been paid to date under this scheme. No Payments Investor Compensation The Bank is the supervisory authority for the purposes of the Investor Compensation Act, 1998. Its functions in this regard include the making of a determination that an investment firm (including an insurance intermediary) is unable to meet its obligations to its clients and has no reasonable foreseeable opportunity of being able to do so. The Investor Compensation Company Limited (ICCL) is responsible for the payment of compensation to private clients of failed investment business firms. 75 Annual Report 2001 Clients of W & R Morrogh, a stockbroking firm currently in receivership, had submitted 2,563 applications for payment of compensation before the closing date of 20 December 2001. Since the appointment of a liquidator, who is also the Administrator for the purpose of the Investor Compensation Act, 1998, to Money Markets International Stockbrokers Limited, the ICCL has received 305 claims from former clients of the firm. By the end of 2001 the Administrator had certified 280 of these claims and compensation has been paid by the ICCL. The remaining claims are being assessed by the Administrator. One claim for compensation arising from the collapse of Andrew Casey, the Cork-based insurance broker which ceased trading in July 1999, was outstanding at year-end. Supervision of Credit Institutions Responsibilities The Bank is responsible for the licensing and prudential supervision of all credit institutions incorporated in the State and branches of credit institutions from outside the European Economic Area (EEA) established in Ireland. EEA credit institutions are entitled, in accordance with EU legislation, to establish in Ireland either on a branch basis or to provide services on a cross-border basis (i.e. without having a presence in Ireland). Passporting of services in this way is subject to a notification procedure through the home country regulator to the Bank. The home country regulator is responsible for prudential supervision, although, in the case of branches established in Ireland, responsibility for the supervision of liquidity is shared between the Bank and the home regulator. The Bank is also responsible for ensuring that EEA branches are in compliance with Irish anti-money laundering procedures. Statistics are collected from the Irish branches of EEA credit institutions on a monthly basis and the Bank holds regular review meetings with branch management. Work was also carried out in preparing material for Oireachtas Committees and Tribunals and assisting the Department of Finance in drafting legislation relating to financial services. Inspections and Reviews More Inspections and Reviews 76 Thirteen inspections and sixty-five reviews of credit institutions and related entities were completed during the year; twelve reviews (on-site) of institutions’ internal auditing functions and nineteen reviews (on-site) of institutions’ adherence to regulatory reporting requirements were undertaken. Annual Report 2001 Chart 2: Onsite-Inspections and Reviews of Credit Institutions 140 120 100 80 60 40 20 0 1996 1997 1998 1999 2000 2001 Licence Changes Thirteen banking licences were issued in 2001 (seven of which reflect a name change and two of which reflect a change of legal status). Ten banking licences were revoked (seven of which reflect a name change) — all at the request of the licence holders. The total number of credit institutions supervised by the Bank at end-2001 was fifty-five. Thirteen Licences Issued In 2001, five EU credit institutions established branches in Ireland; one branch of an EU bank closed with the business being transferred to the Irish banking subsidiary of the bank. This brought the total number of EU branches operating in Ireland at end-December 2001 to thirty-two. Two bureaux de change10 applications were authorised during the year bringing the total to fourteen at end-2001. 10 Under Part V of the Central Bank Act, 1997 (the Act) the Bank has responsibility for authorisation and supervision of bureaux de change. In accordance with an FATF recommendation on authorisation and supervision of bureaux de change the specific objective and focus of the Bank’s supervision, as set out in the Act, is limited to ensuring that bureaux de change effectively implement the anti-money laundering provisions of the Criminal Justice Act, 1994. Accordingly, the Bank has put in place Authorisation Requirements and Standards for Bureaux de Change which focus on ownership, board and management and anti-money laundering procedures and controls. 77 Annual Report 2001 Chart 3: Authorised Credit Institutions at end 2001 140 120 100 80 60 40 20 0 Licensed Banks Other Credit Institutions Building Societies EU Branches Cross-Border Deposit Cross-Border Deposit Non-Deposit Codes of Conduct New Codes The following codes of conduct for the banking industry were prescribed for all credit institutions operating in the State, after consultation with the Minister for Finance: ● Code of Conduct for the Investment Business of Credit Institutions — outlining requirements governing any investment business conducted by credit institutions. ● Advertising Requirements applicable to Credit Institutions — outlining requirements applicable to the different types of product being advertised by credit institutions. ● Code of Practice for Credit Institutions — outlining standards of good banking practice to be complied with in providing general banking services to consumers. Supervision of Non-Credit Institutions Collective Investment Schemes Number of Funds being Processed Reaches All-Time High 78 Collective Investment Schemes are established for the purpose of investing the pooled funds of investors (held as units or shares in the schemes) in investment assets in accordance with investment objectives published in a prospectus. The Bank is responsible for the authorisation and supervision of collective investment schemes established in Ireland. The Bank’s role in this area covers the schemes and firms based in Ireland which provide services to such schemes (e.g. administration and trustee companies). The regulation of the schemes consists of a detailed assessment of their promoter(s) and other related parties. It also involves the imposition and enforcement of detailed supervisory requirements which are set out in Notices prepared by the Bank and which cover, inter alia, investment and borrowing restrictions Annual Report 2001 and disclosure of information to investors. The full text of these Notices is available on the Bank’s website. During the year, 176 schemes (696 including sub-funds)11 were authorised, compared with 126 schemes (563 including subfunds) in the corresponding period in 2000. The number of schemes being processed at end-December 2001 was 35 (127 including sub-funds). The number of funds (including sub-funds) being processed reached an all-time high of 287 in April 2001. A monthly average of 775 amendments to existing funds were received during the period under review. The level of net assets under management by authorised collective investment schemes reached \285.2 billion by end-December 2001. Chart 4: Net Asset Value of Collective Investment Schemes 300000 250000 €m 200000 150000 100000 50000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 During 2001 the Bank carried out 51 on-site inspections of service providers (i.e. administration companies and trustee companies). These inspections were intended to identify areas requiring closer monitoring. Guidance notes are issued by the Bank from time to time to provide direction on issues relating to the funds industry. The Bank issued a revised guidance note in December 2001 which introduced stricter requirements in relation to investment by Irish authorised schemes in overseas schemes established in jurisdictions which allow unregulated schemes. All guidance notes are available on the Bank’s website. Stricter Requirements During the year, the Bank had discussions with the industry to agree changes to the procedures and processes in the authorisation of collective investment schemes with a view to Changes to Authorisation Regime 11 An umbrella fund is a collective investment scheme which is divided into a number of individual sub-funds, each of which has its own investment objectives and policies. 79 Annual Report 2001 increasing efficiencies within the authorisation regime. A joint position paper between the Bank and the Dublin Funds Industry Association has been drafted and issued to the industry for agreement. The proposals include introducing a ‘fast track’ authorisation process for cloned/similar funds and standardising the constitutional document for schemes. The application form for authorisation of schemes has been revised and expanded. In addition, it is intended that the scheme documentation and application will be pre-vetted according to agreed procedures by the scheme’s legal representative prior to submission to the Bank. Amendments to EU Directive 85/611 regarding Undertakings for Collective Investment in Transferable Securities (UCITS) entered into force in February 2002 by way of two separate directives. At the request of the Department of Enterprise, Trade & Employment, the Bank drafted amendments to the UCITS Regulations in order to implement the first amending Directive. The Bank participated in the IFSC Clearing House Group (CHG), a body established to oversee and promote developments in the IFSC. It also participated in the IFSC Funds Group (a working group of the CHG) under the aegis of which the Bank was actively engaged in the work of sub-committees established to consider possible changes to collective investment scheme legislation and to develop the asset management sector respectively. Approval and Supervision of Exchanges Two Futures and Option Exchanges The supervision of the Irish Stock Exchange is focussed on approval of its rules while supervision of its member firms (i.e. stockbrokers) follows the prudential supervisory process described earlier. There are two futures and options exchanges operating in Ireland — FINEX Europe and the New York Futures Exchange. These exchanges are divisions of the New York Board of Trade which is regulated in the US by the Commodity Futures Trading Commission. The Bank has developed a mechanism for the approval of rules and the supervision of the members in conjunction with the Commission. Authorisations and Revocations of firms During 2001, one authorisation was issued under Section 18 of the Stock Exchange Act, 1995. The authorisation of one member firm of the Irish Stock Exchange was revoked at the request of the firm during this period. Fifty-six firms were authorised to provide investment services under Section 10 of the Investment Intermediaries Act, 1995 (IIA). Seventeen authorisations were revoked, at the request of the firms involved, during this period. Nine hundred and twelve 80 Annual Report 2001 applications for authorisation were under consideration at 31 December 2001 of which eight hundred and ninety-two related to applications by retail intermediaries. Seven hundred and sixty of these firms were existing intermediaries on 1 April 2001 (the date on which the Bank assumed responsibility for insurance intermediaries). Those firms were enabled to continue operations pending determination of their application. Twenty applications for authorisation by non-retail intermediaries were under consideration at 31 December 2001. Inspections and Reviews Ongoing supervision of authorised investment and stockbroking firms throughout the year took the form of on-site inspections, formal review meetings, correspondence and communication on specific issues. During the year nineteen inspections and eightysix review meetings were held. Resources continued to be directed at dealing with the high level of new applications for authorisation, developments in the stockbroking industry and a number of issues relating to individual stockbroking and investment firms, the most significant of which was the appointment of a receiver to the stockbroking firm W & R Morrogh, following the collapse of the firm in the first half of 2001. Nineteen Inspections and Eighty-Six Reviews Money Laundering Reports During 2001, the Bank made eight reports to the Garda Sı́ochána in respect of firms under its supervision. The reports were mainly in respect of failure to establish the identity of clients, failure to retain evidence of identification checks undertaken or failure to adopt measures to prevent and detect the commission of a money laundering offence. Eight Reports to Garda Sı́ochána Chart 5: Number of Firms Authorised under Section 10 of the Investment Intermediaries Act, 1995 300 250 200 150 100 50 0 1996 1997 1998 1999 2000 2001 Total (less revocations) 81 Annual Report 2001 Retail Intermediaries New Responsibilities Under the provisions of the Insurance Act, 2000, the Bank assumed responsibility for the supervision and regulation of insurance intermediaries (both life and non-life) on 1 April 2001. Insurance intermediaries are now regulated under the Investment Intermediaries Act, 1995. There are three categories of investment and insurance intermediary under the new supervisory regime: ● Restricted Intermediary, which may only receive and transmit orders and provide advice on investment instruments available from the product producer from whom the Restricted Intermediary holds a written letter of appointment. ● Authorised Advisor, which also provides advice on investment instruments without the necessity to hold a letter of appointment. The firm is obliged to recommend the most suitable investment product available in the market, regardless of whether or not the firm holds an appointment from the relevant product producer. ● Authorised Cash Handler, which may provide a wider range of investment business services. They may be authorised to act on a discretionary basis on behalf of clients and can accept cash in wider circumstances. Registration of Intermediaries The Insurance Act, 2000 provided that insurance intermediaries who held an appointment from a product producer on the day before the Act came into effect i.e. 31 March 2001, could continue to act as insurance intermediaries provided they registered with or applied to the Bank for authorisation by 30 June 2001. Restricted intermediaries were deemed authorised and the remaining firms stood authorised pending a decision on their application for authorisation by the Bank. Any firm that did not provide the required information to the Bank by 30 June 2001 was obliged to cease providing insurance services. Inspections Resources have been concentrated on the review of the registration forms, the processing of applications for authorisation and the development of a database for the sector. Five on-site inspections were conducted during the period under review — four of intermediaries and one of an approved professional body. 82 Annual Report 2001 Chart 6: Review Meetings and Inspections of Regulated Entities other than Credit Institutions (Service Providers, Investment Firms and RAIPI's) 250 200 150 100 50 0 1996 1997 1998 On-site Inspections 1999 2000 2001 Review Meetings Handbooks In May 2001 the Bank issued two draft Handbooks, one for Authorised Advisors and one for Restricted Intermediaries, which set out the proposed rules and requirements with which each category should comply. The Handbooks contained codes of conduct, client money rules, advertising requirements, books and records requirements and general supervisory requirements. Following wide-ranging and detailed consultation processes, the Handbooks were issued to the insurance intermediaries and became effective on 1 November 2001. The full text of these Handbooks is available on the Bank’s website. Two Handbooks Issued Approved Professional Bodies The Bank has approved five accountancy bodies as Approved Professional Bodies under the Investment Intermediaries Act, 1995. Members of these bodies can become certified persons which allows them to carry on investment business services or provide investment business services or investment advice on an incidental basis. International Issues Recent decades have been marked by the transformation of international financial markets with globalisation of the financial services industry, functional integration of banking and securities business and financial innovation. The focus of regulation is therefore increasingly on the international dimension in addition to the domestic one. The Bank is part of an international network, with contact and interfaces with the global economy, Increasing Focus on International Dimension 83 Annual Report 2001 international financial markets and other banking and investment firm supervisors. The Bank’s relationship with other bodies in the conduct of its supervision functions is governed by statutory obligations in respect of the sharing of information. International Committees The Bank participates in meetings of: (i) the Banking Supervision Committee which is a highlevel consultative committee of the European Central Bank that focuses on supervision of credit institutions; (ii) the Banking Advisory Committee, which deals chiefly with issues relating to the development and implementation of EU law in banking supervision; (iii) the Groupe de Contact of EU banking supervisors which meets to exchange views on supervisory policies and practices in Member States; (iv) the EU High Level Securities Supervisors Committee which deals with issues relating to investment business; (v) the Enlarged Contact Group on the supervision of collective investment schemes which deals with the supervision of the funds industry; (vi) the Committee of European Securities Regulators (CESR), established by the EU Commission on 6 June 2001, following the recommendations of the Committee of Wise Men on the Regulation of European Securities Markets (Lamfalussy). The role of the Committee, inter alia, is to improve regulatory coordination and act as an advisor to the Commission in the field of securities regulation. CESR has replaced the Forum of European Securities Regulations (FESCO); (vii) the International Organisation of Securities Commissions (IOSCO) which is the international representative body for securities regulators with in excess of 100 members. Bank representatives also participate in European Central Bank committees and working groups and in a number of EU working groups. Bank joins International Organisation of Securities Commissions 84 During the period, the Bank was invited to become a member of IOSCO Standing Committee 5 on Investment Management (SC5). SC5 deals almost exclusively with issues concerning the regulation, management and distribution of collective investment schemes. In addition to regulators from the USA, Germany and the United Kingdom with large domestic markets, members are drawn from the most important international domiciles for Annual Report 2001 schemes and include Luxembourg, Hong Kong and the Channel Islands (Jersey). The first meeting of SC5 attended by the Bank was held in October, 2001. The Bank also participated in the annual meeting of the Enlarged Contact Group on the supervision of Collective Investment Schemes. This Group comprises EU Members together with the United States, Hong Kong and other countries with a significant mutual funds industry. It addresses detailed questions raised in advance by the members. Memoranda of Understanding Cooperation with other supervisory authorities is organised by establishing working relations through formal bilateral Memoranda of Understanding or other written statement or exchange of correspondence which sets out respective supervisory roles and responsibilities. At the end of 2001, the Bank was a party to Memoranda of Understanding with 11 different jurisdictions. The Bank held discussions during the year with a number of foreign supervisory authorities. This included visits from 12 overseas regulatory agencies seeking technical assistance. Management and Support Services Human Resources With the slowdown in economic growth in the latter part of 2001, the Bank began to experience a significant drop in staff turnover. Turnover for the year was 9.3 per cent compared with 12.9 per cent in 2000. Staff numbers increased by 66.5 or 9.4 per cent to reach 773.5 at end-December 2001. The increase mainly reflects the continued expansion of the Bank’s supervisory responsibilities and a temporary increase in staff numbers in the Bank’s Currency Centre to deal with the preparation for and launch of the euro currency. Staff Turnover Declined Of the total staff employed at end 2001, 538.5 were clerical, administrative and professional staff and 235 were industrial, craft and service staff. Ten staff were on secondment to the ECB. Staff numbers continue to reflect the Bank’s practice of providing services such as security, engineering, catering and cleaning on an in-house basis. The majority of Bank staff are permanent fulltime employees on open contracts. Approximately 55 per cent of Bank staff are female and almost 80 per cent of staff are under 50 years of age, with a Bank average age of 39 years. 85 Annual Report 2001 Table 7: Staff Serving at Year End Department Governor & Management Board 2000 2001 7 7 Financial Financial Control Payments and Securities Settlements Financial Markets 45 34 27 41 39 29.5 Economic Services European Monetary Affairs & International Relations Economic Analysis, Research and Publications Monetary Policy & Statistics 14 25 28 14 21.5 28 Supervision Banking Supervision RED IFSC Funds Supervision Securites and Exchanges Supervision RIIS 33 * 59 56 * 35 16 64.5 38.5 31 Currency Services Currency Issue Currency Production 89 73 106.5 76 Resources Human Resources and Planning Information Systems Corporate Services Engineering Services 32 34 118 24 31.5 34 127.5 25 Audit Internal Audit 9 8 Total 707 773.5 Of which: Clerical, Administrative and Professional Staff Industrial, Craft and Service Staff 485 222 538.5 235 *Departments established 13 July 2001. All figures are full-time equivalent direct employees of the Bank. Remuneration Policies Based on Appropriate Comparators or Industry Norms The remuneration policy for staff is on the basis of appropriate comparators in the Public Sector or by reference to relevant industry norms. At present the Bank is undertaking a benchmarking pay review for clerical, administrative and professional staff which will examine roles, duties, responsibilities and remuneration structures in comparable organisations in both the public and private sectors. The Bank applies the terms of national pay agreements to all categories of staff. Collective agreements have been concluded with all groups of staff on changes in working arrangements related to ESCB activities and on changes in work practices related to the changeover to euro notes and coins. Training and Development Promotion of Academic/Professional Training 86 Under the Bank’s Academic and Professional Training Scheme, 10 staff successfully completed professional or university degree courses by attendance at evening lectures and by home study. A further 15 staff members joined the scheme. This scheme continues to cover a wide range of courses for university degrees and qualifications of professional bodies. Three staff were successful in various stages of the Institute of Bankers in Ireland Annual Report 2001 examination. During the year a combination of internal and external courses in management, interpersonal, technical and language skills was provided. Bank staff attended courses/seminars at the Federal Reserve Bank of New York, Banque de France, Deutsche Bundesbank and participated in the joint training programmes involving the European Central Bank and the other central banks of the European Union. The Bank facilitates work experience and temporary work placements for a small number of Irish students. Equal Employment Opportunities The Bank is an equal opportunities employer with recruitment and employment policies administered on this basis. Training programmes, academic training facilities, promotion competitions, atypical working and career break schemes are available to staff serving in grades to which the schemes are applicable. Employment of People With Disabilities The Bank is committed to observing the Government’s objective for the employment of a minimum target of 3 per cent of people with disabilities within the Public Service. As at 31 December 2001, the percentage of such staff employed within the Bank was 5.2 per cent. Work/Life Balance The Bank recognises the growing social concern for employees to have a balance between paid work and the demands of personal and family life. The Bank has a range of flexible and atypical working arrangements such as job-sharing, part-time work, career break, special leave and short-term contracts. Range of Flexible Arrangements Safety, Health and Welfare at Work Act, 1989 The Bank actively promotes a safe and healthy working environment in accordance with the terms of the Safety, Health and Welfare at Work Act, 1989. Technical Assistance During the year, staff participated in IMF technical assistance programmes for Gibraltar and Georgia. Following on from the previous year, the Bank provided further bi-lateral technical assistance to the Central Bank of Malta. The Bank hosted study and information visits by officials from the Isle of Man Financial Supervision Commission, Kazakhstani Regulatory Authority, National Bank of Kazakhstan, Jersey Financial Services Authority, Bank of Zimbabwe, Bank of Egypt, China Securities Regulatory Wide Range of Assistance Given 87 Annual Report 2001 Commission, Bank of Botswana, Financial Supervisory Service of Korea, Korean Securities Exchange, New York Federal Exchange, South Africa Regulatory Authority, Chicago Federal Exchange, Bank of Finland, European Central Bank and Danmarks National Bank. Information visits were also arranged for the following accession countries: Bank of Estonia, Central Bank of Malta, Maltese Regulatory Authority, National Bank of Poland, Polish Ministry of Finance, National Bank of Hungary, Bank of Slovenia, and the Estonian Regulatory Authorities. Strategic Planning and Organisation Structure The Bank’s planning and budgeting process incorporates an annual plan, annual manpower plan, annual budget, capital expenditure programme and annual review. There is also a longer-term strategic dimension to the planning process. In this context, the major issues impacting on the planning processes at present are the Bank’s evolving role within the Eurosystem and the developing and future responsibilities of the Bank in the area of financial regulation and supervision. Media and External Communications Euro Focus to Media Contact The Bank’s Press Office provided an ongoing information service to the domestic and international media. About onethird of all media queries into the Press Office in 2001 were from the international press. Activities included regular press briefings, interviews by the Governor and other senior personnel and various media events, which were mainly eurorelated and are covered in detail in the ‘Changeover to the Euro’ article in this annual report. Governing Council Meeting in Dublin The Press Office was involved in the organisation of the meeting of the Governing Council of the European Central Bank, held in Dublin on 21 June 2001. The related press conference held in Dublin Castle was attended by more than 100 visiting journalists from outside Ireland in addition to domestic media. The Bank’s Press Office provided various public information services during the year and was involved in a range of educational and other external communication activities. As part of its role with the ECB’s External Communications Committee, the Press Office also coordinated and managed media relations on a domestic basis for the ECB and the ESCB. The Bank’s Press Office provided an ongoing information service to the domestic and international media. 88 Annual Report 2001 Queues outside the Central Bank on the first day of the changeover. Legal Services The principal focus of the Legal Unit in 2001 was the finalisation of legal arrangements for the changeover to euro notes and coin (with particular reference to their issue and distribution), and the allocation of the Eurosystem’s monetary income, as well as participation in the ongoing refinement and adaptation of the ECB’s legal framework and in a review of proposed new central bank legislation. Preparations for the extension of provisions of the Freedom of Information Act, 1997 to cover the Bank were initiated during the year. In addition, the Bank’s role in administering EU legal sanctions against the financing of terrorism was intensified in 2001. Legal Aspects to the Euro Changeover Information Systems The Bank carried out a high level review of its Information Technology Strategy during the year with the assistance of external consultants. While the plan will have to be revisited to accommodate the establishment of a Single Regulatory Authority, the Bank’s IT plans for 2002 are consistent with the review findings. Key priorities for upcoming IT projects include development of an integrated reserves management system linking front, middle and back office operations; the development of supervision systems, cost account systems and significant upgrades to the network infrastructure. Review Undertaken During 2001 there was a significant concentration on systems in the Currency Centre in conjunction with preparations for the launch of the euro. Connections were made between Note Processing machines and the Bank’s Local Area Network and systems for serial number recording and Note Discrepancies were implemented. The ESCB network was extended to the Currency Centre and components of common ESCB systems for Currency Information and Counterfeit Monitoring were installed. Major upgrades were installed for common ESCB systems for 89 Annual Report 2001 Reserves Management and Open Market Tender Operations and the capacity of the underlying ESCB network was increased. Supervision and Regulatory systems were expanded and enhanced in line with increases in business activity and responsibilities. A database system to handle the new Investment and Insurance Intermediaries function was implemented in midyear. The upgrading of PC clients to Pentium level hardware with Windows 2000 and Office 2000 software was completed and additional automated network management and administration procedures were put in place. This is given under the seal of the Central Bank of Ireland. The 4th day of June, 2002. John Hurley, Governor Brian Halpin, Secretary 90 Annual Report 2001 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, as a consequence of the unique nature of some of its operations as a central bank, and as a member of the Eurosystem, some 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 Act 1989, Section 19, the Bank is required to prepare and submit its Statement of Accounts to the Comptroller and Auditor General within six months of every yearend. 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, 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. Following a tender procedure in accordance with the EU rules, PricewaterhouseCoopers was appointed as independent external auditor of the Bank for 2001. As a member of the Eurosystem, the Bank is obliged to comply 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 (NCB) and then redistributed according to each NCB’s share in the capital of the ECB subject to any decision taken by the Governing Council of the ECB pursuant to powers vested in the Governing Council under the Treaty. During the initial years of monetary union, namely 1999-2001, the net effect of this pooling and redistribution of monetary income was designed so as not to have a material impact on NCBs’ profits. For 2001 the Bank paid a net \231,335 (net receipt in 2000 \252,028) to the pool. 91 Annual Report 2001 From 2002 onwards, a revised system for monetary income allocation was required given that euro banknotes are now being issued on behalf of the Eurosystem as a whole rather than a situation where NCBs issued national banknotes and earned monetary income in their own right. As NCBs could be expected to undergo significant changes in their relative income positions following the issue of euro banknotes, against which monetary income is earned, the Treaty provided for a gradual progression to the ultimate situation where monetary income would be allocated according to each NCB’s share in the capital of the ECB. The agreed scheme provides for a six-year smoothing arrangement, over the period 2002-2007. Prompt Payment of Accounts 2001 The Bank is listed in the schedule to the Prompt Payment of Accounts Act, 1997 and is therefore obliged to comply with the terms of that Act. In reporting under the requirements of S12 of the Act, the Bank has taken account of the Guidelines issued by the Minister for Enterprise, Trade and Employment. During the year the Bank continued to operate and refine as required its monitoring procedures which are designed to reduce the incidence of late payments. The rate of interest applied on late payments during the year was 10.74 per cent per annum. Legislation is pending to reduce allowable days from 45 to 30 and to increase the range of suppliers covered by the Act to include those based in all EU countries. Details of interest payments made to suppliers during 2001 in compliance with the provisions of the Prompt Payments of Accounts Act, 1997 were as follows: ● ● ● ● ● ● Total number of late payments in excess of \300 Total value of late payments in excess of \300 Total value of all late payments (A) Total value of all payments (B) A as % of B Total amount of interest paid on late payments 70 \409,381 \417,514 \19,773,327 2.11% \1,537 Financial Results for 2001 Profit for the year to 31 December 2001 before unrealised gains on investments amounted to \563.0 million, an increase of \42.5 million over the 2000 figure. There was an increase in interest income of \153.9 million mainly attributable to increases in interest receivable on securities of \108.2 million and monetary policy operations of \172.1 million. This was offset by a decrease of \42.8 million in interest received on deposits, \67.4 million in premium\discounts on securities and \12.0 million in interest received on intra-Eurosystem balances. The increase in interest payable of \150.6 million is mainly attributable to an increase in 92 Annual Report 2001 interest payable to credit institutions of \33.2 million and intraEurosystem balances of \144.1 million partly offset by a decrease in interest payable on Government deposits of \18.2 million. The net result of financial operations, write downs and risk provisions increased by \63.2 million. Total operating costs, that is pay, non-pay, banknote raw materials and depreciation, charged against profit increased by \21.6 million, or 45.3 per cent in 2001. Pay costs increased by \3.6 million (13.0 per cent), while other operating costs increased by \17.9 million (90.9 per cent). These increases reflect, in particular, increased staff numbers in the Supervisory departments and Currency Centre, and the costs of producing stocks of euro notes and coin in preparation for the euro cash changeover date of 1 January 2002 — see Activities Chapter. A detailed analysis of the Bank’s operating costs is given in Note 7 of the Statement of Accounts. After transfers to reserves, the Bank’s Surplus Income of \530.6 million accrues to the Exchequer. The corresponding figure for 2000 was \451.3 million. Table 1: Summary Profit and Loss Account \million 31 Dec 2001 31 Dec 2000 Change Interest Income Interest Expense Net Interest Income 886.1 498.3 387.7 732.2 347.7 384.4 153.9 150.6 3.3 Net result of financial operations, write downs and risk provisions Income from fees and commissions Income from equity shares and participating interests Net Result of Pooling of Monetary Income Other Income Total Net Income 225.0 2.4 17.1 (0.2) 0.2 632.2 161.8 2.3 19.0 0.3 0.4 568.1 63.2 0.1 (1.8) (0.5) (0.2) 64.1 64.4 4.8 69.2 43.2 4.4 47.6 21.2 0.3 21.6 563.0 520.5 42.5 Total Administration Costs Depreciation Total Operating Costs Profit (income less expenses and operating costs) Figures may not sum due to rounding. Table 2: History of Profit 1996-2001 \m 1996 1997 1998 1999 152.6 146.5 224.7 248.0 2000 520.5 2001 563.0 Balance Sheet Developments The total value of the balance sheet increased by \5,210 million in 2001. Claims on non-euro-area residents denominated in foreign currency increased by \85 million due mainly to capital and exchange rate appreciation and portfolio investment activities. 93 Annual Report 2001 Lending to euro area credit institutions related to monetary policy operations in euro increased by \4,794 million. This was mainly due to an increase in short-term advances to domestic credit institutions — reflecting the impact of ESCB monetary policy operations and the increase in Government deposits at the Bank — see below. The Bank’s claim on the ECB arising from the transfer of foreign reserve assets to the ECB remains unchanged at \425 million. The foreign reserve assets involved continue to be managed by the Bank on behalf of the ECB. Banknotes in circulation decreased by \677 million. Liabilities to euro area credit institutions related to monetary policy operations in euro increased by \1,080 million mainly due to higher average minimum reserve requirements. Liabilities to other euro area residents denominated in euro, essentially Government deposits, increased by \3,013 million. The increase was mainly due to the placement of a deposit of \2,801 million which was held in the name of the National Pension Reserve Fund. Intra-Eurosystem net liabilities to the ECB were \5,113 million at end-2001 compared to \4,000 million on the same basis at end-2000. Changes in this item reflect cross-border payments made by financial institutions in euro through the ESCB’s large-value payments system — TARGET.1 There was an increase of \85 million in Revaluation Accounts, mainly reflecting valuation gains in foreign assets as a result of the depreciation of the euro over the period. Capital and Reserves increased by \12 million as a result of appropriations from profits of \28 million to the General Reserve, \4 million to the Superannuation Reserve and transfers from the Currency Reserve of \21 million arising from the costs of production of euro coin. Redemption of Irish Banknotes Irish banknotes ceased to be legal tender with effect from 9 February 2002. It is anticipated that a significant amount of these notes will never be returned to the Bank for redemption. This will result in a windfall profit to the Bank. As announced by the Minister for Finance in the Budget speech on 5 December 2001, it is estimated that the benefit to the Bank’s profits will be some \240 million in 2002. The Minister proposed that this amount would be transferred to the Exchequer in 2002. Proceeds of Euro Coin Under Irish legislation the benefit from the coin issue by the Bank on behalf of the Minister for Finance has accrued over the years since 1943 to the ‘‘Currency Reserve’’ of the Bank. In other EU member states it is normal that the State would benefit directly from the issue of coinage. To coincide with the introduction of euro coin from 1 January 2002, legislation was passed in March 2002 to permit the proceeds from the issue of coin to be transferred directly to the Exchequer. This change in practice will benefit the Exchequer by some \300 million in 2002. 1 Trans-European Automated Real-time Gross settlement Express Transfer system. 94 Annual Report 2001 Statement of Accounts of the Central Bank of Ireland for the year ended 31 December 2001 95 Annual Report 2001 96 Annual Report 2001 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 amended by Section 14 of the Central Bank Act, 1989 and Sections 3, 4 and 5 of the Central Bank Act, 1998. Moreover, under Section 19 of the Central Bank Act, 1989, 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. 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 17 May 2002 97 Annual Report 2001 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 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. (b) Income Recognition The accruals concept in accounting for income and expenses 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) Plant and Machinery Other — 50 years — 5 to 15 years — 5 years (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. 1 Throughout this document the use of the term the European System of Central Banks (ESCB) refers to the fifteen National Central Banks (NCBs) of the Member States of the European Union plus the European Central Bank (ECB). The term ‘Eurosystem’ refers to the twelve National Central Banks of the participating Member States in the Monetary Union, plus the ECB. 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 and the Economic and Monetary Union Act, 1998. 98 Annual Report 2001 The equivalent of fifteen per cent of salaries and wages is appropriated from profit to the Superannuation Reserve of the Bank under the Central Bank of Ireland (Surplus Income) Regulations, 1943, (see further Note 32 (vi)). In addition, staff superannuation contributions to the Spouses’ and Children’s Pension Scheme are credited to the Superannuation Reserve (Note 32 (vii)). (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. (f) Foreign Currency Transactions Accounting transactions denominated in foreign currency are converted to euro equivalents at exchange rates prevailing at the 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 currencyby-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. (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. 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 a revaluation account. Unrealised losses are accounted for through the profit and loss account to the extent that they exceed revaluation gains brought forward from previous years. 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. 99 Annual Report 2001 (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 (Note 27) 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. 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 11), 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-Eurosystem Claims 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 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-2001 the three nonparticipating countries (U.K., Denmark and Sweden) were included in the multilateral netting process. (l) 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 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. 3 Trans-European Automated Real-time Gross settlement Express Transfer system. 100 Annual Report 2001 Profit and Loss and Appropriation Account for year ended 31 December 2001 2001 2000 Note \000 \000 Interest income 1 886,061 732,162 Interest expense 2 (498,343) (347,742) 387,718 384,420 162,501 NET INTEREST INCOME Realised gains (losses) arising from financial operations 3 233,376 Write-downs on financial assets and positions 3 (8,382) Net result of financial operations, write-downs and risk provisions (724) 224,994 161,777 Income from fees and commissions 4 2,392 2,304 Income from equity shares and participating interests 5 17,123 18,971 Net result of pooling of monetary income 6 (230) 252 231 419 632,228 568,143 Other income TOTAL NET INCOME Staff costs 7 (31,553) (27,916) Administrative expenses 7 (18,939) (10,554) Depreciation 7 (4,753) (4,430) Banknote raw materials 7 (13,956) (4,736) PROFIT FOR THE YEAR BEFORE UNREALISED GAINS 563,027 520,507 Unrealised gains 31 145,631 268,160 Transfers to revaluation account 31 (145,631) (268,160) Transfers to reserves 32 (32,388) (69,204) SURPLUS INCOME PAYABLE TO THE EXCHEQUER 8 530,639 451,303 The accounting policies together with Notes 1 to 41 form part of these accounts. Banc Ceannais na hÉireann John Hurley, Governor 17 May 2002 Brian Halpin, Deputy Director General 101 Annual Report 2001 Balance Sheet as at 31 December 2001 ASSETS 2001 2000 \000 \000 60,875 56,691 6,327,738 6,242,930 10 443,194 405,100 11 5,884,544 5,837,830 Claims on euro area residents in foreign currency 12 400,010 315,318 Claims on non-euro area residents in euro 13 211,152 21,533 Lending to euro area credit institutions related to monetary policy operations in euro 14 13,200,706 8,406,680 Other claims on euro area credit institutions in euro 15 398 303 Securities of euro area residents in euro 16 1,979,608 2,048,007 Intra-Eurosystem claims Participating interest in ECB Claims equivalent to the transfer of foreign reserves 17 18 467,280 42,480 424,800 467,280 42,480 424,800 Items in course of settlement 19 81,383 5,778 20,21 407,387 362,235 23,136,537 17,926,755 Note Gold and gold receivables 9 Claims on non-euro area residents in foreign currency Receivables from the IMF Balances with banks and security investments, external loans and other external assets Other assets Total Assets The accounting policies together with Notes 1 to 41 form part of these accounts. Banc Ceannais na hÉireann John Hurley, Governor 17 May 2002 Brian Halpin, Deputy Director General 102 Annual Report 2001 Balance Sheet as at 31 December 2001 LIABILITIES 2001 2000 Note \000 \000 Banknotes in circulation 22 4,315,706 4,992,746 Liabilities to euro area credit institutions related to monetary policy operations in euro 23 3,506,080 2,426,327 Other liabilities to euro area credit institutions denominated in euro 24 881,225 Liabiities to other euro area residents in euro 25 5,151,612 2,139,055 Liabilities to non-euro area residents in euro 26 22,425 27,589 Liabilities to non-euro area residents in foreign currency 27 67,072 588,165 Counterpart of special drawing rights allocated by the IMF 28 124,306 122,183 Intra-Eurosystem liabilities (net) 29 5,112,647 4,000,008 Other liabilities 30 976,237 748,998 Revaluation accounts 31 1,504,092 1,418,858 Capital and reserves 32 1,475,135 1,462,826 23,136,537 17,926,755 Total Liabilities — The accounting policies together with Notes 1 to 41 form part of these accounts. Banc Ceannais na hÉireann John Hurley, Governor 17 May 2002 Brian Halpin, Deputy Director General 103 Annual Report 2001 Notes to the Accounts Note 1 Interest Income 2001 2000 \000 \000 Deposit Income Coupons on Securities Reverse Repurchase Agreements (i) (Premiums)/Discounts on Securities (ii) Intra-Eurosystem Balances (iii) Monetary Policy Operations (iv) Income from Transfer of Foreign Reserve Assets to ECB (Note 18) Other 62,007 390,150 1,160 (34,014) — 450,274 15,833 651 104,838 281,954 4,402 33,388 11,979 278,194 14,800 2,607 Total 886,061 732,162 (i) See Accounting Policy (j). (ii) See Accounting Policy (g). (iii) 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. From 2001, this interest income/expense amount is shown as a net position. (iv) 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 2001 2000 \000 \000 Government Credit Institutions Intra-Eurosystem Balances (Note 1(iii)) Repurchase Agreements (i) Other 104,073 182,541 195,984 11,954 3,791 122,228 149,294 51,928 18,296 5,996 Total 498,343 347,742 2001 2000 \000 \000 Net Realised Price Gains/(Losses) on Securities Net Realised Exchange Rate Gains 149,598 83,778 4,952 157,549 Total 233,376 162,501 2001 2000 \000 \000 (i) See Accounting Policy (j). Note 3 Realised Gains/(Losses) arising from Financial Operations Write Downs on Financial Assets and Positions 104 Unrealised Price Losses on Securities Unrealised Exchange Rate Losses 8,382 — 724 — Total 8,382 724 Annual Report 2001 Note 4 Income from Fees and Commissions 2001 2000 \000 \000 Service Fees and Charges Security Lending BIS Commission (i) Other 895 1,444 — 53 804 1,095 315 90 Total 2,392 2,304 (i) This item is commission on the participation in the lending facility by the Bank for International Settlements (BIS) to the Central Bank of Brazil. The Bank’s share of the loan facility amounted to approximately USD12 million and was fully guaranteed by the Minister for Finance under the Bretton Woods Agreements (Amendment) Act, 1999. This facility terminated on 12 April 2000. Note 5 Income from Equity Shares and Participating Interests 2001 2000 \000 \000 Share of ECB Profits (i) BIS Dividend (ii) 15,230 1,893 17,222 1,749 Total 17,123 18,971 (i) This item represents Ireland‘s share of the ECB‘s distributable profit for 2001 (Note 17). (ii) Dividend received on shares in the Bank for International Settlements (Note 20). Note 6 Net Result of Pooling of Monetary Income This item represents the net result for the Bank of the pooling and redistribution of monetary income by the NCBs of the Eurosystem. The calculation is based on a formula determined by the Governing Council of the ECB to be used during the transitional period 1 January 1999 to 31 December 2001. 105 Annual Report 2001 Note 7 Expenses \000 Currency Centre (Excl. Coin) (i) Dame Street Total (Excl. Coin) (i) Coin (i) Total (i) 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 Pay PRSI Pensions 19,904 1,021 2,017 18,065 743 1,649 7,457 239 915 6,383 257 819 27,361 1,260 2,932 24,448 1,000 2,468 1,082 90 43 773 60 101 28,443 1,350 2,975 25,221 1,060 2,569 Staff Expenses 22,942 20,457 8,611 7,459 31,553 27,916 1,215 934 32,768 28,850 1,058 632 330 431 906 633 361 398 296 1,251 408 375 285 1,037 382 356 1,354 1,883 738 806 1,191 1,670 743 754 23 14 — — 8 3 — — 1,377 1,897 738 806 1,199 1,673 743 754 1,258 1,065 222 168 1,480 1,233 41 14 1,521 1,247 435 357 69 83 504 440 4 2 508 442 835 1,169 710 1,106 5 323 2 276 840 1,492 712 1,382 — 32 — 37 840 1,524 712 1,419 473 800 375 677 59 201 42 116 532 1,001 417 793 70 169 25 63 602 1,170 442 856 — 448 446 — — 274 199 — 1,559 — 56 5,799 727 — 19 — 1,559 448 502 5,799 727 274 218 — 273 — 31 7,924 269 — 2 — 1,832 448 533 13,723 996 274 220 — 8,315 7,061 10,623 3,493 18,938 10,554 8,581 423 27,519 10,977 — — 13,956 4,736 13,956 4,736 24,114 15,957 38,070 20,693 1,262 1,061 3,491 3,369 4,753 4,430 296 274 5,049 4,704 32,519 28,579 36,681 19,057 69,200 47,636 34,206 17,588 103,406 65,224 Training, Recruitment & Other Staff Costs Maintenance of Premises Energy Rates Equipment, Stationery and Requisites Post and Telecommunications Investment Services and Bank Charges Business Travel Publishing & Media Relations Professional Fees (ii) Works Machine Maintenance RTGS System Costs Miscellaneous Euro Distribution Costs Other Operating Expenses Raw Materials (iii) Depreciation Total Expenses (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 19691990 and the Economic and Monetary Union Act, 1998 and not to the profit and loss account (Accounting Policy (e)). (ii) Auditors fees for 2001 in respect of both the Comptroller and Auditor General and Pricewaterhouse-Coopers amounted to \135,959 (2000: \107,515). PricewaterhouseCoopers non-audit services for 2001 amounted to \12,600. (iii) The total cost of materials used in the production of euro currency in the year was \34.5 million. This comprises expenditure of \13.4 million on notes and \21.1 million on coin. Note 8 Surplus Income Surplus Income of \530.6 million (2000: \451.3 million) was payable to the Exchequer in respect of the profit earned by the Bank in the year ended 31 December 2001. A payment on account of \40.6 million (2000: \40.6 million) of Surplus Income was made during 2001 leaving a balance of \490.0 million (2000: \410.7 million) (Note 30). These arrangements are in accordance with Section 23(4) of the Central Bank Act, 1989 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 21 of the Central Bank Act, 1989, the Bank is exempt from Corporation Tax, Income Tax and Capital Gains Tax. 106 Annual Report 2001 Note 9 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 to the change in the value of gold during the year. Note 10 Receivables from the International Monetary Fund (IMF) 2001 2000 \000 \000 Quota Less IMF Holdings of euro 1,194,436 (813,146) 1,173,933 (820,599) Reserve Position in IMF (i) 381,290 353,334 61,904 51,766 443,194 405,100 SDR Holdings (ii) Total (i) 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 the use of the euro by the IMF in its lendings to member countries. (ii) 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). Note 11 Balances with Banks and Security Investments, External Loans and Other External Assets 2001 2000 \000 \000 Balances with Banks Security Investments Reverse Repurchase Agreements (i) 1,520,935 4,035,562 328,047 1,646,593 4,134,352 56,885 Total 5,884,544 5,837,830 2001 2000 \000 \000 0-3 months 3 months-1 year Over 1 year 1,997,868 1,096,182 2,790,494 1,703,478 266,307 3,868,045 Total 5,884,544 5,837,830 (i) See Accounting Policy (j). Maturity Profile 107 Annual Report 2001 Note 12 Claims on Euro Area Residents in Foreign Currency 2001 2000 \000 \000 Balances with Banks Security Investments 208,967 191,043 153,030 162,288 Total 400,010 315,318 2001 2000 \000 \000 0-3 months 3 months-1 year Over 1 year 243,014 32,311 124,685 153,030 — 162,288 Total 400,010 315,318 2001 2000 \000 \000 Balances with Banks Security Investments 81,697 129,455 517 21,016 Total 211,152 21,533 2001 2000 \000 \000 0-3 months 3 months-1 year Over 1 year 81,697 15,802 113,653 517 — 21,016 Total 211,152 21,533 Maturity Profile Note 13 Claims on Non-Euro Area Residents in Euro Maturity Profile Note 14 Lending to Euro Area Credit Institutions related to Monetary Policy Operations in Euro Main Refinancing Operations (i) Longer Term Refinancing Operations (ii) Marginal Lending Facility (iii) Total 2001 2000 \000 \000 5,208,817 7,849,389 142,500 3,195,562 5,211,118 — 13,200,706 8,406,680 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 two weeks 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. (iii) This is an automatic overnight standing facility described as the Marginal Lending Facility (MLF) available to counterparties to the monetary policy operations. The MLF rate is generally above market rates. 108 Annual Report 2001 Note 15 Other Claims on Euro Area Credit Institutions in Euro This includes working balances on correspondent accounts with institutions in the euro area. Note 16 Securities of Euro Area Residents in Euro These securities comprise debt issued by specified euro area and supranational issuers. Maturity Profile Note 17 2001 2000 \000 \000 0-3 months 3 months-1 year Over 1 year 25,059 83,884 1,870,665 — 397,631 1,650,376 Total 1,979,608 2,048,007 Participating Interest in ECB This represents the Bank’s contribution to the capital of the European Central Bank (Note 5). Note 18 Claims Equivalent to the Transfer of Foreign Reserves The Treaty on European Union, 1992 and Section 6 of the Central Bank Act, 1998, provides for the transfer of a proportion of foreign reserve assets of participating NCBs in the Monetary Union to the ECB. Section 6 of the Central Bank Act, 1998, gave effect to this provision and accordingly the Bank transferred an amount equivalent to \425 million to the ECB in January 1999 and received in turn a corresponding claim on the ECB equivalent to this amount. 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. 109 Annual Report 2001 Note 20 Other Assets 2001 2000 \000 \000 Shares in the Bank for International Settlements (i) Loan to Irish Realtime Interbank Settlement Co. Ltd (ii) Stocks of Materials for Note Production AIB plc/ICAROM Interest Bearing Loan (iii) Accrued Interest Income Prepayments Fixed Assets (Note 21) Other 11,015 32 5,134 115,733 180,969 310 53,965 40,229 10,433 54 3,714 80,986 143,390 250 56,866 66,542 Total 407,387 362,235 (i) The Bank holds 8,000 shares in the Bank for International Settlements (BIS) of 2,500 Swiss Gold Francs each, of which one quarter has been paid up. The increase in the value of the BIS holding is due to valuations (Note 31). (ii) This is a non-interest bearing loan and relates to the Bank’s contribution to the costs associated with the project managed by Irish Realtime Interbank Settlement Company Limited (IRIS Co.) to install a Real Time Gross Settlement (RTGS) system in Ireland. The loan is due to be repaid by 2003. The Bank as a participant in the RTGS system has a 7 per cent shareholding in IRIS Co. Ltd. (iii) 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 mechanism used to collect these monies is a back-to-back loan and deposit arrangement between Allied Irish Banks plc and the Bank and the reduction of Interest paid on the minimum reserve balances held with the Bank. The matching back-toback deposit is shown in Other Liabilities (Note 30). Note 21 Fixed Assets \000 Premises 2001 2000 Plant and Machinery 2001 Computer Equipment Other Equipment Furniture Fixtures & Fittings Total Fixed Assets 2000 2001 2000 2001 2000 2001 2000 2001 2000 At Cost — 1 January Acquisitions (+) Disposals (−) 27,798 27,354 43,981 40,792 143 444 494 3,189 — — — — 6,314 968 — 5,354 960 — 4,561 261 — 4,041 520 — 5,473 282 — 5,146 88,127 82,687 327 2,148 5,440 — — — At Cost — 31 December 27,941 27,798 44,475 43,981 7,282 6,314 4,822 4,561 5,755 5,473 90,275 88,127 Accumulated Depreciation at 1 January Depreciation for Year (i) Depreciation on Disposal (−) 6,650 529 — 6,127 12,852 10,133 523 2,932 2,719 — — — 4,181 714 — 3,611 570 — 2,883 603 — 2,297 586 — 4,695 271 — 4,389 31,261 26,557 306 5,049 4,704 — — — Accumulated Depreciation at 31 December 7,179 6,650 15,784 12,852 4,895 4,181 3,486 2,883 4,966 4,695 36,310 31,261 20,762 21,148 28,691 31,129 2,387 2,133 1,336 1,678 789 778 53,965 56,866 Net Book Value at 31 December (i) Of the total of \5.0 million (2000: \4.7 million) depreciation charge, \0.3 million (2000: \0.3 million) in respect of Mint machinery was charged to the Currency Reserve (Accounting Policy (e)). 110 Annual Report 2001 Note 22 Banknotes in Circulation 2001 2000 \000 \000 LTN Circulation Notes Held Abroad (Under Article 52) (i) 4,343,425 (27,719) 4,997,070 (4,324) Total 4,315,706 4,992,746 (i) Notes held abroad under Article 52 of the ESCB statute refer to Irish pound banknotes held by other NCBs for repatriation. Note 23 Liabilities to Euro Area Credit Institutions related to Monetary Policy Operations in Euro 2001 2000 \000 \000 Minimum Reserves (i) Deposit Facility (ii) 3,506,080 — 2,384,327 42,000 Total 3,506,080 2,426,327 These items have a maturity of less than one year. (i) 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. (ii) The deposit facility is one of the standing facilities of the Eurosystem which credit institutions may use to deposit surplus funds overnight. Note 24 Other Liabilities to Euro Area Credit Institutions in Euro This amount represents deposits used as collateral for the euro banknotes that were frontloaded over the year-end to the credit institutions under the euro changeover plan agreed by the NCBs and the ECB. These deposits were paid back in January 2002. Securities with an accepted value of \2,582,520,700 had been lodged to Central Bank correspondent accounts held with other national central banks as at 31 December 2001. These are not included in the balance sheet. Note 25 Liabilities to Other Euro Area Residents in Euro 2001 2000 \000 \000 General Government (i) Other (ii) 5,151,463 149 1,954,873 184,182 Total 5,151,612 2,139,055 These items have a maturity of less than one year. (i) Included under this heading are deposits totalling \218,307 held by the Official Assignee in Bankruptcy under the provisions of the Bankruptcy Act, 1988. (ii) At end-2000 the Bank held \184.1 million on behalf of Trustees of Coillte No. 2 Pension Fund. This facility was repaid on 10 May 2001. 111 Annual Report 2001 Note 26 Liabilities to Non-Euro Area Residents in Euro 2001 2000 \000 \000 Central Banks International Financial Institutions EU Agencies 147 1,022 21,256 63 480 27,046 Total 22,425 27,589 These items have a maturity of less than one year. Note 27 Liabilities to Non-Euro Area Residents in Foreign Currency Liabilities arising from sale and repurchase agreements are shown under this heading (Accounting Policy (j)). These items have a maturity of less than one year. Note 28 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 29 Intra-Eurosystem Liabilities (net) This item represents the net claim on the ECB as a result of euro cross-border payments transacted over the TARGET system by all NCBs participating in the ESCB. At end-2001, there was a net liability position due to the ECB (Accounting Policy (k)). Note 30 Other Liabilities 2001 2000 \000 \000 AIB plc/ICAROM Deposit (Note 20) Profit & Loss Appropriations (Note 8) Deposit Protection Accounts (i) Interest Accruals Other Accruals Off-balance sheet instruments revaluation (Note 31) Other 115,733 490,007 235,134 53,244 3,233 60,397 18,489 80,986 410,672 201,732 48,078 1,587 — 5,943 Total 976,237 748,998 (i) These are balances placed by credit institutions with the Bank as part of the Irish deposit protection scheme. The Irish deposit protection scheme is funded by credit institutions which are authorised by the Bank. 112 Annual Report 2001 Note 31 Revaluation Accounts 2001 2000 \000 \000 Opening Balance Transfer from Profits (i) 1,418,858 145,631 1,150,698 268,160 Total 1,564,489 1,418,858 Off-Balance Sheet Instruments Revaluation (ii) Total (60,397) 1,504,092 — 1,418,858 (i) This arises from unrealised gains on assets and liabilities following their valuation at yearend. The following is the breakdown of the valuation changes recorded in the year: Gold (Note 9) Shares in Bank for International Settlements (Note 20) Foreign Investment Assets Net Assets in the International Monetary Fund Off-Balance Sheet Instruments Revaluation Total 2001 2000 \000 \000 4,184 582 74,603 5,865 60,397 1,323 770 256,893 9,174 — 145,631 268,160 (ii) This represents off-balance sheet instruments revaluation differences which were transferred to ‘Other Liabilities’ (Note 30) and relate to unmatured contracts in Foreign Exchange (Note 37). The foreign exchange rates used vis-à-vis the euro for the end-year valuations are as follows:— Currency US dollar Japanese yen Australian dollar Sterling Swiss franc Norwegian krone Danish krone Swedish krona Cypriot pound Canadian dollar SDR 2001 2000 Rate Rate 0.8813 115.33 1.7280 0.6085 1.4829 7.9515 7.4365 9.3012 0.5750 1.4077 0.7020 0.9305 106.92 1.6770 0.6241 1.5232 8.2335 7.4631 8.8313 0.5737 1.3965 0.7142 277.60 272.95 The gold prices used were: US dollars per fine ounce 113 Annual Report 2001 Note 32 Capital and Reserves 2001 \000 Capital (i) General Reserve Opening Balance Transfer from Profits (ii) Currency Reserve (iii) Opening Balance Net Proceeds of Coin Issue (iv) Transfer to Superannuation Reserve (v) Superannuation Reserve (Note 34) Opening Balance Transfer from Profits (vi) Transfer from Currency Reserve (v) Pension Contributions (vii) Total 2000 \000 \000 30 764,236 28,389 792,625 648,895 (20,670) (175) 49,665 3,999 175 591 \000 30 698,619 65,617 764,236 614,970 34,049 628,050 (124) 648,895 54,430 45,558 3,587 124 396 49,665 1,475,135 1,462,826 (i) The authorised capital of the Bank is fixed under Section 9(1) of the Central Bank Act, 1942 at £40,000 (\50,790). Issued and paid up capital is £24,000 (\30,474) all of which is held by the Minister for Finance. The balance is payable as agreed by the Board and the Minister. (ii) Under Central Bank of Ireland (Surplus Income) Regulations, 1943, the Board approved a transfer to the General Reserve of \28.4 million (2000: \65.6 million). (iii) Under Section 36(3)(c) of the Central Bank Act, 1942, the Bank is obliged to redeem Consolidated Bank Notes presented to it. The liability to redeem these notes represents a claim on the Currency Reserve. No notes were redeemed in 2001 and \133,640 remained outstanding at 31 December 2001. The closing balance includes an amount of \276.5 million (2000: \297.4 million) relating to cumulative net proceeds from the issue of coin. (iv) Net Proceeds of Coin Issue 2001 2000 \000 \000 Circulating Coin Specimen Coin Sets Melted Coin 13,280 631 (375) 50,879 758 — Total 13,536 51,637 Less Operating Costs (Note 7) (34,206) (17,588) Net Proceeds (20,670) 34,049 Under the provisions of the Coinage Act, 1950, the Decimal Currency Acts 1969-1990 and the Economic and Monetary Union Act, 1998, net proceeds of coin issue are transferred directly to the Currency Reserve (Accounting Policy (e), Note 7). (v) Under the Central Bank of Ireland (Surplus Income) Regulations, 1943, the Board approved a transfer of \175,000 (2000: \124,000), representing fifteen per cent of salaries and wages of staff involved in the provision and issue of coin from the Currency Reserve (Accounting Policy (e)) to the Superannuation Reserve. 114 Annual Report 2001 (vi) Under Central Bank of Ireland (Surplus Income) Regulations, 1943, the Board approved a transfer of \4.0 million (2000: \3.6 million) to the Superannuation Reserve. No specific investment asset of the Bank is assigned to this reserve and consequently it is not adjusted for income earned (Accounting Policy (d)). (vii) Pension contributions were transferred to the Superannuation Reserve during the year as follows: Note 33 2001 2000 \000 \000 Contributions by staff to the Spouses‘ and Children‘s Pension Scheme Purchase of Pension Rights Pension Contributions by Staff recruited after April 1995 ICCL Staff Pensions 291 14 205 81 252 8 136 — Total 591 396 Contingencies Shares in the Bank for International Settlements are one quarter paid up with a contingent liability to pay 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. Under Article 33.2 of the Statute of the ESCB the Bank may be called upon to cover annual losses of the ECB (Note 5). In the event of losses arising from exchange rate movements, the ECB can write down the Bank’s claim corresponding to the transfer of foreign reserve assets (Note 18) by a maximum of twenty per cent. Note 34 Superannuation Liabilities The pension entitlements of past and current permanent employees of the Central Bank arise under an internally defined benefit pension scheme. The scheme results in the Bank’s staff receiving the same entitlements as established civil servants. The Scheme is operated on a noncontributory basis with the exception of contributions made to the Spouses’ and Children’s Pension Scheme, contributions of salary in respect of the main scheme in the case of staff recruited since 1 April 1995 and payments received from eligible staff for the purchase of notional added years of service. Under current Central Bank legislation the Bank does not have the basis to establish and maintain a fully-funded pension scheme. Section 15(5)(a) of the Central Bank Act, 1989, enables the Bank to meet its pension obligations as they fall due from current revenues (Note 7). In this regard the Bank’s accounts do not comply with Statement of Standard Accounting Practice 24 — Accounting for Pension Costs or Financial Reporting Standard 17 — Retirement Benefits — in that it does not recognise the cost of providing pensions over the period during which it benefits from the employees’ services. The balance sheet does not make any provision for the ongoing commitments of the accrued pension rights of either current or retired employees. The policy of the Bank is to arrange an independent actuarial valuation every three years. The last actuarial valuation was carried out by Coyle Hamilton at 31 December 1999 using the Projected Unit Method. The major assumptions used by the actuary were: that the rate of increase of salaries would be 6 per cent; the rate of increase of pensions in payment would be 6 per cent; and the rate used to discount the scheme’s liabilities was 8 per cent. The assumed rate of inflation was 4 per cent. The actuarial review assumes that the Superannuation Reserve (Note 32) represents assets of the pension fund with an initial value equivalent to the reserve balance at 31 December 1999, which would need to be invested to achieve a suitable real rate of investment return. 115 Annual Report 2001 Following an updated valuation at 31 December 2001 using the Projected Unit Method, the actuarial report indicates that the net present value of accrued superannuation liabilities was \53.0 million (without making allowance for salary inflation) and \113.0 million (allowing for salary inflation). There have been no material changes in the Bank‘s pension commitments since the actuarial valuation was last carried out. On the basis that the then current deficit of \113.0 million was funded immediately by the Bank, the actuarial report estimates a regular cost to the Bank for the year ended 31 December 2001 of \4.2 million. This compares with \4.0 million which was charged to the profit and loss and appropriation account this year. 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 holdings of foreign currency assets which represent part of the external assets of the Eurosystem. 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 the reserves, the choice of investment instruments and the overall degree of risk that the Bank considers appropriate for its investment activities. The risks inherent in managing a portfolio of investment assets are managed by a comprehensive system of limits and procedures. An Investments Committee of the Board reviews investment policy and performance, and is supported by the Bank’s External Assets Investment Committee which considers policy issues and strategy relating to the investment of the reserves. This committee, under the chairmanship of the Deputy Director General, consists of senior staff of the Financial Markets Department. A Standing Investment Strategy Committee, comprising departmental management, senior dealers and a representative of the Bank’s economic services, meets 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 ensure that the reserves are fully invested. Risk monitoring and performance measurement are carried out independently of the dealing function. The Bank is exposed to operational risk through unexpected losses arising from human error, systems failures, fraud or inadequate internal controls and procedures. A framework of internal controls, including contingency arrangements for both business processes and IT systems is in place. Each business area has responsibility for management of its operational risk. The Bank has established a high-level committee to oversee 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 Statement of Accounts and Annual Report. 116 Annual Report 2001 Note 37 Unmatured Contracts in Foreign Exchange Unmatured Purchases Unmatured Sales Unmatured Purchases less Sales ’000s of currency units Danish krone Euro US dollar Japanese yen 16,000.0 501,530.0 31,800.0 22,942,940.0 16,000.0 1,530.0 301,354.5 45,885,880.0 — 500,000.0 (269,554.5) (22,942,940.0) All contracts had matured by 4 January 2002. Note 38 Unmatured Contracts in Foreign Securities As a result of commitments made in December 2001 there were unmatured net forward sales of nominal US dollar 378.5 million and net forward purchases of nominal Sterling 5.6 million. All contracts had matured by 4 January 2002. Total net forward sales valued at mid-market closing exchange rates of 31 December had a nominal value of \420.4 million. 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 2001 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 adjusting post-balance sheet events. On 16 April, the Central Bank and Financial Services Authority of Ireland Bill, 2002 was published. The main purpose of the Bill is to provide for the coordination of the ESCB related functions of the Bank and the functions of a single regulatory authority for financial services to be carried out within the overall structure of the Central Bank and Financial Services Authority of Ireland to be chaired by the Governor. The directors do not believe this will have an impact on the Statement of Accounts. Up to 31 December 2001 Irish banknotes issued by the Bank were shown on the balance sheet and were the exclusive liability of the Bank. All such banknotes continue to be the liability of the Bank until redeemed by the holders. During 2002 an estimate will be made of the amount of banknotes unlikely to be redeemed and this amount will be credited to income and paid over to the Exchequer in 2002. 117 Annual Report 2001 Since 1 January 2002 euro banknotes have been issued and redeemed by the Bank on behalf of the Eurosystem. While all euro banknotes issued by the Bank will be shown on the balance sheet, these will not be the exclusive liability of the Bank but will be shared in common with the other members of the Eurosystem. The procedures agreed for the issue and accounting treatment of euro banknotes will generate certain intra-system claims and liabilities which will be disclosed on the balance sheet. From 1 January 2002 the scheme envisaged by the Treaty for the sharing of monetary income has come into operation. The Treaty provided for a phasing-in of the arrangements over the years 2002-2007 as NCBs could be expected to undergo significant changes in their relative income positions following the issue of euro banknotes against which monetary income is earned. Section 137 of the Finance Act, 2002 which came into operation on 25 March 2002 permits the proceeds from the issue of euro coin, from 1 January 2002 to be passed directly to the Exchequer. In addition, the balance in the Currency Reserve at 31 December 2001 (Note 32) representing the net proceeds from the issue of Irish coin, less the cost of withdrawing Irish coin during 2002, can also accrue to the benefit of the Exchequer. It is estimated that the effect of this change will reduce the balance in the Currency Reserve by some \300 million by 31 December 2002. In March 2002 \250 million was transferred to the Exchequer. Note 41 Approval of Accounts The Board of Directors approved the Statement of Accounts on 17 May 2002. 118 Annual Report 2001 Report of the Comptroller and Auditor General for Presentation to the Houses of the Oireachtas I have audited the Statement of Accounts on pages 95 to 118 under Section 19(2) of the Central Bank Act, 1989. Respective Responsibilities of the Central Bank and the Comptroller and Auditor General The accounting responsibilities of the Bank are set out in the Statement of Directors’ Responsibilities on page 97. It is my responsibility to audit, certify and report on the Statement of Accounts transmitted to me by the Bank. As the result of my audit I form an independent opinion on the Statement of Accounts. 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 auditing standards 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 in the Statement of Accounts. It also includes an assessment of the significant estimates and judgements 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 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. Certificate In my opinion, proper books of accounts and records have been kept by the Bank and the Statement of Accounts, which is in agreement with them, gives a true and fair view of the state of the Bank’s affairs at 31 December 2001 and of its surplus income for the year then ended. John Purcell Comptroller and Auditor General 17 May 2002 119 Annual Report 2001 Report of PricewaterhouseCoopers Auditors’ report to the Board of Directors of the Central Bank of Ireland We have audited the Statement of Accounts on pages 95 to 118. Respective responsibilities of directors and auditors The directors, as described on page 97 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 of Ireland (‘the Bank’). Our responsibilities, as independent auditors, are established by Article 27, the Auditing Practices Board, and our profession’s ethical guidance. 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. Basis of audit opinion We conducted our audit in accordance with the Auditing Standards 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 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 121 Annual Report 2001 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 2001 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. PricewaterhouseCoopers Chartered Accountants and Registered Auditors Dublin 17 May 2002 Notes: (a) The maintenance and integrity of the Central Bank of Ireland’s website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 122 Annual Report 2001 Financial Stability Report 123 Annual Report 2001 CONTENTS Page 1. Introduction 127 2. An Analysis of the Risks to Financial Stability in Ireland 2.1 Private-Sector Credit 2.2 Personal-Sector Credit 2.3 Property Price Trends in Ireland 2.4 The Irish Banking System — A Less Benign Environment in 2001 2.4.1 Other Significant Events — AIB/Allfirst 2.4.2 Aggregated Micro-Prudential Indicators 2.4.3 Bank Profitability 2.4.4 Looking Ahead 2.5 Overview 129 129 131 135 138 139 139 142 142 143 3. The External Dimension 3.1 The US Economy 3.1.1 Household Leverage 3.1.2 Interest Rates, Term and Quality Spreads 3.1.3 House Prices 3.1.4 Sustainability of Higher Productivity Growth Rates 3.1.5 Productivity and the Exchange Rate 3.2 Prospects for the Japanese Economy 3.2.1 Present Macroeconomic Position 3.2.2 Risks Associated with Asset Price Movements 3.2.3 Risks Associated with Corporate Sector Weakness 3.2.4 Potential for Spillover Effects onto the International Financial System 3.3 Euro Area — Assessment of Current Risks 3.4 UK — Assessment of Current Risks 3.5 Emerging Economies 144 144 145 149 152 154 155 156 157 158 160 4. Conclusions 165 124 160 161 162 165 Annual Report 2001 Flow Chart Summarising how the Sections of the Report Map into Financial Stability in Ireland US 3.1 Domestic economic & sectoral developments 2.1 2.2 2.3 Japan 3.2 Europe 3.3 UK 3.4 Emerging Economies 3.5 Foreign exchange markets 3.1.5 International economic & sectoral developments Irish financial sector 2.4 Equity markets 3.1.2 3.2.2 Bond market 3.1.2 3.2.2 International financial market developments Money markets 3.1.2 Property markets 3.1.3 3.2.2 International financial stability Irish Financial Stability 125 Annual Report 2001 Page Annex 1: Annex 2: Annex 3: The Events of September 11 and their Effects on Financial Stability The Dollar and US Productivity Growth The US Current Account: Sustainability and Measurement Issues Chart 1: Private-Sector Credit, Annual Percentage Changes (January 1999 to February 2002) — Ireland Private-Sector Credit as a Percentage of GDP (1993 to 2001) — Ireland Personal-Sector Credit, Annual Percentage Changes (1993 Q3 to 2001 Q4) — Ireland Personal-Sector Credit as a Percentage of Personal Disposable Income (1992 to 2001) — Ireland Housing and Non-Housing Credit, Annual Percentage Changes (1998 Q1 to 2001 Q4) — Ireland Estimated Non-Housing Credit Monthly Repayment Burden as a Percentage of Monthly Disposable Income (1992 to 2001) — Ireland Permanent/TSB House Price Index, Annual Percentage Changes (1998 Q1 to 2001 Q4) Capital Values of Jones Lang LaSalle Irish Commercial Property Index, Annual Percentage Changes (1985 to 2001) Rental Values of Jones Lang LaSalle Irish Commercial Property Index, Annual Percentage Changes (1985 to 2001) Non-Performing Assets and Provisions as a Percentage of PrivateSector Credit (1998 to 2001) — Ireland Provisions as a Percentage of Non-Performing Assets (1998 to 2001) — Ireland Average Solvency Ratio of ‘‘Domestic Banks’’ (1995 to 2001) — Ireland Real GDP Growth (1995 Q1 to 2001 Q4) — USA Consumer Credit as a Percentage of Disposable Income and Unemployment Rate (1980 Q1 to 2001 Q4) — USA Core Loans as a Percentage of GDP (1980 Q1 to 2001 Q4) — USA Debt Service Payments as a Percentage of Disposable Income and Change in Household Debt Outstanding (1980 Q1 to 2001 Q3) — USA Non-Performing Loans as a Percentage of Total Loans, All Banks (1985 Q1 to 2001 Q2) — USA Charge-off Rates, All Banks (1985 Q1 to 2001 Q3) — USA Bankruptcy Filings, Annual Percentage Changes (1997 Q1 to 2001 Q3) — USA Long and Short Term Interest Rates (January 2000 to March 2002) — USA 10 Year Swap Spreads over Treasuries (January 1996 to March 2002) — USA Initial Public Offerings (IPOs) (January 1997 to February 2002) — USA FreddieMac Conventional Mortgage Home Price Index, Annual Growth Rates (1980 Q1 to 2001 Q4) — USA Wholesale and Consumer Price Inflation (1990 Q1 to 2001 Q3) — Japan Real GDP and Real Private Consumption Expenditure Growth (1985 to 2002) — Japan Nationwide House Price Index, Annual Percentage Changes (February 2001 to February 2002) — UK Chart 2: Chart 3: Chart 4: Chart 5: Chart 6: Chart 7: Chart 8: Chart 9: Chart 10: Chart 11: Chart 12: Chart 13: Chart 14: Chart 15: Chart 16: Chart 17: Chart 18: Chart 19: Chart 20: Chart 21: Chart 22: Chart 23: Chart 24: Chart 25: Chart 26: 126 170 173 176 130 130 131 132 133 134 136 137 137 140 141 141 144 145 146 147 147 148 149 150 151 152 153 156 157 164 Annual Report 2001 Financial Stability Report1 1. Introduction The first report on financial stability published by the Bank2 concluded that the financial situation in Ireland at the end of the year 2000 was stable. The banking system was profitable, well diversified and well supported by the very favourable state of the overall economy at the time. Nonetheless, two domestic homegrown risks were identified in the report — namely, those arising from the very rapid growth in private-sector credit and the sharp escalation in property prices. In the meantime, some of the heat has been taken out of the property market, which has seen a quite sharp slowing of price increases for both residential and commercial property followed, around the end of the year, by very moderate falls in prices. The growth rate of credit has decelerated throughout last year and into the early months of the current year. Provided these new developments do not swing too far in the opposite direction, they should help to release some of the tensions in the system and help support financial stability. The last report noted that the extreme openness of the Irish economy made it exceptionally vulnerable to shocks emanating from abroad and to the international propagation of systemic weakness. There is a general consensus that the fortunes of the world economy depend to a large extent on the fortunes of the US economy. Trade and capital market linkages between the Irish economy and the US economy are growing and deepening and this trend has been underpinned by Irish exports of high tech products to the euro area. Consequently, short-term developments in the US economy have become even more important for the Irish economy. However, our increasing dependence on the US comes at a time when EU accession countries will be competing for US investment and also at a time when US macroeconomic imbalances, although moderating, remain quite high. In addition, a number of specific sources of risk for financial stability in the US were already evident and had come to the attention of policymakers before September 11. The US economy therefore warrants special attention. Much of the commentary following the events of September 11 last year interpreted these events as a direct attack on capital markets, especially in the US. These markets displayed great flexibility and resilience in coping with the shock and its 1 The commentary in this report is based on data available up to end-April 2002. 2 ‘‘Financial Stability in Ireland: Overview and Current Risks’’, Central Bank of Ireland, Annual Report 2000. 127 Annual Report 2001 aftermath and were again operating smoothly soon afterwards. However, this shock overlaid a number of risks already emerging in the US economy, which had been slowing fairly sharply for some time before the events of September 11. (Annex 1 reviews the effects of the events of September 11 on financial stability). These events had the effect of exacerbating the already weakening situation, although it appears that the US downturn did not develop into a recession — using the common definition of recession as two consecutive quarters of negative growth. The US and other major economies are moving along a recovering path, suggesting that the tensions in the US and international banking and financial system have eased somewhat as a result. However, a number of macroeconomic imbalances which built up earlier in the business cycle, particularly in the US, have not been adequately worked through and present important downside risks. These include the US current account imbalance, which is generally regarded as unsustainable at its current levels; the build up of household and corporate debt; exchange rate distortions, notably the US dollar overvaluation and euro undervaluation; and the risk of further equity market correction, given the continuation of historically high price/earnings ratios. The realisation of these risks depends on a number of factors, viz, whether strong productivity gains in the US will continue to boost income growth; whether the higher net worth of households continues to justify rising indebtedness which, in turn, seems to depend critically on whether the US economy will recover sustainably and in time to prevent the unemployment rate from increasing beyond its current (moderate) level; and whether the US dollar can continue to sustain its apparently elevated value in the face of a large and persistent trade deficit. If some or all of these risks are realised, they could start to interact with ongoing vulnerabilities in the international and Irish financial systems. The US is given special mention here because, to the extent that there are external risks threatening the Irish financial system, the most serious of these are likely to originate in the US economy. But this is not the only source of downside risk for the financial stability in the Irish economy. Other areas of the world economy also pose risks, although they are generally not seen as carrying the same level of threat to financial stability in Ireland. Nevertheless, a brief review of international financial stability more generally is in order. This encapsulates the euro area, the UK, Japan and the emerging economies, which, along with the US, provide the background against which the risks to financial stability in Ireland are assessed below. The prospects for the world’s second largest economy, Japan, are worrisome. The renewed weakening of the Japanese economy, which started in late 2000, brought the economy into 128 Annual Report 2001 its fourth recession in a decade. Private consumption, which has been exceptionally weak for some time, was further undermined by a rise in unemployment to a historically high level for Japan. Although public investment spending contributed to activity earlier in the year, this effect waned subsequently. In some respects, the UK economy is not unlike that in the US. Consumer spending has been the driving force behind domestic demand growth, encouraged by a continuing low unemployment rate and a quite significant increase in mortgage equity withdrawals (MEW). Although the growth in household debt is potentially a worrying factor for financial stability, household income gearing is low by historical standards because of the current low interest rate environment. Despite the significant slowdown in the euro area economy last year, unlike the US it does not suffer from major macroeconomic imbalances that would require significant adjustment. Downside risks remain, however, including the risk that economic recovery in the US could be insipid — especially in view of corporate and household debt levels — and that financial market turmoil could arise from a reassessment of the appropriateness of current levels of equity prices and exchange rates. 2. An Analysis of the Risks to Financial Stability in Ireland The very rapid rate of private-sector credit growth in Ireland has been a source of concern to the Bank for some time. Such a rapid build up in credit could threaten the stability of the financial system if borrowers found that they were unable to meet their loan commitments. While the pace of credit growth has slowed fairly consistently over the last two years, it is still relatively high. Indeed, in the personal (non-housing) sector, there appears to be a reversal of this slowdown in growth more recently. 2.1 Private-Sector Credit The rate of growth of private-sector credit continued to slow in recent months, in keeping with the trend that commenced about two years ago. The outstanding level of private-sector credit grew by \16 billion in the year to end-March 2002 to \132 billion. The annual adjusted rate of growth was 12.7 per cent this March compared with 16.0 per cent in the same month last year3. However, the rate of growth is still quite high (as depicted in Chart 1) particularly in light of the fact that the pace of activity in the economy has slowed very steeply. 3 The annual adjusted rate of growth in private-sector credit excludes IFSC lending and adjusts for the valuation effects caused by exchange rate changes. 129 Annual Report 2001 Chart 1: Private-Sector Credit, Annual Percentage Changes (January 1999 to Febuary 2002) – Ireland 40 35 30 per cent 25 20 15 10 5 0 Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Unadjusted Jul-01 Oct-01 Jan-02 Adjusted Chart 2: Private-Sector Credit as a Percentage of GDP (1993 to 2001) – Ireland 120 110 per cent 100 90 80 70 60 1993 1994 1995 1996 Note: GDP data for 2001 are an estimate 130 1997 1998 1999 2000 e 2001 Annual Report 2001 Private-sector credit as a percentage of GDP continues to rise quite markedly, though at a slower rate than in recent years, reaching an estimated 112 per cent in 2001 (see Chart 2). This reflects the fact that while the growth rate of credit has eased in the past year it still continues to outpace the growth rate of GDP, which fell sharply over the same period. 2.2 Personal-Sector Credit Personal-sector credit is a large component of private-sector credit, contributing an average share of 35 per cent in the last two years. The recent slowdown in the rate of private-sector credit growth from the highs of 1999 is also evident in the personal sector, which is now growing at a slightly faster rate than overall private-sector credit (see Charts 1 and 3). The annual rate of growth at end-December 2001 was 16.2 per cent, which is just slightly lower than the 17.8 per cent in the same month last year. A measure of the exposure of the personal sector to the loan market is personal-sector credit as a percentage of personal disposable income. Indebtedness has been increasing rapidly in recent years, as indicated in Chart 4, with a moderate rise in 2001, as credit as a percentage of disposable income increased from 71 per cent in 2000 to 73 per cent. These ratios compare favourably with those in Germany, the Netherlands and Portugal in particular4. Chart 3: Personal-Sector Credit, Annual Percentage Changes (1993Q3 to 2001Q4) – Ireland 30 25 per cent 20 15 10 5 0 1993 1994 1995 1995 1996 1997 1998 1998 1999 2000 2001 2001 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 4 See Section 3.3, ‘The Euro Area — Assessment of Current Risks’, for details. 131 Annual Report 2001 Chart 4: Personal-Sector Credit as a Percentage of Personal Disposable Income (1992 to 2001) – Ireland 80 70 per cent 60 50 40 30 1992 1993 1994 1995 1996 1997 1998 1999 2000 e 2001 Note: Disposable income data for 2001 are an estimate Personal-sector credit is dominated by housing finance, for which the growth rate has eased steadily but slowly since 2000. This is consistent with indications of a slowing in housing market activity and a significant moderation in house price inflation. Mortgage credit outstanding as a percentage of annual disposable income has continued to increase steadily in the last decade and is estimated at 55.5 per cent in 20015. This figure is quite low in comparison to some other OECD countries. According to data from the OECD for the year 2000, household mortgage debt as a percentage of disposable income was 108 per cent in the UK, 71 per cent in Germany, and 55 per cent in France6. It should also be borne in mind that households’ ability to fund these higher levels of mortgage debt in Ireland has been enhanced by a declining mortgage repayment burden over the past decade. Falling mortgage rates and increasing disposable income have contributed to lowering the burden of mortgage borrowing for the average household. The average mortgage repayment burden as a percentage of average monthly household disposable income is estimated at 30 per cent for 2001 and this is at the lower end of values experienced over the last three 5 This figure appears to be relatively low given the high rate of home ownership in Ireland, but perhaps can be explained by the fact that a large proportion of individuals own their own homes or have only small mortgages. 6 Data source is OECD Economic Outlook No. 70, December 2001. 132 Annual Report 2001 decades7. However, it is important to note that the average figures underestimate the position of some new entrants who may have leveraged themselves quite highly in order to get a foothold in the housing market and who may therefore face greater repayment burdens. Other personal sector non-housing lending (this category includes finance for investment and also other personal lending, including consumer credit) has not eased as quickly as mortgage lending in recent quarters. However, the pace of growth is down from the lofty growth rates of 1999, attributable to the car purchase scheme introduced by the Government (see Chart 5). The estimated repayment burden for non-housing credit as a percentage of disposable income has continued to increase steadily in the 1990s and is estimated to reach a high of almost 7 per cent in 2001 (see Chart 6), despite continued increases in disposable income. This also highlights the particularly strong growth of credit in this sector given that interest rates have not been increasing. Chart 5: Housing and Non-Housing Credit, Annual Percentage Changes (1998Q1 to 2001Q4) – Ireland 40 35 30 per cent 25 20 15 10 5 0 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Housing Non-Housing 7 Calculated as the average monthly repayment on a mortgage valued at 90 per cent of average new house prices. 133 Annual Report 2001 Chart 6: Estimated Non-Housing Credit Monthly Repayment Burden as a Percentage of Monthly Disposable Income (1992 to 2001) - Ireland 7 per cent 6 5 4 3 1992 1993 1994 1995 1996 1997 1998 1999 2000 e 2001 Note: Disposable income data for 2001 are an estimate In sum, private-sector credit growth has been slowing, with the growth rate falling from a high of about 33 per cent in 2000 to 14 per cent at the beginning of this year. Despite this, the level of private-sector indebtedness is continuing to rise, with credit as a percentage of GDP reaching a peak of 112 per cent. The growth in housing related credit has been slowing gradually in the past year. Moreover, despite increasing credit levels, falling mortgage interest rates and increasing disposable income have allowed the estimated average mortgage repayment burden to fall from the highs of 40 per cent in the early 1980s. Personal non-housing sector credit experienced particularly strong growth in comparison with the previous year. This has contributed to the continued increase in the estimated average repayment burden for this segment of the loan market. The continued high growth in credit to the private sector and, in particular, to the personal sector which began in the mid-1990s has prompted the Bank to express its concern about these developments on a number of occasions. The set of sectoral and concentration limits operated by the Bank in its supervisory requirements, which are designed to ensure that financial institutions do not have overly concentrated balance sheets, should help in strengthening the financial system and prevent over exposure to any individual sector. A balanced perspective on loan market developments should flag an important role of this market. This role is to help firms 134 Annual Report 2001 and households to smooth expenditures over time in the face of a variety of shocks. A fall in consumption by households and investment expenditure by firms arising, respectively, from falling disposable income and diminished cash flow, in the context of a cyclical slowdown, would automatically exacerbate the macroeconomic situation if households and firms did not have access to the loan market to help them smooth these expenditures over time. Accordingly, the readings for some aggregate prudential ratios (e.g., debt/disposable income or debt/net worth ratios), which could spell danger, have to be interpreted carefully. This is because these ratios will also tend to move countercyclically (i.e., increase with a slowdown or recession in the economy) as the loan market facilitates the flow of loanable funds from surplus to deficit units in the economy. This can be a healthy development if it prevents the level of activity in the economy from slipping further. This of course is only a partial assessment and does not take account of the fact that, in the Irish case, such a cyclical increase in the debt/disposable income or debt/cash flow ratios is occurring on top of a very strong trend or structural increase in these ratios over the last number of years. It is, therefore, a worrisome development and one that the Bank is monitoring carefully. 2.3 Property Price Trends in Ireland In the previous Financial Stability Report, rapid house price growth in Ireland was recognised as a major source of vulnerability confronting the Irish financial system. Since then, the pace of growth in house prices has experienced a significant slow down, according to data from both the Department of Environment and Local Government (DoE) and the Permanent/TSB House Price Index (PTSB). The DoE data indicate that the price of new houses increased by 0.6 per cent and existing house prices increased by 1.4 per cent in the year to the fourth quarter of 2001. This compares with annual increases of 13.8 per cent and 13.3 per cent in the same period of the previous year. The PTSB exhibited stronger signs of growth than the DoE statistics, but it also showed signs of a marked slowdown in growth during the past year. New house prices increased by 10.1 per cent in the year to the fourth quarter of 2001 compared to 19.7 per cent in the previous year, while existing house prices increased by 5 per cent compared to 22.0 per cent (see Chart 7). While data in the latter months of 2001 indicate a moderate fall in house prices on a month-to-month basis, this trend began to show signs of reversing in February 2002. The PTSB index indicates that new house prices fell each month between November 2001 and January 2002, falling a cumulative 2.2 per cent, while existing house prices fell by a cumulative 4.5 per cent since September last year. However, prices began to increase again in February, and in March 2002 the price of new houses rose by 0.4 per cent and existing house prices increased by 2.5 per cent. These monthly increases have largely been attributed 135 Annual Report 2001 to the recent budgetary tax changes, which have encouraged property investors to re-enter the market. Overall property price developments suggest that the risks to financial stability from this sector have become slightly less pressing than at the time of the last Financial Stability Report, but that caution is still warranted. On the one hand, a resumption of a strong rate of increase in property prices would put pressure on new loan-to-value ratios and would decrease affordability. On the other, property price falls would have negative repercussions for the balance sheets of those credit institutions heavily involved in mortgage lending, although this is likely to become a serious problem for banks only when loans default and they have to foreclose on the properties to realise their collateral value. For this to happen property owners would have to experience a substantial fall in disposable income. Chart 7: Permanent/TSB House Price Index, Annual Percentage Changes (1998Q1 to 2001Q4) 35 30 25 per cent 20 15 10 5 0 1998 Q1 1998 1998 Q2 Q3 1998 1999 1999 Q4 Q1 Q2 1999 1999 2000 2000 2000 Q3 Q4 Q1 Q2 Q3 New 2000 2001 2001 Q4 Q1 Q2 2001 2001 Q3 Q4 Existing Commercial property prices are also a potential source of vulnerability for the Irish banking system. The rapid price escalation of recent years has in part been driven by fundamentals, namely higher rental values. While the average annual rate of price inflation remained quite strong in 2001 in each of the office, retail and industrial sectors (see Chart 8), capital values actually experienced slight declines in the office and industrial sectors in the final quarter of 2001 in comparison with the previous quarter. Rental value growth has also remained strong, although the annual rate of growth in the office and retail sectors appears to be easing moderately (see Chart 9). If there is 136 Annual Report 2001 a significant decline in rental values and, thereby capital values, then the key risk factor would be the extent to which firms have been leveraging themselves in the loan market to take advantage of rising prices. Any decline in economic growth to below potential would undermine firms’ ability to pay high rents, so that the sharply increased level of leverage could cause financial strains with knock-on effects in the banking sector. Chart 8: Capital Values of Jones Lang LaSalle Irish Commercial Property Index, Annual Percentage Changes (1985 to 2001) 40 30 per cent 20 10 0 -10 -20 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Office Retail 1999 2000 2001 Industrial Chart 9: Rental Values of Jones Lang LaSalle Irish Commercial Property Index, Annual Percentage Changes (1985 to 2001) 25 20 per cent 15 10 5 0 -5 -10 1985 1986 1987 1988 1989 Offices 1990 1991 1992 1993 1994 1995 1996 Retail 1997 1998 1999 2000 2001 Industrial 137 Annual Report 2001 2.4 The Irish Banking System — A Less Benign Environment in 2001 The weakening global and domestic economic situation during 2001 presented credit institutions with a deterioration in their business environment. On the demand side, potential borrowers became more cautious as conditions tightened and business volumes were reduced. On the supply side, credit institutions reviewed their assessment of credit risk because there was an increased risk that the ability of borrowers to repay would have been weakened with the less benign economic outlook. The Bank has been assiduous in reminding the credit institutions of the importance of taking a longer term prudent view of lending, given the potential to write business in an economic upturn that would not be sustainable over the entire business cycle. As a result of the combination of a changing business environment and moral suasion by the Bank, credit institutions have become more cautious in their approach to lending, particularly in relation to housing and commercial property. Increasing caution in the banking sector was marked by specific events. The first set of key events comprised the global economic slowdown in 2001, the setback in the technology, media and telecommunications (TMT) sector, and the Foot and Mouth scare. The difficulties being encountered by the TMT sector led banks to re-examine their exposures to these industries. Two Bank surveys on exposure to the telecommunications sector carried out in 2001 indicated that, while exposure to the sector is not insignificant for some institutions operating in Ireland, it is not of systemic importance. In relation to the Foot and Mouth scare, the tourism and associated industries were adversely affected in the summer season of last year. The banks perceived that this was a once-off event and they worked with affected firms to find a mutual accommodation. In mid-2001, the Bank issued guidance to home mortgage lenders on what it regarded as best practice in home mortgage lending assessment. The second set of key events comprised the terrorist attack on the US on 11 September 2001 and the subsequent setback for the tourist and air travel businesses, as well the effect of the claims facing the insurance industry as a result of the attack. In the immediate aftermath of these events, banks reassessed their outlook for the economy, reviewed the implications for their business and, in particular, reviewed their exposure to industries vulnerable in the aftermath of the attack. The Bank was in contact with individual credit institutions in the wake of the attack. It requested them to assess issues such as their primary exposure to vulnerable sectors. It also enquired as to whether their loan assessment policy had changed as a result of the deterioration in economic conditions. The Bank also asked whether banks had observed any change in arrears patterns. Although a large 138 Annual Report 2001 minority of credit institutions indicated that they had some exposure to so-called ‘‘vulnerable’’ sectors, these exposures did not threaten the stability of the banking system. 2.4.1 Other significant events — AIB/Allfirst In early 2002, AIB reported a loss of $691 million due to fraudulent trading at its subsidiary US Allfirst Bank. From a financial stability viewpoint there are a number of issues which are of relevance. On discovery of the events at Allfirst, AIB acted immediately to estimate the level of the losses and to inform the regulatory authorities (Central Bank, Federal Reserve) and the market about the situation. From a reputational viewpoint AIB’s prompt handling of the issue, the announcement of a definite loss amount and the appointment of an external investigator to oversee the internal investigation were viewed positively by the market. Despite the failure of controls which resulted in the substantial currency trading losses reported by AIB, the financial stability of the AIB group is not in question — the solvency ratio of AIB group fell from 10.8 per cent to 9.9 per cent (required minimum is 8.5 per cent). Allfirst has been restored to its status of being ‘well-capitalised’ (overall capital ratio of 10 per cent and a tier one ratio of 6 per cent) which is an important indicator for the US market in helping to restore confidence about Allfirst’s ability to continue to do business. The liquidity position of both Allfirst and AIB remained comfortable during the period. In terms of the regulatory response, the US Federal Reserve, which is responsible for the prudential supervision of Allfirst, dispatched an investigation team to Allfirst immediately upon being informed of the losses. Two officers from the Bank were immediately sent to join the Federal Reserve investigation team. Both regulatory authorities were concerned to maintain the financial stability of Allfirst/AIB and to identify the precise source of the losses. The Bank is continuing to work closely with the US Federal Reserve to finalise the investigation of the events at Allfirst. The Bank has written to all credit institutions re-emphasising the need for compliance with best international standards of management and controls and has requested that they arrange independent verification that these controls are in operation. 2.4.2 Aggregated micro-prudential indicators In macro-prudential terms, the deterioration in the economic climate has had a predictable effect on lending, with credit growth falling from over 20 per cent at the start of 2001 to 14.2 139 Annual Report 2001 per cent at end-February 2002 (as indicated in Chart 1). The expectation that there might have been a deterioration in asset quality over the course of 2001 is borne out by the data. In the event, there was a marginal disimprovement in the banks’ aggregate data on non-performing loans (relative to the stock of private-sector credit outstanding) over the second half of last year. This brought a halt to the dominant pattern for this measure over the last three years (see Chart 10). Moreover, as can be seen from the same chart, aggregate provisions (again as a percentage of total private-sector credit) increased marginally from their steady level of just below 1 per cent towards the end of 2001. Maintaining provisions at this level while nonperforming loans, as a percentage of total credit, have declined steadily, has allowed provisions as a percentage of nonperforming loans to increase from a coverage of about 60 per cent at the end of 1998 to a coverage of about 118 per cent coming to the end of 2001 (see Chart 11). The Irish banking system, therefore, remains well provided for against bad debts. Nevertheless, credit institutions have been maintaining a close watch on the performance of their portfolios, with some opting to put a small number of borrowers on ‘‘watchlists’’ in the wake of the events of September 11. A small number of institutions have also put enhanced systems in place to monitor their portfolios, although the majority believe their current systems to be adequate for this task. Chart 10: Non-Performing Assets and Provisions as a Percentage of Private Sector Credit (1998 to 2001) – Ireland 1.4 1.2 per cent 1.0 0.8 0.6 0.4 Jun-98 Dec-98 Jun-99 Dec-99 Non-Performing Assets as % of PSC 140 Jun-00 Dec-00 Jun-01 Provisions as % of PSC Dec-01 Annual Report 2001 Chart 11: Provisions as a Percentage of Non-Performing Assets (1998 to 2001) – Ireland 140 120 per cent 100 80 60 40 20 0 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 This healthy picture is also shown in the aggregate data on bank solvency, as set out in Chart 12. This chart shows the average solvency ratio for the subset of institutions that could be regarded as ‘‘domestic’’ banks. This indicates that the average solvency ratio is maintained well above the regulatory norm of 8 per cent of risk-weighted assets. As can be seen from Chart 12, there has been no discernible decline in solvency as a result of the events of 2001; in fact, the average solvency ratio increased marginally towards the end of last year. Chart 12: Average Solvency Ratio of "Domestic Banks" (1995 to 2001) – Ireland 14 13 per cent 12 11 10 9 8 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 141 Annual Report 2001 2.4.3 Bank profitability In terms of profitability, Irish banks in common with all commercial enterprises have benefited from the exceptional growth of the Irish economy in recent years. This is reflected in Table 1, which shows the relative profitability of Irish banks. However, Irish banks’ profitability in 2000 was somewhat lower than in 1995, reflecting the increasingly competitive nature of banking in Ireland. In particular, the entry of foreign institutions into the home mortgage and retail deposit markets in 1999 lowered interest margins markedly. Underlying the movements in overall profitability are structural changes in the composition of income. Over time, an increasing proportion of Irish banks’ gross income has come from noninterest rate related sources reflecting diversification into the provision of financial services other than straightforward deposit taking and lending. Furthermore, operating expenses as a proportion of gross income have been on a sustained downward trend, reflecting increased efficiency in bank operations. Overall, Irish banks remain very profitable in an increasingly competitive environment. In part, this profitability reflects buoyant underlying economic conditions, but is also underpinned by a diversification of business and increased operational efficiency. Table 1: Bank Profitability (Profit Before Tax as a Percentage of Average Balance Sheet Total) Ireland France Germany Netherlands Portugal UK USA Coverage 1995 1996 1997 1998 1999 2000 All Banks All Banks All Banks All Banks Commercial Banks Commercial Banks Commercial Banks 1.50 0.15 0.57 0.75 0.65 1.17 1.81 1.46 0.18 0.53 0.78 0.77 1.14 1.85 1.35 0.28 0.47 0.74 0.88 1.15 1.93 1.43 0.35 0.71 0.61 0.83 1.23 1.81 1.24 0.47 0.38 0.78 0.80 1.35 2.03 p 1.19 1.38 p p indicates provisional data Source: OECD and Central Bank of Ireland 2.4.4 Looking ahead The risks to the global and domestic economies outlined earlier, raise the question of the degree to which the Irish financial system could weather a sharp decline in economic activity. The experience of the last year highlights the resilience of the Irish banking system to economic weakness. This resilience was also demonstrated in the Bank’s most recent stress testing exercise, where individual institutions were required to evaluate the effect of an adverse economic scenario on their financial position. This hypothetical shock embodied some of the features that are currently relevant, and more that could become relevant, to the Irish economy in the future. 142 Annual Report 2001 This severe stress test exercise demonstrated that Irish banks, like other firms, are not immune to the vagaries of the economic cycle. This is reflected in the degree to which lending and total asset growth declined in the adverse shock scenario relative to the baseline. The postulated collapse in economic activity would cause a significant decline in asset quality resulting in a sharp rise in estimates of non-performing loans and provisions. The lower business volumes and the increase in provisions would hit profits, with profit growth declining significantly over the course of the scenario. Nevertheless, the exercise suggested that the solvency and liquidity of the banking system could be maintained in the face of a significant adverse shock. This reflects the strong solvency and liquidity position of the Irish banking system, which would allow a decline in solvency ratios without a breach of regulatory limits. In the Bank’s last financial stability report, published in its Annual Report for 2000, it underlined the caveats that should accompany these stress test results. It noted that, because of their mechanical nature, they could not cover all eventualities. This health warning is still valid. 2.5 Overview International experience indicates that the health of the overall economy is probably the most robust leading indicator of the health of the banking system. Although there are dangers for financial stability in having a growth rate which is unsustainably in excess of potential for a long period of time, there are also dangers from the kind of very rapid slowdown in the growth rate which Ireland has experienced since about the middle of last year. High growth rates may encourage agents to enter contracts that imply a high level of financial commitment on the expectation that past income trends would continue into the future. Another potential source of fragility for the financial system could arise from a substantial erosion of international competitiveness. The competitive position of the Irish economy improved steadily throughout most of the 1990s, underpinned by strong productivity growth, moderate wage increases and generally favourable exchange rate developments. However, a significant turning point was reached during the second quarter of 2001. While average earnings growth continued to accelerate, a sharp downturn in manufacturing output per person was recorded. This trend continued throughout the remainder of the year, bringing with it an erosion of some of the competitive gains that the economy had experienced in the preceding years. A further loss of competitiveness is to be expected in 2002. Average earnings growth in the manufacturing sector is expected to exceed the growth rate of output. As a result, it is projected that there will be a faster rate of increase in per unit wage costs than will be 143 Annual Report 2001 experienced by our main trading partners. Such a loss of competitiveness would be further aggravated if a substantial appreciation of the euro, which some observers seem to expect, were to materialise. 3. The External Dimension 3.1 The US Economy A stable and strong macroeconomic environment is a cornerstone of overall financial stability. Past evidence suggests that a fall in the growth rate of GDP reduces the repayment capacity of borrowers and leads to systemic weakness in the banking industry. Growth in the US economy slowed precipitously, from an average of around 4 per cent between 1996 and 1999 to a small negative value in the third quarter of 2001. Taken in isolation and given the speed of the slowdown (see Chart 13), past experience might suggest that this could pose trouble for the US banking system. The US banking system is, however, better capitalised than it was in entering previous slowdowns, ensuring that it is better placed to weather cyclically related losses. In addition, the US economy appears to have avoided a recession last year and economists are now quite bullish about future growth prospects. However, the relative brevity of the recent business cycle downturn has meant that macroeconomic imbalances have not been worked off and, accordingly, continue to present downside risks to the economic outlook and also to financial system stability. Chart 13: Real GDP Growth (1995Q1 to 2001Q4) - USA per cent (q-on-q % change, annualised) 10 8 6 4 2 0 -2 1995 1995 1996 Q1 Q3 Q1 1996 1997 1997 1998 Q3 Q1 Q3 Q1 Source: Bureau of Economic Analysis 144 1998 1999 1999 2000 2000 2001 2001 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Annual Report 2001 3.1.1 Household leverage An important risk to financial stability could emanate from the housing market. Despite the negative sentiment in equity markets throughout last year, especially in the high-tech end of the market, house prices continued to accelerate into 2001. They slowed, however, to a still fairly fast pace of 7.1 per cent in the fourth quarter. This has helped to sustain consumer expenditure since the start of the recent slowdown in activity in the US. The concern among policymakers is that a softening in the market could see consumer confidence being undermined and thus precipitate a steep fall in consumers’ expenditure. The extent of the possible adjustment to such a combination of asset price declines, and the potential implications for financial fragility in the US, would depend, inter alia, on how leveraged the household sector is and how its ability to service its loan commitments would be affected by ongoing sluggish economic performance. High and growing levels of consumer debt have helped to support the robust consumer spending that has helped to sustain the US economy in the face of retrenchment in almost all other areas of aggregate expenditure. Chart 14 illustrates the strong systematic and negative relationship between consumer credit (as a percentage of disposable income) and the unemployment rate. If the historical pattern evident from the chart continues into the future, then any further increase in the unemployment rate would probably precipitate a bunching of personal bankruptcies and/or a wave of financial consolidation by households. In either case, it could put a damper on aggregate consumption as households attempt to rebuild savings, which are currently around historically low levels. The situation could be aggravated if banks were to respond to an accumulation of loan losses on consumer debt by squeezing credit availability still further. 23 12 22 11 21 10 20 9 19 8 18 7 17 6 16 15 5 14 4 13 Unemployment Rate (%) Consumer Credit (as % of Disposable Income) Chart 14: Consumer Credit as Percentage of Disposable Income and Unemployment Rate (1980Q1 to 2001Q4) – USA 3 1980 Q1 1981 Q3 1983 Q1 1984 Q3 1986 Q1 1987 Q3 1989 Q1 1990 Q3 1992 Q1 1993 Q3 Consumer Credit as % of Disposable Income 1995 Q1 1996 Q3 1998 Q1 1999 Q3 2001 Q1 Unemploment Rate Source: Federal Reserve Board of Governors, Bureau of Economic Analysis and Bureau of Labor Statistics 145 Annual Report 2001 The ratio of total bank credit to GDP provides an indication of the extent to which the banking sector of the economy may be over-extended. As Chart 15 highlights, the current reading from this variable could be a source of discomfort to regulators. Core loans (i.e., commercial and industrial, real estate and consumer loans) as a percentage of GDP have trended upwards over the last two decades from about 26 per cent to reach a peak of 33 per cent towards the end of 2001 before falling slightly since then. However, a number of related indicators (e.g., debt service payments as a percentage of disposable income, the ratio of nonperforming loans to total loans and charge-off rates, see Charts 16 to 18) would all tend to suggest that the US banking system entered the recent economic slowdown in a healthier condition than at the start of previous slowdowns or recessions. Chart 15: Core Loans as a Percentage of GDP (1980Q1 to 2001Q4) – USA 34 32 30 per cent 28 26 24 22 20 1980 Q1 1981 Q3 1983 Q1 1984 Q3 1986 Q1 1987 Q3 1989 Q1 1990 Q3 1992 Q1 1993 Q3 1995 Q1 1996 Q3 1998 Q1 1999 Q3 2001 Q1 Source: Federal Reserve Board of Governors and Bureau of Economic Analysis Nevertheless, caution regarding the health of the financial sector is still warranted. Some of the macro-prudential indicators relating to the banking system show some deterioration. In conformity with its cyclical pattern, debt service payments as a percentage of disposable income increased quite sharply during the spurt in growth in the latter half of the 1990s (see Chart 16), and reached 14.3 per cent in the fourth quarter of last year. A rosier picture is presented by non-performing loans as a percentage of total loans, which had only edged up slightly by the second quarter of last year from a relatively low value of 146 Annual Report 2001 about 1 per cent for the latter 1990s compared to over 3 per cent for the latter 1980s and early 1990s. 15.0 18 14.5 16 14.0 Household Debt (%) 14 13.5 12 13.0 12.5 10 12.0 8 11.5 6 11.0 4 10.5 2 10.0 Debt Service Payment (as % of Disposable Income) Chart 16: Debt Service Payments as a Percentage of Disposable Income and Change in Household Debt Outstanding (1980Q1 to 2001Q3) - USA 1980 1981 1983 1984 1986 1987 1989 1990 1992 1993 1995 1996 1998 1999 2001 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Household Debt Outstanding Debt Service Payments Source: Federal Reserve Board of Governors and Bureau of Economic Analysis Chart 17: Non-Performing Loans as a Percentage of Total Loans, All Banks (1985Q1 to 2001Q2) – USA 4.5 4.0 3.5 3.0 per cent 2.5 2.0 1.5 1.0 0.5 0.0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Source: Federal Reserve Board of Governors 147 Annual Report 2001 1.4 3.5 1.2 3.0 1.0 2.5 0.8 2.0 0.6 1.5 0.4 1.0 0.2 0.5 0.0 Consumer Loans (per cent) Real Estate Loans (per cent) Chart 18: Charge-Off Rates, All Banks (1985Q1 to 2001Q3) – USA 0.0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Real Estate Loans Consumer Loans Source: Federal Reserve Board of Governors The patterns for charge-off rates on real estate and consumer loans present a somewhat mixed picture. They have diverged quite sharply since the early 1990s, with the former falling to very low levels before increasing somewhat (to 0.2 per cent) towards the end of last year while the latter rose steadily during the second half of the 1990s to reach a level of 3.1 per cent in the fourth quarter of last year. Although disposable income tends to fall in recessions, the tax cuts already enacted (with the possibility of more in the pipeline), along with the 475 basis points (bps) reduction in official interest rates brought about by the Federal Reserve last year, should ensure that the aggregate debt service ratio should, on balance, not come under undue pressure and might even fall in the near term. The figures for bankruptcy filings paint a gloomier picture however, with fairly sharp increases — both business and non-business — being experienced from the beginning to the fourth quarter of 2001. Although the authorities charged with a mandate for financial stability have to be always vigilant of the dangers of overindebtedness, it should be borne in mind that increased indebtedness in an economic downturn may merely reflect the efficient operation of the loan market in enabling some firms and households to buffer themselves against temporary falls in cash flow and disposable income. Another factor to be considered in looking at household leverage is that financial innovation, particularly relating to mortgage funding, has made it easier for consumers to borrow during slowdowns in economic activity. 148 Annual Report 2001 Households and firms may therefore be moving to a higher and more optimal level of leverage. Chart 19: Bankruptcy Filings, Annual Percentage Changes (1997Q1 to 2001Q3) - USA 30 20 per cent 10 0 -10 -20 -30 1997 Q1 1997 Q3 1998 Q1 1998 Q3 1999 Q1 Business 1999 Q3 2000 Q1 2000 Q3 2001 Q1 2001 Q3 Non-Business Source: Administrative Office of the US Courts 3.1.2 Interest rates, term and quality spreads Higher real interest rates are frequently invoked as a variable that can have adverse systemic implications, in particular as they are likely to hurt the non-financial corporate sector, some parts of which tend to be highly leveraged. Following the very sharp and speedy interest rate reductions brought about by the Federal Reserve in 2001, short-term real interest rates are now close to zero, having come down from fairly high levels in a comparatively short period of time. Whatever threat may have been overhanging the financial system from high real interest rates has now been obviated. The signals emanating from the government bond market about the future growth prospects for the economy have been quite positive since the middle, but more particularly since the autumn of last year. Historically, the yield spread between short- and long-term bonds has proved to be a fairly reliable indicator of slowdowns/recessions and recoveries in the US economy8. A plot of these rates since January of last year shows the short rate exceeding the long rate for the two quarters immediately preceding what the NBER classified as the start date of a US recession (i.e., March of last year), but which now increasingly 8 The Bank’s first financial stability report contained a brief historical examination of this relationship. 149 Annual Report 2001 looks like a slowdown instead. If previous experience can be relied on, an optimistic note may be warranted since this indicator is now signalling a recovery, with the long-short spread widening since early last year (see Chart 20) to reach about 330 bps in April of this year. Chart 20: Long and Short Term Interest Rates (January 2000 to March 2002) – USA 7 6 5 per cent 4 3 2 1 0 Jan Mar May Jul 00 00 00 00 Sep Nov Jan Mar May Jul 00 00 01 01 01 01 3 Month Sep Nov Jan Mar 01 01 02 02 10 Year Source: Federal Reserve Board of Governors US swap spreads provide an indication of markets’ rating of risk in the US financial sector (Chart 21). As the chart indicates, swap spreads had widened over the latter part of the 1990s, as periods of international financial crisis prompted a re-assessment of risk. However, they narrowed back quite markedly during 2001, which suggests that the markets’ assessment of the risks attached to the financial sector has been improving. 150 Annual Report 2001 Chart 21: 10 Year Swap Spreads over Treasuries (January 1996 to March 2002) - USA 140 120 basis points 100 80 60 40 20 0 Jan 96 Jul 96 Jan 97 Jul 97 Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Source: Bloomberg Investors’ appetite for risk can be measured by the additional yield they demand on corporate bonds relative to treasuries. At the moment, this spread for the below-investment grade bonds of the corporate sector (i.e., junk bonds) is at its widest level since 1990, reflecting deep pessimism on corporate defaults. The spread has narrowed slightly from its widest margin in the aftermath of September 11 but is still a long way short of what it stood at just before the terrorist attack. These high yields amount to a credit crunch for many companies, particularly in the hightech segment of the market. Following the collapse of the hightech and dotcom share prices, the market for initial public offerings in the US has, for all intents and purposes, dried up (see Chart 22). As already mentioned, the US still faces a number of imbalances and misalignments that have accumulated over a fairly long time period. While the weakening in US economic activity over the past year helped to correct part of these problems — especially the unsustainably high level of investment spending particularly in some of the ‘‘New Economy’’ technologies — imbalances remain an important source of risk for financial stability in the US. Some of these risks have recently become the focus of attention of policymakers. We briefly look at three of these below, namely house prices, the possibility that recent productivity gains prove to be only transitory and the related issue of the exchange rate. Annex 3 attached to this report highlights some of the issues related to an additional imbalance 151 Annual Report 2001 — namely, the US current account deficit, which is widely regarded as unsustainable at its present level. Chart 22: Initial Public Offerings (IPOs) (January 1997 to February 2002) – USA 90 75 Number of IPOs 60 45 30 15 0 Jan 97 Jul 97 Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Source: Bloomberg 3.1.3 House prices The US housing market has, so far, been largely immune to the problems affecting the wider US economy. House prices have experienced a trend acceleration throughout the 1990s reaching an annualised rate of increase of almost 10 per cent in the first quarter of last year before decelerating somewhat in the following quarters (see Chart 23). It is now fairly well accepted that substantial capital gains for homeowners, combined with an increased ability to turn these gains into spending power via equity withdrawal, has helped to sustain consumer sentiment and consumer expenditure since the start of the recent slowdown in activity in the US. Should the housing market soften and house prices come under downward pressure, it could act as a trigger for a further collapse in consumer confidence and dent consumers’ expenditures, which was the main support to the US economy in 2001. The severity of this threat is underscored by the fact that US personal consumers’ expenditure accounts for almost two-thirds of US GNP. 152 Annual Report 2001 Chart 23: FreddieMac Conventional Mortgage Home Price Index, Annual Growth Rates (1980Q1 to 2001Q4) - USA 12 10 per cent 8 6 4 2 0 1980 Q1 1981 Q3 1983 Q1 1984 Q3 1986 Q1 1987 Q3 1989 Q1 1990 Q3 1992 Q1 1993 Q3 1995 Q1 1996 Q3 1998 Q1 1999 Q3 2001 Q1 Source: FreddieMac The extent of the adjustment in the wake of such a combination of asset price declines and the implications for financial fragility in the US would depend, inter alia, on how leveraged the household sector is — more specifically on loan-to-value ratios in house purchases. As noted already, debt service payments as a proportion of disposable income have been trended upwards since the mid-1990s but have increased by only about two percentage points while non-performing loans and charge-off rates (except for consumer loans) have, as also noted already, only increased modestly from low levels. Furthermore, with the 475 bps reduction in money market rates brought about by the Federal Reserve since late last year, the debt service ratio should now be levelling off if not falling. Recent data for second hand house sales showed a substantial annual increase, which expert commentary suggest is largely attributable to a robust rebound in consumer confidence following the setback post-September 11 and the drop in mortgage rates following the Federal Reserve’s steep and rapid reduction in short-term money market rates. Some economists are also arguing that, for risk-averse investors, housing is now becoming a more attractive investment alternative to the stock market. In analysing the likely effects of indebtedness on the financial health of the economy, it is important to avoid a partial analysis. In considering the likely consequences of the strong build-up in household debt, an important additional consideration here is 153 Annual Report 2001 that, although consumer debt has increased as a percentage of disposable income, consumers’ balance sheets have improved due to a combination of rising house prices and falling interest rates along with the tax rebates that occurred in 2001. Moreover, despite the setback last year, share prices have also played an important role in boosting household net worth. Although financial debt held by US households increased sharply since 1997, assets have risen by about five times this amount, increasing net worth per household by about $36,0009. Financial innovation, particularly via mortgage equity withdrawal, has also meant that an increasing proportion of this net worth is being rendered liquid and spendable. Both factors are helping consumers to sustain a level of expenditure that is substantially higher than would have been reasonably expected given the shocks to the US economy over the last year and a half or so. 3.1.4 Sustainability of higher productivity growth rates The majority view among US academics and policymakers10 would appear to be that most of the gains in productivity in the US economy in recent years have been structural. However, there is still a non-trivial probability that this increased productivity growth could, in the event, turn out to be only temporary because it is purely cyclically related or due to very rapid growth in the capital stock in some sectors of the economy that is not viable or sustainable. Figures that have become available since the recent slowdown in the US economy support the structural interpretation and suggest that the productivity renaissance that began in the US in the mid-1990s remains largely intact. Indeed, figures on productivity increases for the final quarter of last year (it grew at an annual rate of 5.2 per cent) lends some additional support to the structural and permanent interpretation of the recent US productivity boom. Productivity experts11 argue that the case for annual productivity growth over the next decade at about 2.2 per cent is robust. Higher productivity means that higher wages can be granted to employees without generating inflationary pressures. This raises the speed limit of the economy. Other things being equal, the need for the central bank to tighten monetary policy is reduced and the threat to financial stability coming from highly leveraged households and firms defaulting on their payments is lessened. Therefore, the support which increasing productivity growth lends to financial stability is evident. 9 See ‘‘Burden weighs on American shoppers’’, Financial Times, January 24, 2002. 10 As reflected in the presentations and comments at the symposium sponsored by the Federal Reserve Bank of Kansas City Jackson Hole (Wyoming) in August of last year. 11 See Jorgenson and Stiroh (2002), paper presented at the American Economic Association in January 2002. 154 Annual Report 2001 However, corporate profits continue to be weak and this is exerting a brake on investment, particularly in the new economy technologies. However, as the latter have been the main driving force behind the high productivity growth rates of the latter 1990s, the near-term future productivity gains may be less than expected. 3.1.5 Productivity and the exchange rate It is widely believed that one of the reasons, if not indeed the main reason, warranting the very strong performance of the dollar (particularly vis-à-vis the euro) over recent years is that this acceleration in productivity in the US is a structural and lasting phenomenon. The recent poor performance of US equity markets, especially for high-tech stocks, is symptomatic of evaporating optimism about the New Economy. However the dollar/euro exchange rate has apparently been buoyed up by the same New Economy belief but has not yet seen a reversal of fortunes to any significant extent. If the structural productivity story turns out to have been false, then there could be a substantial reversal of capital flows resulting in a significant fall in the value of the dollar and a corresponding appreciation of the euro. This has the potential to destabilise the global economy with predictable adverse consequences for financial stability. The relationship between the exchange rate and productivity is discussed in more detail in Annex 2 at the end of the paper. Overall risks could be compounded if important real estate prices, especially house prices, were to come under downward pressure at the same time as the dollar. The combination of these two events could reduce both structural and cyclical support for the dollar at the same time and could result in a sharp fall in its value. As history demonstrates, very large swings in the value of exchange rates can occur over fairly short periods of time. Such a combination of events would compound the systemic weakness already in the system following the collapse of the high-tech share price bubble. Most recent data relating to the US economy suggest these risks, while still substantial, may have ameliorated somewhat over the past year. The cyclical prop to the dollar now seems to be fairly well underpinned, with the majority of indicators telling a favourable story about the evolving conjunctural situation in the US. The structural prop to the dollar, i.e., the New Economy productivity renaissance, also continues to be supported, according to latest productivity data, although more observations will be needed to bed down this conclusion. The general belief is also that the resumption of productivity growth may not be as potent as it was in the latter half of the 1990s. In sum, the risk that the dollar will fall significantly, from what many see as an unsustainably elevated value at the moment, appears to be diminishing slightly. If this assessment is correct, this would also 155 Annual Report 2001 lessen one of the danger points for financial stability in Ireland, i.e., a steep fall in the dollar. 3.2 Prospects for the Japanese Economy The recession in the Japanese economy intensified during late 2001 and early 2002, as did the problem of deflation, which is now in its fourth year as measured by the consumer price index. On a wholesale price index basis, the economy has experienced almost continuous deflation for a decade (see Chart 24). The exceptional and increasing weakness of Japanese activity over the past decade (see Chart 25) and the associated build up of structural problems leave Japan especially vulnerable to any shocks emanating from the international economy and, in fact, increase the risk that Japan will, itself, be a source of risk for the international financial system. In the context of the current adverse macroeconomic situation and limited policy flexibility, the major risks facing the domestic economy and financial sector, and the links through which these could potentially impact on international financial stability, are set out below. Chart 24: Wholesale and Consumer Price Inflation (1990Q1 - 2001Q3) – Japan 5 Percentage Change (year-on-year) 4 3 2 1 0 -1 -2 -3 1990 Q1 1991 Q1 1992 Q1 1993 Q1 1994 Q1 1995 Q1 Wholesale Source: IMF 156 1996 Q1 1997 Q1 1998 Q1 Consumer 1999 Q1 2000 Q1 2001 Q1 Annual Report 2001 Chart 25: Real GDP and Real Private Consumption Expenditure Growth (1985 to 2002) – Japan 7 6 5 per cent 4 3 Estimates 2 1 0 -1 -2 1985 1986 1987 1988 1989 1990 e e 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Real Private Consumption Exp. Real GDP Source: OECD 3.2.1 Present macroeconomic position Japan’s economic situation reflects the weakness of external and domestic, private and public demand. The industrial sector was particularly hard hit by the downturn in the international economy, given the importance of IT-related and capital goods in Japan’s and other Asian economies’ exports. Capital investment contracted sharply, given the increase in spare capacity and in an environment of ongoing weakness of corporate profitability. Private consumption, already exceptionally weak for some time, was further undermined by an increase in unemployment, a fall in employee compensation and negative sentiment regarding the prospects for consumer income. Both consumption and investment plans were also deterred by the worsening in deflation, which encouraged a deferment of spending plans. Public investment was unable to provide a stimulus to activity, given the deterioration in the fiscal situation over the past decade. The problem of deflation has become more pressing over the past year, in view of the acceleration in the rate of decline in prices, from −0.7 per cent in October to −1.9 per cent in January; the length of the deflation period, which increases the risk of it becoming embedded in expectations; an ageing population, saving for retirement having already incurred fairly large capital losses following the asset price meltdown; and the lack of flexibility with traditional macroeconomic policy tools. 157 Annual Report 2001 The outlook for the economy is for one of continuing weakness, although there are tentative signs that the worst may be over, as net exports and inventory adjustment exert less downward pressure on activity. Nevertheless, important downside risks remain. Consumers and businesses remain burdened with large volumes of debt, which have been increasing in real terms by the ongoing deflation. These factors, combined with the restructuring needs of the domestic economy, have contributed to depressed investment and consumer spending. In this context, most forecasts of Japanese economic growth are for a negative outturn again this year, with the economy only returning to positive growth in 2003, supported by an international upturn. These developments occur against a background of deep-rooted problems in the Japanese economy, which makes the risks attached to the present macroeconomic position unusually severe. Japan is still saddled with problems, which relate to the bursting of its asset price bubble in 1991 and the subsequent failure to adequately restructure the balance sheets of the financial and corporate sectors. The authorities relied on a strategy of ‘‘growth before reform’’ — using fiscal and monetary stimulus to reactivate growth in the intervening decade, to provide an environment in which structural reform could be undertaken. However, the weakness of the financial and corporate sectors meant that the normal transmission from policy easing to domestic demand ceased to function and the growth dividend, along with restructuring, failed to materialise. However, the extent of macroeconomic policy easing has itself generated a number of particular risks. 3.2.2 Risks associated with asset price movements With the financial sector already burdened by a severe nonperforming loans (NPL) problem, low profitability and shortage of capital, banks are vulnerable to asset price shocks, which would reduce the value of its capital. This encompasses bond, equity and property prices, in view of the Japanese banking sector’s disproportionately large holdings of such assets on its balance sheet. The extent of fiscal policy easing has brought the government debt and deficits to levels, which pose risks for the sustainability of the government budgetary position. Yields on Japanese Government Bonds (JGBs) remain extremely low however, despite the overhang of fiscal consolidation which Japan faces and the fact that Japanese government debt has been downgraded by international rating agencies on a number of occasions recently. A major contributing factor to the low level of yields is the availability of significant private savings in the Japanese economy, which has enabled the government to finance much of its borrowing within the domestic economy. Having extended monetary policy towards significant monetary base expansion over recent years, the Bank of Japan (BoJ) is a 158 Annual Report 2001 major purchaser of JGBs. The domestic banking sector is also a major purchaser; in the context of an extraordinary increase in the amount of liquidity being provided by the BoJ but a marked reluctance to engage in new lending, banks have instead chosen to use liquidity to buy assets such as JGBs. These factors help to partly explain why there is no real risk premium built into JGB yields. However, the absence of such a premium leaves JGB holders particularly vulnerable to the prospect of a loss of confidence in fiscal consolidation and a corresponding increase in yields. Such an increase in yields would have serious negative consequences for the budget and fiscal consolidation — by increasing debt service burdens — and for banks. Given the latter’s already weak balance sheets, if banks were to suffer capital losses on significant holdings of JGBs it would increase insolvencies. This would have further negative consequences for the budget, by increasing the risk of further calls on public funds to finance financial sector rehabilitation. The economic decline has exacerbated the rate of decline in equity and real estate prices, which further reduce the value of banks’ assets. Banks are significant holders of equities as a result of the practice of holding shares in corporations with which banks have trading relationships. Falling asset prices have renewed concerns at the ability of the banks to meet capital adequacy standards. This has been exacerbated by the introduction of a mark-to-market accounting standard in March 2002.12 The average of published capital adequacy ratios of major banks fell over the past year, although for the system as a whole they are still above the levels pertaining before the 199798 banking crisis. These problems have deterred banks from engaging in credit creation, reducing the effectiveness of the monetary policy loosening which has been taking place through increased liquidity provision to the banking system, and reducing banks’ ability to dispose of NPLs out of operating profits. Reserves for potential loan losses are much lower than market estimates of either bad or non-performing loans, as a consequence of the low profitability of the sector. The Government’s Emergency Economic Package, announced in April 2001, contains plans for disposal of NPLs and some of the banks’ equity shareholdings, which should have positive long run implications for the sector although it could, in the short run, drive asset prices even lower. In any case, implementation has been slow. 12 This extends fair value accounting from trading to investment securities. Any net unrealised losses on investment securities must now be deducted directly from retailed earnings on the balance sheet, reducing Tier 1 capital but not affecting the accounting measure of profits. 159 Annual Report 2001 3.2.3 Risks associated with corporate sector weakness Difficulties in the corporate sector have also increased the risks facing the Japanese economy in general and the financial sector in particular. The combined effects of excessive indebtedness, significant overcapacity, a weak capital base, poor profitability and a corporate culture which traditionally valued lifetime employment and cross-shareholding relationships rather than shareholders’ returns, have undermined the ability of the sector to drive growth and innovation. With lending to companies accounting for 67 per cent of Japanese banks’ domestic loan book, and 92 per cent of NPLs, the performance of the corporate sector is a serious factor in assessing the stability of the banking sector. While aggregate operating profits for the corporate sector rose in each of the two years to March 2001, non-financial listed companies have suffered substantial falls in their operating profits in the past year. The vulnerability of large portions of the corporate sector means that any further economic deterioration, or tightening in credit conditions, could trigger a rise in bankruptcies, creating a vicious circle for economic activity. As the above illustrates, Japan remains in a difficult macroeconomic and financial situation. The risks which it faces are exacerbated by the important interrelationships, which exist between the macroeconomy; the orientation of fiscal and monetary policy; financial and corporate sectors’ balance sheet, and profitability concerns. On balance, it appears that the risks attached to this conjuncture have worsened over the past year, given the economic downturn and its effects on the financial, corporate, government and household sectors. 3.2.4 Potential for spillover effects onto the international financial system So far, the significant risks facing Japanese financial system stability appear to have had a limited effect on the stability of the international financial system and there is little to suggest that the possibility of such contagion has increased recently. Nevertheless, in view of the size and importance of Japan in the international economic and financial environment — as the world’s second largest economy — it is useful to consider where such spillovers could potentially arise. With regard to the potential transmission of Japanese asset price changes onto international financial stability, the fact that foreign investment in the Japanese government bond and equity market has slowed over the past year suggests that the potential risk emanating from this channel may have been slightly reduced, but nonetheless remains important. 160 Annual Report 2001 However, risk associated with exposures to Japanese bank lending may have increased over the same period, although the levels of exposures are comparatively low. A number of rating agencies have placed their long-term ratings of a number of Japanese banks on downgrade or review, reflecting their assessment that the capacity of government to continue to provide an ‘‘underpinning’’ to Japanese banks’ foreign branches may be weakened by the economic downturn and worsening fiscal position. Nevertheless, in view of the relatively limited size of these exposures in the aggregate of foreign lenders’ exposures, a major financial spillover effect via this channel seems fairly unlikely. Technically, if domestic circumstances were to drive any sharp withdrawal of Japanese banks’ international lending, it could disrupt financing in countries or sectors heavily reliant on such lending. Although the probability of this happening appears low — in the absence of international disruption to financing conditions — nevertheless the particularly strong role of Japanese institutions in lending to Asian emerging economies increases the risk of a spillover in this direction, emanating from further economic decline or a tightening in credit conditions in Japan. More likely than the above, however, is the potential for Japanese financial stability to be adversely affected by the transmission of shocks emanating from the international financial system. 3.3 Euro Area — Assessment of Current Risks While the euro area suffered a deeper than expected slowdown in economic activity during 2001, it appears that the trough was reached in the final quarter of last year, and the economy is now moving along a path to recovery. The economic slowdown generally reflected the impact of the slowdown abroad which, given the increased worldwide integration of financial markets and international trade, had greater effects on the euro area than originally anticipated. Weakening economic activity was evident in nearly all of the individual euro area countries, with Germany and Italy (which together account for almost half of euro area economic activity) being particularly adversely affected. The global economic slowdown facilitated a further sharp fall in export volumes and a deepening of the recession in the exportdependent industrial sector. The impact on domestic demand was driven by the corporate sector, as business investment fell sharply particularly in the second half of last year, in response to both the slowdown in demand and increased uncertainty regarding the potential return from technology spending. While household spending held up reasonably well in relative terms, the impact of declining consumer confidence, as the outlook for labour demand deteriorated, became apparent in quarter four with a significant decline in retail sales growth, although this was offset somewhat by strong growth in passenger car numbers. 161 Annual Report 2001 The most recent challenge for the euro area banking system was the euro cash changeover on 1 January 2002. The changeover went very smoothly and the withdrawal of national banknotes was largely achieved before the deadline of them ceasing to be legal tender. Private-sector indebtedness (as a proportion of GDP) has increased significantly, particularly in 2000 in most euro area economies. It increased with particular rigour in some of the smaller countries, particularly in the Netherlands and Portugal (see Table 2). The heightened vulnerability posed by this increased indebtedness may explain the sustained decline in the growth rate in loans to the private sector since early 2001. Table 2: Private-Sector Credit as a Percentage of GDP Austria Belgium Germany Spain Finland Irelandb Italy Netherlands Portugal 1999 2000 2001a 100.6 81.7 117.8 91.9 54.1 103.1 71.8 129.4 119.7 104.4 79.2 120.7 101.2 53.5 106.9 77.6 139.8 139.5 104.2 77.7 119.8 102.4 57.0 107.4 77.0 138.6 145.9 a GDP data are forecasts and credit data are as at end-October 2001. b The definition of private-sector credit data differs from Bank data as it excludes accrued interest. Source: IMF and Eurostat. The European Commission predicts growth of 1.4 per cent for 2002, based on a recovery around mid-2002 accelerating over the course of the year. This upturn is expected to be underpinned by a decline in inflation, accommodative monetary policy and a recovery in the US and in the wider international economy. A further factor supporting the picture of good prospects for the euro area is the fact that economic fundamentals along with the banking and financial system are generally sound. Furthermore, the euro area economy does not suffer from major macroeconomic imbalances, which would require significant adjustment. It is, however, hampered by significant structural rigidities. To the extent that these retard growth and reduce competitiveness, they can have indirect negative consequences for the health of the financial system. In addition, there are some downside risks arising from conjunctural weakness. These include the risk that economic recovery in the US could be insipid and the potential for financial market turmoil, given the still historically high valuations of US equities and the undervalued exchange rate of the euro. 3.4 UK — Assessment of Current Risks While the pace of economic growth in the UK was generally quite resilient in the face of the global economic downturn, there 162 Annual Report 2001 are a number of imbalances in the UK economy, which warrant close attention. These imbalances, while showing tentative signs of easing, still pose a threat to the prospects for future economic growth. There has been a divergence between the household and corporate sectors on the demand side of the economy, as relatively strong consumer spending contrasts with declining investment and trade. The factors underpinning the strong consumption expenditure, in particular, give rise to concerns. On the supply/output side of the economy, the relative performance of the manufacturing and services sectors has diverged considerably, reaching a 20-year high in the last quarter of 2001. The impact of the global slowdown on GDP growth in the UK was generally offset by the continuing strength in domestic demand. Consumer spending was the main driving force behind domestic demand growth, experiencing a growth rate of 4.2 per cent in 2001. Retail sales have also been particularly strong, with the annual growth rate reaching a 13-year high of 6.2 per cent in the last quarter of 2001, although there have been some signs of easing in early 2002. The strong consumption growth had been encouraged by earlier strong growth in real disposable income and, more recently, by an increased availability of credit. While total lending13 to individuals grew by an annual rate of 11.5 per cent in March 2002, consumer credit grew by 15.1 per cent in the same period. Rising house prices14 have also contributed to increased consumer spending as they encourage mortgage equity withdrawal (MEW) which finances non-housing consumption (see Chart 26). The Bank of England estimated MEW to be £7 billion in the fourth quarter of 2001, bringing the annual total to £22.6 billion. This annual total is a record high and is an increase of 70 per cent on the previous year. While increased consumption expenditure in conjunction with rapidly rising household debt increases the vulnerability of households and the financial sector to adverse shocks, the Bank of England recognises that household income gearing is low by historical standards, given the current low interest rate environment15. Households should therefore be in a reasonable position to meet repayments even if there were unexpected shocks to asset prices and incomes. On the supply side of the UK economy, there is considerable divergence in the performance of the manufacturing and services sectors, reflecting the degree of exposure to global or domestic influences. Manufacturing output (which accounts for about onefifth of GDP) fell by 1.9 per cent in the fourth quarter of last year, which was 5.8 per cent below the level of the fourth quarter of 13 Total household borrowing is comprised of borrowing secured on dwellings and consumer credit. 14 In the year to April 2002, house prices increased by 16.5 per cent according to the Nationwide index. 15 Bank of England, Financial Stability Report, December 2001. 163 Annual Report 2001 the previous year, and is the fourth consecutive quarter of falling output. The manufacturing sector has been particularly affected by weaker external demand and sterling’s strength against the euro. In contrast, services output rose by 0.5 per cent, up 3.1 per cent year-on-year. Overall however, the corporate sector has been experiencing declining profitability16 and increasing indebtedness. The corporate debt to profits ratio is over 14 per cent, a level higher than in the early 1990s. Corporate sector capital gearing (the ratio of loan to share capital) has also been rising steadily over the past two years. However, while income gearing has also been increasing, it is at a low level by historical standards, and hence places the corporate sector in a reasonably strong position to meet debt repayment burdens in the current low interest rate environment. Chart 26: Nationwide House Price Index, Annual Percentage Changes (February 2001 to February 2002) – UK 16 15 14 per cent 13 12 11 10 9 8 7 6 Feb 01 Mar Apr May 01 01 01 Jun 01 Jul 01 Aug 01 Sep Oct Nov Dec Jan 01 01 01 01 02 Feb 02 Source: Nationwide The Bank of England recently highlighted some elements of the corporate sector that pose particular risks to the financial sector17. The commercial property sector has increased borrowing at a rapid rate in the past two years. However, capital values do not appear to be particularly high, and speculative development is limited, thereby reducing the risks of default. The aviation and technology sectors have been particularly affected by the events of September 11 and the global slowdown respectively, and both sectors are perceived to be a greater credit risk than previously. On balance, the corporate sector is 16 Excluding oil companies. 17 Bank of England, Financial Stability Report, December 2001. 164 Annual Report 2001 likely to pose a greater risk to the financial system than the household sector, but the modest levels of income gearing should allow debt-servicing obligations to be met in the current low interest rate environment. 3.5 Emerging Economies An important development with respect to emerging economies over the past year has been the realisation of major macroeconomic and financial sector risks in the Turkish and Argentine economies. In both cases, international financial assistance and the adoption of reform programmes have helped to limit the negative repercussions for economic activity, financial system stability and international contagion. Indeed, the relatively low levels of contagion from these events onto other emerging and industrialised economies have been rather surprising and appear to reflect investors’ perception that the Turkish and Argentine economic problems had unique elements, and therefore did not warrant a re-rating of risk in all emerging economies. The incipient upturn which is underway in most of the major economies is accompanied by an improvement in the outlook and prospects for the emerging economies, which reduces some of the downside risk to international financial stability emanating from macroeconomic weakness in this group. In conclusion, the risks to international financial stability emanating from emerging economies appears to have diminished slightly over the past year, although caution is still warranted given the exposure of European banks to developments in Latin America and Eastern Europe and, to a lesser extent, Asia. 4. Conclusions 4.1 The overall micro-prudential indicators for the Irish banking system indicate that it is stable. The system remains highly profitable and is well capitalised. Asset quality remains good with the ratio of non-performing loans as a percentage of total loans falling steadily to about half its value three years ago and, despite this, provisions being maintained steady at just less than 1 per cent of total credit. This has allowed the coverage rate of provision for non-performing loans to increase steadily to about one and a half times towards the end of last year. 4.2 Despite recording a loss of $691 million due to fraudulent trading at its US subsidiary, the financial stability of AIB Group is not in question. Nevertheless, the event highlighted the seriousness of a failure of internal controls. AIB Group has undertaken an internal reorganisation of the treasury function and reporting responsibilities to address this issue. To minimise this risk for the financial system as a whole, the Bank has 165 Annual Report 2001 contacted all Irish credit institutions to increase focus on the area of internal controls; this includes the requirement that credit institutions arrange independent verification that they are operating the best international standards of control. 4.3 The risks inherent in the broader domestic macroeconomy give an idea of the type and likely size of problems the banking system could face in the future if some of these risks materialise. The assessment carried out here suggests that these risks, although they remain sizable, have nevertheless eased somewhat in recent times. On a positive note, the rate of growth in private credit has more than halved over the last two years while property prices have ceased rising and, in some cases, have fallen slightly. However, private-sector credit as a percentage of GDP continues to rise and has now risen slightly above the average level for euro-area countries. In addition, although property prices seem to have stabilised from very high growth rates, they could overshoot on the downside, with predictable implications for the health of banks’ balance sheets, particularly if the economy were to under-perform. 4.4 The stress tests performed by the Bank in collaboration with the banks indicate the magnitude of the shocks that the banking system, with its existing prudential ratios, could withstand. The hypothetical shocks of the most recent stress testing exercise embody some of the features that are currently relevant (a rapid slowdown in the growth rate), or could become relevant (substantial house price deflation) to the Irish economy. The results from the exercise suggest that the banking system is quite resilient to a variety of shocks. Indeed, this resilience was demonstrated by the real shocks that hit the system over the last year. These stress-testing exercises can be quite helpful in attempting to answer some ‘‘what if’’ questions. However, it should be noted that they are mechanical and are likely to miss some of the important driving forces behind financial fragility; they therefore have to be interpreted carefully and cautiously. 4.5 Of the external macro imbalances and misalignments that currently exist, it is generally agreed that those affecting the US economy pose the greatest threat to the health of the world financial system. In the light of the high and growing exposure of the Irish economy to the US economy, these are also the externally generated risks that pose the greatest potential problem for financial stability in the Irish economy. 4.6 The slowdown in the US economy over the last year and the precipitous fall in high-tech share prices have helped to reduce, but not eliminate, some of these imbalances and misalignments. Arguably, the near-term prospects for the US economy, both from a conjunctural and a financial stability perspective, depends on: 166 Annual Report 2001 (a) whether strong productivity gains will continue to boost income growth; (b) whether the higher net worth of households continues to justify growing indebtedness which, in turn, seems to depend critically on whether the economy will recover sustainably, and in time, to prevent the unemployment rate from increasing substantially beyond its current (moderate) level; and (c) whether the dollar can continue to sustain its apparently elevated value. 4.7 The tentative assessment of the first of these is broadly positive. The majority view of the experts on the faster pace of US productivity growth in the latter half of the 1990s is that it is well founded in structural changes to the US economy and the result of both the production and application of New Economy technologies. However, although the productivity renaissance may be an enduring phenomenon, productivity growth is not likely to be as strong as experienced in recent times. Nevertheless, in helping to both boost incomes and keep inflationary pressures in check, productivity developments have the potential to continue to contribute to underpinning financial stability. 4.8 With respect to the second of these risks, hopes of global recovery seem to depend, to a major extent, on the willingness of US households to continue their high level of spending. This, in turn, may depend on households being able to service their increasing indebtedness. However, looking at both sides of the household balance sheet, it is clear that the household sector has built up considerable net worth during the boom years of the latter 1990s and is now more asset-rich than at similar points in previous cycles. The strong inverse relationship between unemployment and loans (as a percentage of disposable income) would suggest that any further increase in unemployment could give rise to a wave of loan defaults and/or financial retrenchment by households, denting consumption expenditure in the process. 4.9 The third source of risk emanating from the US economy relates to whether the dollar can continue to sustain its apparently elevated value. Both the cyclical and structural props to the dollar, coming respectively in the forms of an improving conjunctural situation and the fact that the New Economy productivity renaissance seems to be more or less intact, would appear to be quite positive. This suggests that the risk that the dollar will fall significantly, from what many see as an unsustainably elevated value at the moment, may be diminishing. Also, the near-term prospects for the dollar have to be seen against the background of investors’ unwillingness to switch portfolios to the other two major currencies, the euro and the 167 Annual Report 2001 yen. Nevertheless, despite the arguments pointing to a diminution in the risk of a major exchange rate correction, it remains an important overhanging concern. 4.10 The banking sector in the US is in a stronger financial position than it was in previous slowdowns/recessions and would appear to be sufficiently well capitalised to weather shocks of a fairly substantial nature. 4.11 So far, the substantial and persistent risks to Japanese financial stability do not appear to be spilling over to the international financial system and there is no recent evidence of any increase in the likelihood of such contagion. Nevertheless, in view of the size and importance of Japan in the international economic and financial environment, it is important to monitor the possibility of spillovers occurring. 4.12 While the euro area economy, unlike the US, does not appear to suffer from major macro structural imbalances, it is hampered by a number of structural rigidities affecting labour, product and financial markets. It is widely believed that these rigidities are fairly severe and entrenched and that they retard economic performance. Since faster economic growth is, other things equal, a positive for financial health, these structural rigidities do not favour financial stability in the euro area in the longer run. Over the short-to-medium term horizon, the greatest potential for financial market turmoil in the euro area would seem to emanate from macroeconomic imbalances in the US spilling over to the euro area, originating in the still historically high valuations of US equities and the apparent overvalued exchange rate of the dollar. 4.13 The trade and financial market linkages between Ireland and the US have been growing for some time. The unravelling of some of the imbalances and misalignments in the US economy has already had adverse repercussions on the Irish economy although it has not to date negatively affected financial stability. Whether it could sustain another blow arising from another shock to the US economy or from further correction of the remaining imbalances without financial stability being threatened is doubtful. Probably the biggest risk is a sharp depreciation of the dollar, which would, on balance, be adverse for the Irish economy. A more obvious negative influence from the US slowdown is the direct effect coming from US corporate retrenchment, which has already resulted in substantial job losses in Ireland. 4.14 The tentative conclusion from this assessment is that the combination of events, which would see the simultaneous collapse of both the structural (productivity) and the cyclical supports for the dollar, is unlikely. It is unlikely that either one of 168 Annual Report 2001 these two shocks will occur by themselves. However, the Bank is fully aware of these possibilities, which cannot be fully ruled out. It monitors assiduously any likely fallout for systemic stability in Ireland arising from the realisation of any of the risks discussed in this report. 169 Annual Report 2001 Annex 1: The Events of September 11 and their Effects on Financial Stability The terrorist attacks on the US in September raised concerns about the prospects for financial stability, reflecting the disruption to economic and financial sector activity and the effects on confidence. The attacks took place against a background of deteriorating international economic conditions which, following on from earlier rapid growth in private consumption in a number of major economies, had been accompanied by an increase in household and corporate borrowing. With credit risk increasing, particularly in parts of the corporate sector, this had already contributed to an increase in the risks facing the financial system. In that context, the attacks precipitated greater uncertainty about the outlook for the economy and financial markets. While the disruption to US real economic activity on the days of, and in the aftermath of the attacks was considerable, particularly in travel and financial industries, the more serious issue was how consumers and businesses might adjust their spending plans in the environment of greater economic and political uncertainty, and could thus precipitate a more serious downturn in the US and elsewhere. In the event, it appears that the negative economic effects of attacks have proved to be more contained than seemed likely six months ago, with quick policy responses appearing to have had positive effects on confidence. While the US economy experienced negative growth in the third quarter of 2001, it returned to positive growth in the fourth quarter and has since moved solidly along the path to recovery. Other major industrial economies — with the exception of Japan — also appeared to pass the trough of their economic downturns in late 2001. The terrorist attacks had important financial market effects, leading — as might be expected — to higher risk premia and greater volatility in the price of investments, especially in the immediate aftermath. This applied to equity indices, government and corporate bond prices, short-term interest rates, exchange rates and commodities prices. While these effects have ameliorated somewhat in the intervening period, volatilities and spreads generally remain slightly higher, and equity and corporate bond prices lower, than immediately before the attacks. Usually, a combination of lower equity prices and higher implied equity price volatility, along with widening bond yield spreads, suggest that credit risk has increased. A further indication of increased credit risk is the fall in the ratio of debt-upgrades to total ratings changes (calculated for rated companies) and rising default rates. The route by which increases in credit risk affect financial stability is through their potential negative effects on 170 Annual Report 2001 both debt holders — who may be required to increase their capital allocated against potential credit losses — and debt issuers — who may suffer negative effects on earnings potential, if increasing credit risk limits their access to funds and/or increases the cost of funds. Thus, the financial market responses to the events of September 11 exacerbated the risks to financial stability, which were already emanating from underlying economic fundamentals. However, the system seemed to cope reasonably well with the increased risk, in view of relatively high capital-to-income ratios and generally strong profitability. Market participants appear to be somewhat less leveraged and more liquid than in some previous, but relatively recent, financial crisis ‘‘events’’ — such as the Asian and Russian crises of 1997 and 1998, and the LTCM failure. As a result of these factors, the financial markets response to the terrorist attacks — in terms of wider spreads, increased volatilities, and sharp asset price movements — was of shorter duration and appeared less disruptive than had been the case with those previous events. A major contributory factor to the reduction in market risk was the role of central banks in providing liquidity to minimise the effects of market disruption. Given the particular risks facing the US financial system, the US Federal Reserve actively provided liquidity, using open market operations, the discount window, overdrafts and extended collateral arrangements. With US dollar liquidity difficulties emerging in the euro area, the ECB offered unlimited liquidity through a quick tender. The effects of these actions were to enable market interest rates to fall back towards their pre-attack levels relatively quickly. The concerted reductions in central bank official interest rates was a further contributing factor.18 The nature of the terrorist attacks meant that the potential for systemic instability emanating from operational risk, such as in payments and settlements, was substantial. However, the fact that most financial firms directly affected by the events were able to relocate key operations such as trading, risk management and settlement systems in a very short period of time ensured that such risks remained well contained. In the event, no payment and settlement systems experienced direct operational problems. Regarding the stability of the financial system as a whole, capital reserves in industrialised countries appear to be somewhat more substantial than had been the case prior to earlier crises. This reflects a tendency by banks to meet not only required capital 18 In the week after the attacks, the Central Banks of the euro area, US, Canada, Switzerland, Sweden and Denmark cut official interest rates by 0.5 per cent, while the Bank of England reduced rates by 0.25 per cent and the Bank of Japan by 0.15 per cent. 171 Annual Report 2001 adequacy rules, but also to have enough capital as ‘‘insurance’’ in the event of financial market distress. This enabled the financial system to remain relatively little affected by events of September 11, through direct effects — financial sector balance sheets were more resilient to negative market movements and increased credit risk — and indirectly — by containing the potential for destabilising financial market movements. Of course, the effects of the terrorist attacks were not evenly distributed across the financial system. The global insurance industry was particularly badly affected, both directly — in terms of actual and potential claims — and indirectly, through the adverse effects of falling nominal interest rates on investment returns and falling asset prices on balance sheets. However, in terms of overall systemic stability, the resilience of the international banking system is more important. Despite a number of uncertainties and associated risks, this system seems to have worked through the negative effects of September 11 remarkably well. 172 Annual Report 2001 Annex 2: The Dollar and US Productivity Growth Much of the strength in the dollar in recent years has been attributed to persistent capital inflows into the US attracted by the superior growth performance in favour of the US economy by comparison with other parts of the world, the euro area inter alia. The argument is that a structural improvement in US productivity has occurred (dating from approximately the middle of the 1990s) and that this has increased the rate of return on capital located in the US. This has resulted in large capital inflows into the US in order to buy into the highly productive new technologies there and, accordingly, to avail of the higher returns on capital afforded by these new technologies. At the outset, it should be noted that what influences the real exchange rate19 between two regions (e.g., the US and the euro area) is not the differences in overall productivity between these two regions. It is rather the difference between the productivity gaps (traded sector minus non-traded sector productivity growth) in the US on the one hand and the corresponding productivity gap in the euro area on the other20. In other words, an increase in the growth in productivity in the traded sector of the US economy relative to its non-traded sector in a situation in which the same differential growth rate in the euro area remained unchanged would cause the real value of the dollar to appreciate relative to the value of the euro. Therefore, for the New Economy to have an effect on the dollar exchange rate, it must affect the traded and non-traded sectors of the US economy differently and, at the same time, in the most likely scenario to date, have no effect on either the traded or non-traded sectors of the euro area. According to some academic observers, the productivity gains experienced by the US have been largely confined to a particular sector of the economy21 — i.e., in the high-tech producing sector which is effectively engaged in the manufacture and therefore in the traded goods sector of the economy. Productivity gains did not seem to emerge in the high-tech using sector, i.e., mainly the services sector of the economy, which is generally looked on as being in the non-traded sector of the economy. Combining this with a lack of evidence of any New Economy productivity effects 19 The real exchange rate is the ratio of the aggregate price indices expressed in the same currency units or, alternatively, the nominal exchange rate adjusted for the domestic and foreign price levels. 20 A user-friendly treatment is given in the Federal Reserve Bank of New York ‘‘Current Issues’’, August 2001: ‘‘To what extent does productivity drive the dollar?’’, by Tille, Stoffels and Gorbachev. Their approach is based on the theoretical work of Harrod (1933), Balassa (1964) and Samuelson (1964). 21 This limited perspective has been argued strongly by Gordon (2000). Even if the Gordon thesis is not correct in every detail, it is still broadly correct that the productivity gains have been much greater in the high-tech producing sector than in the high-tech using sector in the US. 173 Annual Report 2001 anywhere in the euro area would be consistent with the observed real appreciation of the dollar vis-à-vis the euro. The analysis of the New York Federal Reserve also suggests that any influence of differential traded/non-traded productivity gaps on the exchange rate would only be evident over very long horizons such as decades rather than years or quarters22. Its own analysis suggests that productivity gaps do in fact play an important role in driving the real exchange rates between the dollar on the one hand and the (synthetic) euro and the yen on the other. It does a particularly good job in accounting for movements in the dollar-euro exchange rate in the 1990s explaining nearly two-thirds of the 1.8 per cent annual appreciation of the dollar over this period. Although not covered by its analysis, and having only a relatively short span of time to make any sensible inferences, the appreciation of the dollar since the start of stage three of EMU would also seem to be consistent with the differences in productivity performance. This analysis would also suggest, of course, that the appreciation of the dollar is soundly based and, accordingly, not misaligned and therefore not in imminent danger of collapse as some commentators seem to suggest. Indeed, if the New Economy spreads to the high-tech using sector of the US economy and/or, at the same time, to the high-tech producing sector in the euro area (but not yet to the high-tech using sector in the euro area) then the previous appreciation of the dollar/euro exchange rate could be fully or partially reversed. However, since this would be in the nature of an equilibrium correction, there would normally be a tendency for such a depreciation to be fairly slow and drawn out in time; if that were to be the case, this would pose less of a threat to financial stability. The near-term prospects for the dollar remaining in the broad region of its current value (vis-à-vis the euro, say) may therefore depend on whether the fast pace of US productivity growth experienced in the latter half of the 1990s can soon be resumed once the current cyclical setback is overcome. By corollary, it may also depend on the productivity boosting New Economy not migrating to the traded-sector of the euro area. Either eventuality could see a dramatic reversal in the direction of capital flows that have occurred in recent years. If this were to occur then the large US current account deficit might precipitate a substantial fall in the dollar. However, an adjustment of a relative price (the dollar-euro real exchange rate) in response to changes in the fundamental determinants of this price should be 22 Over the short to medium term there are many more influences bearing on the exchange rate such as interest rate differentials and differences in the respective countries net foreign asset positions, which, in turn, are closely related to current account imbalances, cumulated over long periods of time. 174 Annual Report 2001 welcomed. The real concern here is that when asset prices, of which the exchange rate is one, start to adjust (correct) they tend to over-adjust (or over-correct). This could drive the dollar down by more than would be warranted by the real underlying fundamentals. The repercussions for the health of the global macroeconomy could be severe and consequently also for the systemic health of national financial systems. So it would appear from this and other research23 that the strength of the dollar in the last few years can be accounted for by differences in productivity gaps and resulting capital flows but this cannot fully account for all the variation in the real exchange rate over this period. Additional explanations are needed. The most popular candidate in this respect is that the dollar’s appreciation is to some extent a purely cyclical phenomenon, i.e., the cyclical boom in investment and the fall in the savings ratio have combined to suck in resources from abroad appreciating the dollar. A logical implication of this explanation is that when the domestic US demand falls and the economy slows, the dollar will also collapse. Given that the first part of this story has already transpired and that the second part has not, some more analysis is required. Indeed, those who worry about a substantial fall in the value of the US dollar should be consoled by the fact that this prediction ranks as one of the most enduring, so far, in the face of a non-complying reality. 23 See Bank of England Quarterly Bulletin Autumn 2001: ‘‘Capital flows and exchange rates’’, by Bailey, Millard and Wells. 175 Annual Report 2001 Annex 3: The US Current Account: Sustainability and Measurement Issues The frequently expressed view that the dollar is due for a substantial fall against the euro may be inspired by the persistently large size of the US current account deficit. The US deficit was, according to IMF estimates, about $400 billion in 2001. This contrasts with a current account that is more or less in balance for the euro area. If relative cumulative current account deficits is an important variable determining exchange rate values, it is difficult to appreciate why the dollar has remained at an apparently elevated value with respect to the euro for so long. One obvious interpretation is that the foreign exchange market does not see any problem with the sustainability of this deficit, reflecting a belief that the US can continue to attract capital inflows to finance a deficit of comparable size. One of the sources of worry about the US deficit is that it only reflects a shift in the source of funding from domestic to foreign savers. However, cross-country evidence, including that for the US and particularly for the period 1993 to 2000, would seem to suggest that the current account balance as a percentage of GDP is negatively related to overall domestic investment as a percentage of GDP24. Increasing current account deficits seem to go along with increased domestic investment. The future productive capacity of the US economy should therefore be higher than it would otherwise have been enabling it to fund, in part or totally, the increased indebtedness associated with the current account deficit. Indeed, the very high (negative) correlation between the US current account deficit and overall domestic US investment (−0.91) in the latter half of the 1990s suggests that what may be happening is that the international business community is finding the US a very congenial business environment in which to produce. The capital inflow associated with the deficit is being invested in productive capacity and, providing the funds are not misallocated, thereby rendering the deficit more sustainable. Another interpretation of the foreign exchange markets’ apparently relaxed attitude to the current account deficit is that the deficit is mismeasured and not as large as the official data suggest. One aspect of the mismeasurement that has been noted relates to the under-recording of exports. Exports from the US to other countries are not subject to tax and therefore the incentive to record them accurately is not as strong as with imports, which are subject to tax. It has been argued that this asymmetry in the 24 See Federal Reserve of St. Louis, International Economic Trends, May 2001. 176 Annual Report 2001 taxation of imports and exports has led to a systematic underrecording of exports relative to imports. A consequence of this on a bilateral basis is that US exports to, say, Canada are systematically less than Canadian imports from the US. The upshot is an over-statement of the current account deficit. Indeed, the existence of a very large and persistent world current account deficit25 would suggest serious flaws in the recording of underlying trade movements and perhaps a problem not confined to the US. The Census Bureau also offer two other reasons as to why US merchandise exports might be understated. US exporters are not required to file paperwork for shipments valued less than $2,500. The Census Bureau has therefore relied on a survey to ascertain the volume of this trade. However, the Federal Reserve Bank of St. Louis (FRBSL) report that, at least in 1999, the latest survey at that time was already outdated and referred to ten years earlier. It also notes that changes in the pattern of trade have increased the frequency of small shipments relative to large shipments but the size of this shift is unknown. If other countries don’t have the same exemption on reporting (which is being argued implicitly but not explicitly), then the US current account deficit is overstated. Arising from these and other measurement biases, the FRBSL report that the Census Bureau believes that the merchandise trade deficit could be dramatically overstated — and possibly by as much as 34 per cent in 1997. 25 See Federal Reserve Bank of St. Louis National Economic Trends, ‘‘An Overstated Headline’’, July 1999. The Federal Reserve Bank of St. Louis reports that it is the Census Bureau, the agency responsible for the trade data, which believes that the overall merchandise exports are understated for a number of reasons. 177 Annual Report 2001 Index to Appendices Page 1. Legislative Basis for Supervisory Functions 181 2. Credit Institutions licensed in Ireland to carry on Banking Business 182 3. Credit Institutions authorised in another EU Member State and operating in Ireland 184 4. Undertakings for Collective Investment in Transferable Securities (UCITS) authorised in Ireland 188 5. Unit Trust Schemes authorised in Ireland 204 6. Authorised Designated Investment Companies 213 7. Authorised Non-Designated Investment Companies 231 8. Authorised Investment Limited Partnerships 232 9. UCITS authorised in another EU Member State marketing in Ireland 233 10. Collective Investment Schemes (Other than UCITS) authorised in another country marketing in Ireland 234 11. Moneybrokers 234 12. Bureaux de Change 235 13. Memoranda of Understanding to which the Bank is a signatory 235 179 Annual Report 2001 Appendix 1 Legislative Basis for Bank’s Supervisory Functions Principal Irish Statutes Central Bank Acts, 1942-1998 Building Societies Act, 1989 Trustee Savings Bank Act, 1989 Companies Act, 1990 Unit Trust Act, 1990 ACC Bank Act, 1992 ICC Bank Act, 1992 Investment Limited Partnerships Act, 1994 Criminal Justice Act, 1994 Criminal Justice (Miscellaneous Provisions) Act, 1997 Investment Intermediaries Act, 1995 (IIA) Stock Exchange Act, 1995 (SEA) Investor Compensation Act, 1998 Insurance Act, 2000 European Directives Codified Directive (2000/12/EC) (Has codified and combined in a single text the following Directives (and amendments)) First Banking Directive (77/780/EEC) Own Funds Directive (89/299/EEC) Solvency Ratio Directive (89/647/EEC) Second Banking Directive (89/646/EEC) Consolidated Supervision Directive (92/30/EEC) Large Exposures Directive (92/121/EEC) Annual Accounts Directive (86/635/EEC) Branch Accounts Directive (89/117/EEC) Money Laundering Directive (91/308/EEC) Investment Services Directive (93/22/EEC) Capital Adequacy Directive (93/6/EEC and 98/31/EC and 98/33/EC) Deposit Guarantee Directive (94/19/EEC) ‘Post-BCCI’ Directive (95/26/EC) UCITS Directive (85/611/EEC and 88/220/EEC) Investor Compensation Schemes Directive (97/9/EC) Implemented by: S.I. No. 414 of 1979 and Central Bank Acts, 1942-1998 Administrative Notice Administrative Notice S.I. No. 395 of 1992 S.I. No. 396 of 1992 Administrative Notices i u q r u t S.I. No. 294 of 1992 S.I. No. 294 of 1992 Criminal Justice Act, 1994 and Criminal Justice (Miscellaneous Provisions) Act, 1997 IIA and SEA IIA, SEA & Administrative Notices S.I. No. 168 of 1995 and S.I. No. 468 of 1999 and Central Bank Act, 1997 S.I. No. 267 of 1996 and S.I. No. 50 of 1999 S.I. No. 78 of 1989 Investor Compensation Act, 1998 181 Annual Report 2001 Appendix 2 Credit Institutions Authorised to Carry on Banking Business in the State under Irish Legislation Holders, as at 31 December 2001 of Banking Licences issued under Section 9 of the Central Bank Act, 1971 AIB Capital Markets plc AIB Finance Limited Allied Irish Banks plc Anglo Irish Bank Corporation plc Bankgesellschaft Berlin (Ireland) plc Bank of America National Association Bank of Ireland, The Governor and Company of the Bank of Montreal Ireland plc Bank of Scotland (Ireland) Limited Bear Stearns Bank plc BW Bank Ireland plc CIBC World Markets Ireland Limited Citibank Ireland Financial Services plc CNH Capital plc Commerzbank Europe (Ireland) Commerzbank International (Ireland) DePfa-Bank Europe plc Deutsche Bank/DB Ireland plc Dresdner Bank (Ireland) plc DZ-Bank Ireland plc First Active plc Garras Bank — Naspa Dublin GMAC Commercial Mortgage Bank (Ireland) plc Helaba Dublin Landesbank Hessen-Thüringen International Hewlett-Packard International Bank plc HVB Bank Ireland ICC Bank plc ICC Investment Bank Limited IIB Bank Limited IntesaBci Bank Ireland plc Investment Bank of Ireland Limited Irish Life & Permanent plc Irish Trust Bank Limited (in liquidation)* J.P. Morgan Bank (Ireland) plc KBL Bank Ireland LGT Bank in Liechtenstein (Ireland) Limited Lombard & Ulster Banking Limited maxblue Limited Merchant Banking Limited (in liquidation)** Merrill Lynch Capital Markets Bank Limited National Irish Bank Limited National Irish Investment Bank Limited Pfizer International Bank Europe Rabobank Ireland plc Rheinhyp Bank Europe plc Sachsen LB Europe plc Sanpaolo IMI Bank Ireland plc Scotiabank (Ireland) Limited Ulster Bank Ireland Limited 182 Annual Report 2001 UniCredito Italiano Bank (Ireland) plc Westdeutsche Landesbank (Ireland) plc WGZ-Bank Ireland plc Zurich Bank * An order for the winding-up of Irish Trust Bank Limited was made by the Supreme Court on 26 March 1976. ** An order for the winding-up of Merchant Banking Limited was made by the High Court on 24 May 1982. Note: Under the terms of Section 7 of the Central Bank Act, 1971, as amended by Section 30 of the Central Bank Act, 1989, the following bodies are exempted from the requirement to hold a banking licence: ACCBank plc Post Office Savings Bank Building Societies Industrial and Provident Societies Friendly Societies Credit Unions Managers or Trustees of Unit Trusts or Collective Investment Schemes (in respect of the business of such schemes) Building Societies, as at 31 December 2001, authorised to raise funds under the Building Societies Act, 1989 EBS Building Society ICS Building Society Irish Nationwide Building Society 183 Annual Report 2001 Appendix 3 Credit Institutions Authorised in Another Member State of the European Union Operating in Ireland Branch Basis ABN AMRO Bank NV Artesia Banking Corporation Associates Capital Corporation plc Bankinter SA Banque Bruxelles Lambert BNP Paribas BNP Paribas Securities Services Barclays Bank plc Caja de Ahorros Y Monte de Piedad de Madrid (Caja de Madrid) Citco Bank Nederland N.V. Citibank International plc Crédit Agricole Indosuez Luxembourg Daiwa Securities Trust and Banking (Europe) plc DePfa Bank AG Dexia Banque Internationale a Luxembourg S.A. Dexia Public Finance Bank Europäische Hypothekenbank S.A. FCE Bank plc Fimat International Banque HFC Bank plc HSBC Bank plc ING Bank NV Investec Bank (UK) Ltd KBC Bank NV Dublin Branch Landesbank Hessen — Thüringen Girozentrale Marks and Spencer Financial Services Ltd MBNA Europe Bank Ltd Merrill Lynch International Bank Ltd Northern Rock plc Rabobank Nederland Société Genéralé SA Volkswagen Bank GmbH Member State of Origin Netherlands Belgium United Kingdom Spain Belgium France France United Kingdom Spain Netherlands United Kingdom Luxembourg United Kingdom Germany Luxembourg France Luxembourg United Kingdom France United Kingdom United Kingdom Netherlands United Kingdom Belgium Germany United Kingdom United Kingdom United Kingdom United Kingdom Netherlands France Germany Cross Border Basis Deposit-Taking and Other Services ABN AMRO Bank N.V. ABN AMRO Bouwfonds Nederlandse Gemeenten N.V. ABN AMRO Lease Holding NV Allied Trust Bank Limited Artesia Bank Luxembourg S.A. Banca Commerciale Italiana (France) S.A. Banco Essi SA Bank Austria Aktiengesellschaft Bank for Europe Ltd Bank Labouchere N.V. Bank of China International (UK) Ltd Bank One Capital Markets Bankers Trust International plc Bankgesellschaft Berlin AG Bankinter S.A. Banque AIG Banque De Bretagne Banque De La Cité 184 Member State of Origin Netherlands Netherlands Netherlands United Kingdom Luxembourg France Portugal Austria Luxembourg Netherlands United Kingdom United Kingdom United Kingdom Germany Spain France France France Annual Report 2001 Cross Border Basis Deposit-Taking and Other Services — continued Banque et Caisse d’Epargne de L’Etat, Luxembourg Banque Generale du Luxembourg S.A. Banque General Du Phenix Et Du Credit Chimique (Banque Du Phenix) Banque Lehman Brothers Banque Leu (Luxembourg) S.A. Banque Nationale De Paris S.A. Banque Nationale De Paris Guyane Banque Nationale De Paris Intercontinentale Banque Pour L’Expansion Industrielle (BANEXI) Banque Sofirec Barclays Bank plc Barclays Private Bank Limited Bayerische Hypotheken-und Wechsel-Bank AG (Hypo-Bank) BHF-Bank Aktiengesellschaft BNP Finance BNP Paribas (Luxembourg) BNP Paribas Bouwfonds Hypotheken B.V. Bouwfonds Property Finance B.V. CDC Finance Chang Hwa Commercial Bank (Europe) NV Carnegie Bank A/S Chase Investment Bank Limited Chase Manhattan International Limited Chiao Tung Bank Europe NV Christiania Bank OG Kreditkasse ASA CIBC World Markets plc Citibank España S.A. Citibank International plc comdirect Bank AG Commerzbank Aktiengesellschaft Compagnie Du Credit Universel Compagnie Financiere De CIC Et De L’Union Europeenne (Union Europeenne De CIC) Coöperatieve Centrale Raiffeisen-Boerenleenbank BA (Rabobank Nederland) Crêdit Européen S.A. Credit Industriel D’Alsace Et De Lorraine Credit Lyonnais Credit Suisse (Luxembourg) S.A. Credit Universel Creditanstalt — Bankverin Aktiengesellschaft Danske Bank A/S Danske Bank International SA Den Københavnske Bank A/S Den Norske Bank ASA Deutsche Ausgleichsbank Deutsche Bank AG Deutsche Bank Luxembourg SA Deutsche Hypothekenbank — Hannover Deutsche Siedlungs-und Landesrentenbank (DSL Bank) DG Bank Deutsche Genossenschaftsbank AG Dornbirner Sparkasse Dresdner Bank Luxembourg S.A. Erste Bank der oesterreichischen Sparkassen AG Evli Bank plc Finansbank (Holland) NV, Amsterdam Fleet Bank (Europe) Ltd Fortis Bank (Nederland) N.V Fortis Bank N.V. Goldman Sachs Paris Inc et Cie Halifax plc Luxembourg Luxembourg France France Luxembourg France France France France France United Kingdom United Kingdom Germany Germany France Luxembourg France Netherlands Netherlands France Netherlands Denmark United Kingdom United Kingdom Netherlands Norway United Kingdom Spain United Kingdom Germany Germany France France Netherlands Luxembourg France France Luxembourg France Austria Denmark Luxembourg Denmark Norway Germany Germany Luxembourg Germany Germany Germany Austria Luxembourg Austria Finland Netherlands United Kingdom Netherlands Belgium France United Kingdom 185 Annual Report 2001 Cross Border Basis Deposit-Taking and Other Services — continued Havana International Bank Ltd Henry Ansbacher & Co. Ltd HSBC Equator Bank plc HSBC Investment Bank plc HSBC Republic Bank (Luxembourg) S.A. HSBC Republic Bank (UK) Limited Internationale Nederlanden Bank NV (ING Bank) Investec Bank (UK) Ltd JP Morgan International Bank Limited Kas-Associatie NV (Kas-Netbank) Kredietbank S.A. Luxembourgeoise Landesbank Schleswig-Holstein Girozentrale LB Lux S.A. Lehman Brothers Bankhaus Aktiengesellschaft Marks and Spencer Financial Services Ltd MATTEUS BANK AB (publ) Merrill Lynch International Bank Limited Midland Bank plc Mizuho Bank Nederland N.V. Morgan Stanley Dean Witter Bank Ltd NABAB S.A. NationsBank Europe Limited NM Rothschild & Sons Limited NV Bank Nederlandse Gemeenten N.V. De Indonesische Overzeese Bank P-H Bank A/S Prudential — Bache International Rabo Robeco Bank (Luxembourg) S.A. Raiffeisen Zentralbank Österreich AG RBS Trust Bank Limited Rheinhyp Rheinische Hypothekenbank AG, Frankfurt Royal Bank of Canada Europe Limited Royal Bank of Scotland plc Sabanci Bank plc Sampo Bank plc Scotiabank (UK) Ltd Societe Europeenne de Banque SA Luxembourg Société Générale Societe Nanceienne Varin — Bernier — (Banque SNVB) State Street Banque SA 3i Group plc Toronto Dominion Bank Europe Limited UBS Warburg Ltd Ulster Bank Limited Westdeutsche Immobilienbank Westdeutsche Landesbank Girozentrale Westland/Utrecht Hypotheekbank NV West Merchant Bank Yorkshire Building Society United Kingdom United Kingdom United Kingdom United Kingdom Luxembourg United Kingdom Netherlands United Kingdom United Kingdom Netherlands Luxembourg Germany Luxembourg Germany United Kingdom Sweden United Kingdom United Kingdom Netherlands United Kingdom France United Kingdom United Kingdom Netherlands Netherlands Denmark United Kingdom Luxembourg Austria United Kingdom Germany United Kingdom United Kingdom United Kingdom Finland United Kingdom Luxembourg France France France United Kingdom United Kingdom United Kingdom United Kingdom Germany Germany Netherlands United Kingdom United Kingdom Services Other Than Deposit-Taking ABN AMRO Bank (Luxembourg) S.A. Alliance & Leicester Group Treasury plc Assemblies of God Property Trust Banco Bilbao Vizcaya Argentaria S.A. Banco Central Hispanoamericano S.A. Banca Popolare di Sondrio Banco Popular Espänol S.A. Banco Santander S.A. Bank Degroof SA Member State of Origin Luxembourg United Kingdom United Kingdom Spain Spain Italy Spain Spain Belgium 186 Annual Report 2001 Cross Border Basis Services Other Than Deposit-Taking — continued Bankgesellschaft Berlin (UK) plc Bank of America International Ltd Bank of America SA Madrid Bank of Scotland Bank of Tokyo-Mitsubishi (Holland) N.V. Banque Privée Edmond de Rothschild Luxembourg S.A. Banque Sanpaolo Brown Brothers Harriman (Luxembourg) S.C.A. CDC IXIS Capital Markets Citibank Belgium County NatWest Limited Credit Agricole Indosuez Credit Communal de Belgique SA Credit Lyonnais Rouse (France) S.N.C. Crown Agents Financial Services Ltd Deutsche Hyp Deutsche Hypothekenbank Frankfurt — Hamburg AG Deutsche VerkehrsBank AG Ester Finance Titrisation Euler-SFAC Credit Europaische Hypothekenbank SA, Luxembourg Exane Finance Finansbanken ASA First National Bank plc ‘‘FNB’’ First Personal Bank plc GE Sovac Goldman, Sachs & Co.oHG Goldman Sachs International Bank Gudme Raaschou Bankaktieselskab Hamburgische Landesbank Girozentrale IKB Deutsche Industriebank AG JP Morgan & CIE SA Landesbank Rheinland-Pfalz Girozentrale Mediofactoring SpA Merrill Lynch Capital Markets (France) S.A. Merrill Lynch Finance S.A. Morgan Stanley Bank AG Münchener Hypothekenbank eG Natexis Banque Natexis Banques Populaires National Westminster Bank plc Pinatton Finance Prominnofi (S.A.)-Centrale de Cotation et de Contrepartie Sanwa International plc Saxo Bank A/S Schroder & Co. Limited Schroder Munchmeyer Hengst AG SNVB Financements Standard Chartered Bank Tesco Personal Finance Limited Triodas Bank NV 3i Plc Württembergischen Hypotheken Bank AG United Kingdom United Kingdom Spain United Kingdom Netherlands Luxembourg France Luxembourg France Belgium United Kingdom France Belgium France United Kingdom Germany Germany France France Luxembourg France United Kingdom United Kingdom United Kingdom France Germany United Kingdom Denmark Germany Germany France Germany Italy France France Germany Germany France France United Kingdom France France United Kingdom Denmark United Kingdom Germany France United Kingdom United Kingdom Netherlands United Kingdom Germany 187 Annual Report 2001 Appendix 4 Undertakings for Collective Investment in Transferable Securities (UCITS) The following schemes have been authorised by the Central Bank of Ireland, as at 31 December 2001, as Undertakings for Collective Investment in Transferable Securities under the powers conferred on the Bank by the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 1989 (Statutory Instrument No 78 of 1989). Name of UCITS Name of Management Company Name of Trustee Aberdeen International Fund plc Aberdeen International Management Ireland Limited The Governor & Company of the Bank of Ireland Aberdeen Umbrella Cash Fund plc Aberdeen International Management Ireland Limited The Governor & Company of the Bank of Ireland ABN AMRO Global Liquidity Funds plc — Deutsche International Custodial Services (Ireland) Limited ACM International Reserves II plc — The Governor & Company of the Bank of Ireland Advanced Capital Fund plc — PFPC Trustee & Custodial Services Limited AIB Indexmaster Funds AIB Fund Management Limited Allied Irish Banks plc AIB Investment Fund AIB Fund Management Limited Allied Irish Banks plc AIG American Equity Trust AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Asia Balanced Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Balanced World Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Dynamic Emerging World Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Emerging Europe Equity Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Emerging Markets Bond Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Euro-Optimizer Fund AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Europe Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Europe Small Companies Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG European Opportunities Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland 188 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee AIG Global Bond Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Global Emerging Markets Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Global Equities Growth Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Global Equities Value Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Japan Small Companies Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Latin America Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Liquidity Fund — Euro AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Liquidity Fund — Swiss Franc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG Liquidity Fund — US Dollar AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG New Asia Capital Opportunities Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG South East Asia Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG South East Asia Small Companies Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIG/SunAmerica International Funds AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland AIM Capital Funds plc AIM Capital Management Company Limited The Governor & Company of the Bank of Ireland AIMIC Japan New Horizon Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland Akelius Fonder plc Akelius Fund Management (Ireland) Limited Barings (Ireland) Limited All Points Multi-Manager plc — Bermuda Trust (Dublin) Limited Amadeus Capital Vision plc Dresdner International Management Services Limited J.P. Morgan Bank (Ireland) plc AMB Ireland Capital Fund CICM Fund Management Limited Brown Brothers Harriman Trustee Services (Ireland) Limited American Century World Investors plc — Brown Brothers Harriman Trustee Services (Ireland) Limited American Diversified Funds plc — PFPC Trustee & Custodial Services Limited 189 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Antonveneta ABN AMRO Funds Antonveneta ABN AMRO Investment Funds Limited Allied Irish Banks plc AON International Funds plc — The Governor & Company of the Bank of Ireland Area Asset Advisor Funds plc Area International Management (Ireland) Limited Dexia Banque Internationale à Luxembourg S.A., Dublin Branch Arlecchino Investment plc Mantovana Management Limited Allied Irish Banks plc Asia Small Company Growth Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Atlantis Asian Recovery Fund plc Atlantis Investment Management (Ireland) Limited Barings (Ireland) Limited Attica Institutional Multi-Manager plc — Dexia Banque Internationale à Luxembourg S.A., Dublin Branch AXA Asian Funds Citibank Investment Services Ireland Limited Citibank Trustees (Ireland) Limited AXA Rosenberg Equity Alpha Trust AXA Rosenberg Management Ireland Limited PFPC Trustee & Custodial Services Limited Bank of America Global Liquidity Funds plc Banc of America Capital Management (Ireland) Limited Allied Irish Banks plc Bank of Ireland Asset Management Equity Mutual Fund Bank of Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Bank of Ireland Asset Management Managed Mutual Fund Bank of Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Bank of Ireland Asset Management Mutual Investment Fund Bank of Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Bank of Ireland Funds plc — J.P. Morgan Bank (Ireland) plc Barclays Global Investors Fixed Income Selection Fund plc Barclays Global Investors Ireland Limited The Governor & Company of the Bank of Ireland Barclays Global Investors Index Selection Fund Barclays Global Investors Ireland Limited The Governor & Company of the Bank of Ireland BDT Invest Funds plc — Bermuda Trust (Dublin) Limited Belinvest Realty Fund plc — Bermuda Trust (Dublin) Limited BG Bolsa Crecimiento plc BT Fund Managers (Ireland) Limited BT Trustee Company (Ireland) Limited Billenium Funds plc Billenium Finance Limited Barings (Ireland) Limited BiscayneAmericas Euro Fund plc — The Governor & Company of the Bank of Ireland BlackRock Global Series plc — PFPC Trustee & Custodial Services Limited Blevins Franks International Select Funds plc Blevins Franks Managers Ireland Limited AIB/BNY Trust Company Limited 190 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee BN Multimanagers plc — Allied Irish Banks plc BNL Global Funds plc — Dexia Banque Internationale à Luxembourg S.A., Dublin Branch BNY Hamilton Funds plc — Allied Irish Banks plc BOC International Fund BOC International Fund Management Limited The Governor & Company of the Bank of Ireland BT & T Telecommunications & Technology Fund plc BT & T Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland BT Global Assets Funds BT Fund Managers (Ireland) Limited BT Trustee Company (Ireland) Limited BT Global Liquidity Fund plc BT Fund Managers (Ireland) Limited BT Trustee Company (Ireland) Limited Buchanan Performance Funds plc Buchanan Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland Cardinal Funds plc — Allied Irish Banks plc Cash Reserve Funds plc — Northern Trust Custodial Services (Ireland) Limited Cazenove International Fund plc — Brown Brothers Harriman Trustee Services (Ireland) Limited CB Clients plc CICM Fund Management Limited Allied Irish Banks plc CB Global Sector Fund plc CICM Fund Management Limited Allied Irish Banks plc CDC AM-Loomis Sayles International Funds plc — The Governor & Company of the Bank of Ireland CHALLENGE Funds Mediolanum International Funds Limited Dexia Banque Internationale à Luxembourg S.A., Dublin Branch Charles Schwab Worldwide Funds plc Charles Schwab Asset Management (Ireland) Limited Brown Brothers Harrimann Trustee Services (Ireland) Limited Charles Schwab Worldwide Trust Charles Schwab Asset Management (Ireland) Limited Brown Brothers Harrimann Trustee Services (Ireland) Limited Christows Investments plc Christows Investments (Dublin) Limited Mellon Trustees (Dublin) Limited CICM International Investments plc CICM Fund Management Limited Allied Irish Banks plc CICM International Portfolios plc CICM Fund Management Limited Allied Irish Banks plc Citi Institutional Liquidity Fund plc — PFPC Trustee & Custodial Services Limited Close Finsbury Global Investment Funds plc — J.P. Morgan Bank (Ireland) plc COBA Clients plc CICM Fund Management Limited Allied Irish Banks plc Comgest Growth plc — Dexia Banque Internationale à Luxembourg S.A., Dublin Branch 191 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Conseq Invest Plc — Citibank International plc, Ireland Branch Coronation Retail Fund Coronation Fund Managers (Ireland) Limited J.P. Morgan Bank (Ireland) plc Coutts Liquidity Fund plc Coutts Fund Managers Limited Allied Irish Banks plc Credit Lyonnais ETF plc — AIB/BNY Trust Company Limited Daiwa TAA Japan Fund plc Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited DBLA-Dresdner RCM Latin American Selections Funds plc Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland DekaTeam-Bio Tech Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-EM Bond Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-Emerging Markets Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-Global Resources Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-GlobalBond Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-GlobalEnterprises Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-GlobalSelect Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-Immoflex USA Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-Konsumwerte Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc DekaTeam-PharmaTech Deka International (Ireland) Limited J. P. Morgan Bank (Ireland) plc Deutsche Direkt Funds plc CICM Fund Management Limited Allied Irish Banks plc Deutsche Funds plc Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Deutsche GlobalSpectrum Funds plc Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Deutsche Global Liquidity Series plc — Deutsche International Custodial Services (Ireland) Limited Deutsche Global Select Funds plc Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Deutsche International Funds plc Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Dicam Japan Fund plc — Daiwa Europe Trustees Ireland Limited DIT-Dresdner Global Opportunities Fund Dresdner International Management Services Limited J.P. Morgan Bank (Ireland) plc DIT-Dresdner Bond Strategies Fund Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland 192 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee DIT-Dresdner Cashplus 12/96 Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland DIT-Dresdner Global Strategies Fund Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland Dolmen Securities Funds plc — Barings (Ireland) Limited Dresdner RCM India Fund plc Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland Dresdner Thornton Asian Selection Funds plc Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland Dresdner Thornton India Fund plc Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland dSAM Investment Fund plc — BT Trustee Company (Ireland) Limited Dublin International Funds BPM Fund Management (Ireland) Limited Citibank International plc, Ireland Branch Eaton Vance Umbrella Fund plc Eaton Vance Advisors (Ireland) Limited Investors Trust & Custodial Services (Ireland) Limited Edinburgh Investment Company (Ireland) plc Edinburgh Unit Trust Managers (Ireland) Limited Bermuda Trust (Dublin) Limited Egerton Capital European Fund plc — Daiwa Europe Trustees Ireland Limited EII Voyager Fund plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Electra Active Management plc — Barings (Ireland) Limited Ennismore Smaller Companies plc — Deutsche International Custodial Services (Ireland) Limited Enterprise Global Funds plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Equator Investment Programmes Coutts Fund Managers Limited Allied Irish Banks plc European Exchange-Traded Fund Company plc Merrill Lynch Investment Managers (Dublin) Limited Allied Irish Banks plc F.I.T. Asian Fund F.I.T. Investment Trust Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited F.I.T. Czech Investment Fund F.I.T. Investment Trust Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited F.I.T. Delta Growth Fund F.I.T. Investment Trust Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited F.I.T. Frontier Fund F.I.T. Investment Trust Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited F.I.T. Japan Fund F.I.T. Investment Trust Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited 193 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Federated International Funds plc Federated International Management Limited Allied Irish Banks plc Federated Unit Trust Federated International Management Limited J.P. Morgan Bank (Ireland) plc Fidelity Institutional Cash Fund plc — J.P. Morgan Bank (Ireland) plc Findlay Park US Smaller Companies Fund plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Finter Investment Fund plc Finter Fund Management (Ireland) Limited Allied Irish Banks plc First State Global Umbrella Fund plc — Bermuda Trust (Dublin) Limited Fleming Private Fund plc — AIB/BNY Trust Company Limited Fondo Santander Doble Asegurado plc Santander International Fund Advisory Ireland Limited AIB/BNY Trust Company Limited Formosa High-Tech Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited FPK Financial Funds plc — Citibank International plc, Ireland Branch Frank Russell Investment Company plc Frank Russell Investments (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Frank Russell Investment Company II plc Frank Russell Investments (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Frank Russell Investment Company III plc Frank Russell Investments (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Fresh Korea Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Fuji-Lord Abbett Global Fund Fuji-Lord Abbett International (Dublin) Limited J.P. Morgan Bank (Ireland) plc GAM Asia Funds GAM Fund Management Limited J.P. Morgan Bank (Ireland) plc GAM Europa Funds GAM Fund Management Limited J.P. Morgan Bank (Ireland) plc GAM Orient Funds GAM Fund Management Limited J.P. Morgan Bank (Ireland) plc GAM Star Fund plc GAM Fund Management Limited J.P. Morgan Bank (Ireland) plc GAM Tokyo Funds GAM Fund Management Limited J.P. Morgan Bank (Ireland) plc GAM Total Bond Fund (DM) GAM Fund Management Limited J.P. Morgan Bank (Ireland) plc GAM Universal D.Mark Fund GAM Fund Management Limited J.P. Morgan Bank (Ireland) plc GeneralCologne Re Capital Investment Trust GeneralCologne Re Capital Fund Managers (Ireland) Limited Citibank International plc, Ireland Branch Gensec Universal Fund plc Gensec Asset Management (Dublin) Limited Deutsche International Custodial Services (Ireland) Limited 194 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee GLG Emerging Markets Fund plc GLG Partners Asset Management Limited Allied Irish Banks plc GLG Investments plc GLG Partners Asset Management Limited Allied Irish Banks plc GLG Investments III plc GLG Partners Asset Management Limited Allied Irish Banks plc GLG Investments IV plc GLG Partners Asset Management Limited Allied Irish Banks plc Global Capital Markets Portfolio Salomon Brothers Management Company (Ireland) Limited Investors Trust & Custodial Services (Ireland) Limited Global Enhanced Income Fund Salomon Brothers Management Company (Ireland) Limited PFPC Trustee & Custodial Services Limited Global Funds Management plc Lazard Investment Funds Limited The Governor & Company of the Bank of Ireland Global Property Fund GPA Fund Managers (Ireland) Limited SEI Investments Trustee and Custodial Services (Ireland) Limited Global Resources Stock Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Global SCAP Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Securities Trust & Banking Europe plc Global Treasury Funds plc The Royal Bank of Scotland Funds (Dublin) Limited Allied Irish Banks plc GMO Funds plc — Northern Trust Custodial Services (Ireland) Limited Goldman Sachs Funds plc — Allied Irish Banks plc Govett Investment Funds plc AIB Fund Management Limited Allied Irish Banks plc Green Effects Investment plc — Barings (Ireland) Limited Griffin Umbrella Fund plc — Barings (Ireland) Limited Group One International Trust Group One International Trust Managers Limited J.P. Morgan Bank (Ireland) plc GT Latin America Fund plc INVESCO Asset Management Ireland Limited Barings (Ireland) Limited Gulf International Investment Company plc — Barings (Ireland) Limited Hambros Global Investment Fund plc Hambros Fund Managers (Ireland) Limited Barings (Ireland) Limited Hamon Asian Funds Hamon Ireland Limited Bermuda Trust (Dublin) Limited Hansard Global Funds plc — AIB/BNY Trust Company Limited Hardy & Co Strategy Fund Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland 195 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Haussmann International Fund plc — The Governor & Company of the Bank of Ireland Helios Portfolio Bank of Ireland Unit Managers Limited The Governor & Company of the Bank of Ireland Henderson Crosthwaite Investment Company plc Henderson Crosthwaite Investment Management (Ireland) Limited Dexia Banque Internationale à Luxembourg S.A., Dublin Branch Herald Investment Fund plc — Deutsche International Custodial Services (Ireland) Limited HighMark World Funds plc — SEI Investments Trustee and Custodial Services (Ireland) Limited HSBC Global Liquidity Funds plc — Allied Irish Banks plc HSBC Global Reserve Funds plc — Allied Irish Banks plc HSBC International Capital Secured Growth Funds plc — HSBC Global Investor Services (Ireland) Limited INVESCO GT Emerging Markets Series INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc INVESCO GT India Fund INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc INVESCO GT Pathfinder Series INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc INVESCO GT Small Companies Series INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc INVESCO GT World Bond Series INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc INVESCO GT World Series INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc INVESCO Series INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc INVESCO Sterling Bond Fund INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc Investec Select Funds plc Investec Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc Investec Liquidity Funds plc Investec Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc iShares plc Barclays Global Investors Ireland Limited The Governor & Company of the Bank of Ireland Janus Universal Funds Janus Capital Trust Manager Limited The Governor & Company of the Bank of Ireland Janus World Funds plc — The Governor & Company of the Bank of Ireland 196 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee J O Hambro Capital Management Umbrella Fund plc — Dexia Banque Internationale à Luxembourg S.A., Dublin Branch John Hancock Funds plc John Hancock Advisers International (Ireland) Limited The Governor & the Company of the Bank of Ireland Korea Active Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Korea Open Fund Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Korea Twenty-First Century Investment Company plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Korean Growth Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Lares Funds Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Latin America Fund Baring Mutual Fund Management (Ireland) Limited Daiwa Europe Trustees Ireland Limited Lazard Global Active Fund plc Lazard Investment Funds Limited PFPC Trustee & Custodial Services Limited Lazard Global Bond Fund plc Lazard Investment Funds Limited PFPC Trustee & Custodial Services Limited Lazard Global Liquidity Fund plc Lazard Investment Funds Limited Deutsche International Custodial Services (Ireland) Limited LDRS I plc — Allied Irish Banks plc LDRS II plc — Allied Irish Banks plc LDRS III plc — Allied Irish Banks plc LDRS IV plc — Allied Irish Banks plc LDRS V plc — Allied Irish Banks plc LDRS VI plc — Allied Irish Banks plc LDRS VII plc — Allied Irish Banks plc LDRS VIII plc — Allied Irish Banks plc LDRS IX plc — Allied Irish Banks plc LDRS X plc — Allied Irish Banks plc LDRS XI plc — Allied Irish Banks plc LDRS XII plc — Allied Irish Banks plc LDRS XIII plc — Allied Irish Banks plc Lehman Brothers Alpha Fund plc Lehman Brothers Asset Management (Ireland) Limited Allied Irish Banks plc 197 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Lotus Fund plc — Bermuda Trust (Dublin) Limited Marathon Global Fund Marathon Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland Marriott Singer International Funds plc — Barings (Ireland) Limited Mediolanum Defender Funds Mediolanum International Funds Limited Dexia Banque Internationale à Luxembourg S.A., Dublin Branch Mellon Global Funds plc Mellon Global Management Limited Mellon Trustees (Dublin) Limited Merrill Lynch Institutional Liquidity Funds plc Merrill Lynch Investment Managers (Dublin) Limited The Governor & Company of the Bank of Ireland Metzler International Investments plc Metzler Ireland Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Metzler Strategic Investments plc Metzler Ireland Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Metzler/Payden Global Funds plc Metzler Ireland Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Minster Trust International Umbrella Fund — AIB/BNY Trust Company Limited Montanaro European Smaller Companies plc — Deutsche International Custodial Services (Ireland) Limited Montpelier Funds plc — Bermuda Trust (Dublin) Limited Multi-Link Global Funds plc Skandia Fund Management (Ireland) Limited SEI Investments Trustee and Custodial Services (Ireland) Limited Multi-Style, Multi-Manager Funds plc SG\Russell Asset Management Limited Deutsche International Custodial Services (Ireland) Limited Murray Global Accumulation Funds plc Murray Johnstone (Dublin) Limited Bermuda Trust (Dublin) Limited NCL Investment Company plc — Investors Trust & Custodial Services (Ireland) Limited New Flag Euro High Yield Fund plc — Barings (Ireland) Limited Nicholas-Applegate International Umbrella Fund plc — Bermuda Trust (Dublin) Limited NOK Strategies Fund Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland NPI Portfolio Fund plc NPI International Dublin Limited J. P. Morgan Bank (Ireland) plc Nucleus Funds plc — Investors Trust & Custodial Services (Ireland) Limited Odey European Growth Fund BT Fund Managers (Ireland) Limited BT Trustee Company (Ireland) Limited Old Mutual Dublin Funds plc — Brown Brothers Harriman Trustee Services (Ireland) Limited 198 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Oppenheimer Millennium Funds plc Oppenheimer Funds International Limited PFPC Trustee & Custodial Services Limited Orbitex Investment Funds plc — Bermuda Trust (Dublin) Limited PALLMALL Funds plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Payden & Rygel Global Funds plc — AIB/BNY Trust Company Limited Payden & Rygel Improved Liquidity Fund plc — Northern Trust Custodial Services (Ireland) Limited Pegasus Strategic Investment Company plc Dresdner International Management Services Limited The Governor & Company of the Bank of Ireland Peregrine Premier Funds plc — Bermuda Trust (Dublin) Limited PIMCO Funds: Global Investors Series plc PIMCO Global Advisors (Ireland) Limited Investors Trust & Custodial Services (Ireland) Limited Pioneer America Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer Emerging Europe Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer Euro Reserve Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer European Equity Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer Global Bond Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer Global Equity Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer Greater Asia Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer U.S. Growth Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer U.S. High Yield Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer US Real Estate Fund plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited PLURIMA Funds EPTA Global Investments Limited Deutsche International Custodial Services (Ireland) Limited Polar Capital Funds plc — Barings (Ireland) Limited Premier Protected Assets Funds plc — AIB/BNY Trust Company Limited Principal Investment Funds Principal Capital Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited 199 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Prudential Global Umbrella Fund plc Prudential Global Managers Company Limited J. P. Morgan Bank (Ireland) Limited Putnam World Trust Putnam Investments Limited The Governor & Company of the Bank of Ireland Putnam World Trust II Putnam Investments Limited The Governor & Company of the Bank of Ireland Regent Magna Europa Fund plc — Bermuda Trust (Dublin) Limited Rothschild Private Investor Funds plc — The Governor & Company of the Bank of Ireland Salomon Brothers Global Horizons Funds Salomon Brothers Management Company (Ireland) Limited PFPC Trustee & Custodial Services Limited Salomon Smith Barney Umbrella Trust Salomon Brothers Management Company (Ireland) Limited J. P. Morgan Bank (Ireland) plc Sanpaolo Invest Funds Sanpaolo Invest Ireland Limited Allied Irish Banks plc Santander Central Hispano Latin America Coupon Fund plc — AIB/BNY Trust Company Limited Scottish Mutual International Investment Fund plc Scottish Mutual International Fund Managers Limited Barings (Ireland) Limited Scottish Value Portfolio Fund Scottish Value Management (Ireland) Limited Citibank International plc, Ireland Branch SEI Global Assets Fund plc SEI Investments Global Limited SEI Investments Trustee and Custodial Services (Ireland) Limited SEI Global Investments Fund plc SEI Investments Global Limited Brown Brothers Harriman Trustee Services (Ireland) Limited SEI Global Master Fund plc SEI Investments Global Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Sella Fund Sella Fund Management Ireland Limited Northern Trust Custodial Services (Ireland) Limited SG Emerging Markets Fund plc — J. P. Morgan Bank (Ireland) plc SG Select Fund SGAM (Ireland) Limited Sociètè Genèralè Short-Term Investments Company (Global Series) plc AIM Global Management Company Limited Allied Irish Banks plc Singer & Friedlander Investment Funds plc Singer & Friedlander Total Asset Management Limited HSBC Global Investor Services (Ireland) Limited Singer & Friedlander ‘‘Roll-Up’’ Funds plc Singer & Friedlander Total Asset Management Limited HSBC Global Investor Services (Ireland) Limited Smith & Williamson Investment Funds plc Smith & Williamson Investment Management (Ireland) Limited J. P. Morgan Bank (Ireland) plc SSgA Cash Management Fund plc — The Governor & Company of the Bank of Ireland 200 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Standard Master Funds plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Standard Life Investments (Global Liquidity Funds) plc — J. P. Morgan Bank (Ireland) plc Standard Chartered Global Liquidity Funds plc — PFPC Trustee & Custodial Services Limited Standish Funds plc — Investors Trust & Custodial Services (Ireland) Limited Strategic Value Advisors plc — PFPC Trustee & Custodial Services Limited Stryx International Funds plc Seilern Investment Management (Ireland) Limited Bermuda Trust (Dublin) Limited Summit Investment Funds plc EBS Asset Managers Limited Northern Trust Custodial Services (Ireland) Limited Summit Mutual Funds plc EBS Asset Managers Limited Northern Trust Custodial Services (Ireland) Limited Swiss Life Investment Fund plc Swiss Life Investment Management Limited BNP Paribas Securities Services, Dublin Branch Swiss Re Funds Swiss Re Funds Management (Ireland) Limited Citibank International plc, Ireland Branch Thames River Traditional Funds plc — Barings (Ireland) Limited The Access to Asset Allocation (AAA) International Fund plc — Dexia Banque Internationale à Luxembourg S.A., Dublin Branch The Baring Capitalisation Umbrella Fund Baring International Fund Managers (Ireland) Limited Barings (Ireland) Limited The Baring Emerging Markets Umbrella Fund Baring International Fund Managers (Ireland) Limited Barings (Ireland) Limited The Baring Global Umbrella Fund Baring International Fund Managers (Ireland) Limited Barings (Ireland) Limited The Baring International Umbrella Fund Baring International Fund Managers (Ireland) Limited Barings (Ireland) Limited The Franklin Templeton Global Fund Fiduciary International Ireland Limited Investors Trust & Custodial Services (Ireland) Limited The Halal Mutual Investment Company plc — AIB/BNY Trust Company Limited The International Investment Portfolios plc — The Governor & Company of the Bank of Ireland The Knight Williams International Portfolio Knight Williams Portfolio Management International Limited Barings (Ireland) Limited The Sagitta Fund plc — Brown Brothers Harriman Trustee Services (Ireland) Limited 201 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee The Sagitta II Fund plc — Brown Brothers Harriman Trustee Services (Ireland) Limited The Wanger Investment Company plc — The Governor & Company of the Bank of Ireland The World Emerging Markets Umbrella Fund plc — Barings (Ireland) Limited The Worldwide Financial Services Fund plc — Bermuda Trust (Dublin) Limited Thema International Fund plc — Bermuda Trust (Dublin) Limited Threadneedle Liquid Assets Fund plc — J. P. Morgan Bank (Ireland) plc Tilney Ireland Collective Funds plc Tilney (Ireland) Limited AIB/BNY Trust Company Limited TOP MANAGERS Funds Mediolanum International Funds Limited Dexia Banque Internationale à Luxembourg S.A., Dublin Branch TimesSquare Funds plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Tokai Umbrella Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited TT International Funds plc — Brown Brothers Harriman Trustee Services (Ireland) Limited UAM Funds plc — SEI Investments Trustee and Custodial Services (Ireland) Limited UBS (Irl) Fund plc — J. P. Morgan Bank (Ireland) plc UNIPOL FUNDS Unipol Fondi Limited Citibank International plc, Ireland Branch Unitfond plc Unitfond Limited PFPC Trustee & Custodial Services Limited Universal Liquidity Funds plc Mellon Global Management Limited Mellon Trustees (Dublin) Limited UOB Global Strategies Funds plc UOB Global Capital (Dublin) Limited The Governor & Company of the Bank of Ireland Valoris Pioneer Funds Management Limited The Governor & Company of the Bank of Ireland Vanguard Investment Series plc Vanguard Group (Ireland) Limited J. P. Morgan Bank (Ireland) plc Veritas Funds plc — Bermuda Trust (Dublin) Limited Voyager Investments plc Bank of Ireland Unit Managers Limited The Governor & Company of the Bank of Ireland W & W Global Strategies Fund W & W Asset Management Dublin Limited Deutsche International Custodial Services (Ireland) Limited Warburg Pincus Funds plc Warburg Pincus Asset Management (Dublin) Limited PFPC Trustee & Custodial Services Limited 202 Annual Report 2001 Name of UCITS Name of Management Company Name of Trustee Wells Fargo Worldwide Funds plc Wells Fargo Fund Management (Ireland) Limited The Governor & Company of the Bank of Ireland Wellington Management Portfolios (Dublin) plc — The Governor & Company of the Bank of Ireland Wellington Management Portfolios (Ireland) plc — The Governor & Company of the Bank of Ireland Western Asset Debt Securities Fund plc — PFPC Trustee & Custodial Services Limited Weser EMS Investment Company plc — The Governor & Company of the Bank of Ireland WJB Chiltern Global Investment Fund plc — AIB/BNY Trust Company Limited WP Stewart Funds plc WP Stewart Fund Management Limited Bermuda Trust (Dublin) Limited Yamaichi Samsung Dynamic Korea Fund Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Yuki Korea Fund Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Zenith Investment Fund plc — Bermuda Trust (Dublin) Limited 203 Annual Report 2001 Appendix 5 Authorised Unit Trust Schemes The unit trusts listed below are authorised by the Central Bank of Ireland, as at 31 December 2001, under the Unit Trusts Act, 1990. Unit trusts established before 26 December 1990 and registered under the Unit Trusts Act, 1972, which is repealed, were automatically authorised by the new legislation. Name of Unit Trust Name of Management Company Name of Trustee ABN AMRO Alternative Investments Fund ABN AMRO Fund Managers (Ireland) Limited Daiwa Europe Trustees Ireland Limited AIB Capital Growth Fund AIB Fund Management Limited Allied Irish Banks plc AIB Capital Markets Unit Trust AIB Fund Management Limited Allied Irish Banks plc AIB Select Portfolio AIB Fund Management Limited Allied Irish Banks plc AIMIC Asian Capital Growth Fund AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland Al Silaa Fund Barep Asset Management (Ireland) Limited Société Générale Alban Gate Investment Fund J.P. Morgan Administration Services (Ireland) Limited J.P. Morgan Bank (Ireland) plc Altius Fund SGAM (Ireland) Limited Société Générale Apollon Europe Equity Fund Apollon Asset Management Company Limited Deutsche International Custodial Services (Ireland) Limited Asia Access 2000 Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited Asia Landmark Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited Asian Equity Pioneer Fund Bank of Ireland Unit Managers Limited The Governor & Company of the Bank of Ireland ASO I (Ireland) Fund Goldman Sachs Fund Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc ASO II (Ireland) Fund Goldman Sachs Funds Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc ASO III (Ireland) Fund Goldman Sachs Funds Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc Asset Korea Fund KEB (Ireland) Fund Management Limited KEB (Ireland) Custodial Services Limited Atlantis Korean Smaller Companies Fund Atlantis Investment Management (Ireland) Limited Barings (Ireland) Limited AXA Currency and Managers Fund Fortis Fund Services (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited 204 Annual Report 2001 Name of Unit Trust Name of Management Company Name of Trustee AXA Rosenberg Market Neutral Strategies Trust AXA Rosenberg Management Ireland Limited PFPC Trustee & Custodial Services Limited B,H&S Residential Property Fund B,H&S Asset Management (Ireland) Limited Barings (Ireland) Limited Bank of Ireland Asset Management Bond Mutual Fund Bank of Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Bank of Ireland Asset Management EIRI Mutual Funds Bank of Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Bank of Ireland Asset Management Mutual Fund Unit Trust Bank of Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Bank of Ireland Asset Management Mutual Fund Unit Trust II Bank of Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Bank of Ireland Private Banking Fitzwilliam Portfolio Bank of Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Barclays Global Investors Advanced Active Strategies Funds Barclays Global Investors Ireland Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Barclays Global Investors Active Selection Fund Barclays Global Investors Ireland Limited The Governor & Company of the Bank of Ireland Barclays Global Investors Diversified Alpha Plus Funds Barclays Global Investors Ireland Limited PFPC Trustee & Custodial Services Limited Barclays Global Investors Selection Fund Barclays Global Investors Ireland Limited The Governor & Company of the Bank of Ireland Barep Achillea Barep Asset Management (Ireland) Limited Société Générale Barep Alize USD Barep Asset Management (Ireland) Limited Société Générale Barep Commodity Arbitrage Fund Barep Asset Management (Ireland) Limited Société Générale Barep Convertible Arbitrage Barep Asset Management (Ireland) Limited Société Générale Barep Dynamique Barep Asset Management (Ireland) Limited Société Générale Barep Emerging Markets Barep Asset Management (Ireland) Limited Société Générale Barep Fixed Income Arbitrage Barep Asset Management (Ireland) Limited Société Générale Barep Global Arbitrage Fund Barep Asset Management (Ireland) Limited Société Générale Barep Hedgefocus Barep Asset Management (Ireland) Limited Société Générale Barep Investissments Alternatifs Barep Asset Management (Ireland) Limited Société Générale 205 Annual Report 2001 Name of Unit Trust Name of Management Company Name of Trustee Barep Kappa Europe Barep Asset Management (Ireland) Limited Société Générale Barep Long Short Equity Barep Asset Management (Ireland) Limited Société Générale Barep Protea M & A USD Barep Asset Management (Ireland) Limited Société Générale Baring Global Opportunities Umbrella Fund Baring International Fund Managers (Ireland) Limited Barings (Ireland) Limited Baring Infrastructure Fund Baring Mutual Fund Management (Ireland) Limited Barings (Ireland) Limited Baring Toshin Toshikomon Umbrella Fund Baring Mutual Fund Management (Ireland) Limited Barings (Ireland) Limited Bear Stearns Explorer Bear Stearns Asset Management (Ireland) Limited PFPC Trustee & Custodial Services Limited Bear Stearns Explorer II Bear Stearns Asset Management (Ireland) Limited PFPC Trustee & Custodial Services Limited Capital Growth Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited CIBC Eyres Reed Australian Resources Fund Investor Fund Services (Ireland) Limited Investors Trust & Custodial Services (Ireland) Limited Coronation Retail Fund 2 Coronation Fund Managers (Ireland) Limited J. P. Morgan Bank (Ireland) plc Coronation Universal Fund Coronation Fund Managers (Ireland) Limited J.P. Morgan Bank (Ireland) plc CR Alternative Funds CR Management Limited Dexia Banque Internationale à Luxembourg S.A., Dublin Branch Daiwa Gaika MMF Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Daiwa Giga Fund (Daiwa/Goldman Sachs Global Trading Strategies Fund) Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Daiwa Liberty Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Daiwa Mega Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Davy Growth Trust Davy International Financial Services Limited Daiwa Europe Trustees Ireland Limited Davy High Yield Trust Mulroy Investment Services Limited The Governor & Company of the Bank of Ireland Defined Asset Trust Group One International Trust Managers Limited J.P. Morgan Bank (Ireland) plc Deutsche Asset Management International Bond Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited 206 Annual Report 2001 Name of Unit Trust Name of Management Company Name of Trustee Deutsche Asset Management International Fund Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Deutsche UK Managed Property Fund Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Deutsche UK Property Ventures Fund (No. 1) Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Dexia Alternative Dexia Asset Management Alternative Dublin Limited PFPC Trustee & Custodial Services Limited Dolmen Irish Equity Fund Dolmen Securitites Limited Barings (Ireland) Limited Dynamic Futures Fund Barep Asset Management (Ireland) Limited Société Générale Dynamic Futures II Barep Asset Management (Ireland) Limited Société Générale Dynamic Futures III Barep Asset Management (Ireland) Limited Société Générale Dynamic Futures V Indent Barep Asset Management (Ireland) Limited Société Générale Edgehill Select Group Umbrella Trust Fortis Fund Services (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Epsilon Barep Asset Management (Ireland) Limited Société Générale Euro Digital Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Euro Leaders CICM Fund Management Limited Allied Irish Banks plc Euromeister CICM Fund Management Limited Allied Irish Banks plc Europe Futures 2004 Barep Asset Management (Ireland) Limited Société Générale Finter Fund Ireland Finter Fund Management (Ireland) Limited Allied Irish Banks plc Framlington Maghreb Fund Framlington Investment Management (Ireland) Limited Bermuda Trust (Dublin) Limited Futures Investments Barep Asset Management (Ireland) Limited Société Générale Gartmore Global Index Umbrella Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited Gartmore Umbrella Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited GE Dublin Funds GE Asset Management (Ireland) Limited The Governor & Company of Bank of Ireland Global Alternative Barep Asset Management (Ireland) Limited Société Générale 207 Annual Report 2001 Name of Unit Trust Name of Management Company Name of Trustee Global Futures Barep Asset Management (Ireland) Limited Société Générale Global Investment Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited Global Protection Advantage Fund Brown Brothers Harriman Fund Administration Services (Ireland) Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Global Super Select Fund Baring Mutual Fund Management (Ireland) Limited Barings (Ireland) Limited Goldman Sachs Global Currency Fund — Dollar Plus Goldman Sachs Funds Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc Goldman Sachs Global Currency Fund — Euro Plus Goldman Sachs Funds Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc Goldman Sachs Global Funds Goldman Sachs Funds Management (Ireland) Limited The Governor & Company of the Bank of Ireland Goldman Sachs Global Multi Manager Funds Goldman Sachs Funds Management (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Goldman Sachs Money Market Funds Goldman Sachs Funds Management (Ireland) Limited Allied Irish Banks plc Goldman Sachs Qualified Investor Unit Trust Goldman Sachs Funds Management (Ireland) Limited The Governor & Company of the Bank of Ireland Goldrings Group of Funds AGF International Advisors Company Limited The Governor & Company of the Bank of Ireland GT Asian Warrants and Derivatives Fund INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc Hanmi Korea Venture Fund KEB (Ireland) Fund Management Limited KEB (Ireland) Custodial Services Limited Hedgefocus Enterprise Selection Barep Asset Management (Ireland) Ltd Société Générale Hibernian Alternative Strategies Trust Hibernian Investment Finance Limited PFPC Trustee & Custodial Services Limited Hibernian Irish Property Unit Trust Hibernian Investment Finance Limited The Governor & Company of the Bank of Ireland Hibernian Equity Unit Trust Hibernian Investment Finance Limited The Governor & Company of the Bank of Ireland HIRAMEKI Barep Asset Management (Ireland) Limited Société Générale IBJI Delta Neutral Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited IBM Global Strategy Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited International Resources & General Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited 208 Annual Report 2001 Name of Unit Trust Name of Management Company Name of Trustee Invesco J Series Funds AIM Global Management Company Limited Allied Irish Banks plc Investec International Funds Investec Asset Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc Investec International Private Equity Funds Investec Private Equity Management (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited Irish Life Charite Unit Trust Irish Life Unit Fund Managers Limited Citibank International plc, Ireland Branch Irish Life Mixed Irish and International Equity Unit Trust Irish Life Unit Fund Managers Limited Citibank International plc, Ireland Branch Janus Selection Janus Capital Trust Manager Limited The Governor & Company of the Bank of Ireland KBC Global Institutional Funds Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited KBC Life Alternative Investments Trust KBC Life Fund Management Ireland Limited PFPC Trustee & Custodial Services Limited KBC Umbrella Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited KEB Rose Fund KEB (Ireland) Fund Management Limited KEB (Ireland) Custodial Services Limited KEB Shamrock Fund KEB (Ireland) Fund Management Limited KEB (Ireland) Custodial Services Limited Korea Blue Chip Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Korea Capital Growth Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Korea Domestic Convertible Bond Fund Fortis Fund Services (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Korea Preferred Share Fund AIB/BNY Fund Management (Ireland) Limited Allied Irish Banks plc Korea Prime Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Korea Restructuring Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Korea Twin Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited La Vie en Rose Barep Asset Management (Ireland) Limited Société Générale Latin American Corporate Bond Fund Bank of Ireland Unit Managers Limited The Governor & Company of the Bank of Ireland Latin American Extra Yield Fund Bank of Ireland Unit Managers Limited Bank of Ireland Trust Services Limited 209 Annual Report 2001 Name of Unit Trust Name of Management Company Name of Trustee LibertyView Investment Fund CPR Investment Management (Ireland) Limited PFPC Trustee & Custodial Services Limited Mega II (Daiwa) Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Monthly Dividend High Yield Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Morgan Stanley Strategic Alternatives Fund Daiwa Europe Fund Managers (Ireland) Limited Daiwa Europe Trustees Ireland Limited NatWest/IFC Latin American Index Fund Bank of Ireland Unit Managers Limited J.P. Morgan Bank (Ireland) plc New Ireland Charity Fund Unit Trust New Ireland Unit Trust Managers Limited The Governor & Company of the Bank of Ireland Nomura Asset Management Global Investment Fund Nomura Asset Management Ireland Limited The Governor & Company of the Bank of Ireland North American Property Securities Trust GPA Fund Managers (Ireland) Limited SEI Investment Trustee and Custodial Services (Ireland) Limited Norwich Irish Managed Unit Trust Hibernian Investment Finance Limited The Governor & Company of the Bank of Ireland Orient Express Fund KEB (Ireland) Fund Management Limited KEB (Ireland) Custodial Services Limited Pacific 21st Century Fund AIB Fund Management Limited Allied Irish Banks plc Pacific Asian Ex-Japan Fund SGAM (Ireland) Limited Société Générale Pareto Alternative Investments Umbrella Trust Pareto Asset Management (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Paribas Emerging Markets Index Allocation Fund BNP Paribas Asset Management (Ireland) Limited Barings (Ireland) Limited Pioneer Convertible Bond Arbitrage Pioneer Alternative Investment Management Limited Deutsche International Custodial Services (Ireland) Limited Pioneer Global Equity Arbitrage Pioneer Alternative Investment Management Limited Deutsche International Custodial Services (Ireland) Limited Pioneer Global Macro Pioneer Alternative Investment Management Limited Deutsche International Custodial Services (Ireland) Limited Pioneer Long/Short European Equity Pioneer Alternative Investment Management Limited PFPC Trustee & Custodial Services Limited Principal Protected Fund (Euro) Barep Asset Management (Ireland) Limited Société Générale Principal Protected Fund (Euro) II Barep Asset Management (Ireland) Limited Société Générale Principal Protected Fund (USD) Barep Asset Management (Ireland) Limited Société Générale 210 Annual Report 2001 Name of Unit Trust Name of Management Company Name of Trustee Principal Protected Fund (USD) II Barep Asset Management (Ireland) Limited Société Générale Principle Protected Fund (USD) III Barep Asset Management (Ireland) Limited Société Générale Principal Protected Fund (USD) IV Barep Asset Management (Ireland) Limited Société Générale Protea M&A Barep Asset Management (Ireland) Limited Société Générale Putnam Private Equity Fund Putnam Investment Limited J.P. Morgan Bank Ireland plc RMB Global Fund RMB Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Robusta Fund Robusta Asset Management Limited Northern Trust Custodial Services (Ireland) Limited Rouge Barep Asset Management (Ireland) Limited Société Générale Rouge’99 Barep Asset Management (Ireland) Limited Société Générale S.L. Umbrella Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Salomon Brothers Qualified Investor Portfolio Salomon Brothers Management Company (Ireland) Limited PFPC Trustee & Custodial Services Limited Sapphire Global Equity Ex-Asia Fund SGAM (Ireland) Limited Société Générale Schwab Tokio Marine Trust Charles Schwab Asset Management (Ireland) Limited Brown Brothers Harriman Trustee Services (Ireland) Limited SG Privinvest Alternative Barep Asset Management (Ireland) Limited Société Générale SGAM Alternative Currency Fund SGAM (Ireland) Limited Société Générale SGAM Convertible Arbitrage Fund SGAM (Ireland) Limited Société Générale SGAM Currency Performer Fund SGAM (Ireland) Limited Société Générale SGAM Long Short Euro Equity Fund SGAM (Ireland) Limited Société Générale SIIM Asia Growth Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Southern Selections Development Capital Fund Southern Investment Services Limited Northern Trust Custodial Services (Ireland) Limited Sovereign Value Trust I Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Sovereign Value Trust II Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited SSgA Market Neutral Funds State Street Global Advisors Ireland Limited The Governor & Company of the Bank of Ireland 211 Annual Report 2001 Name of Unit Trust Name of Management Company Name of Trustee Strategic Global Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Strategic Investment Service IPAC Portfolio Management (Dublin) Limited J.P. Morgan Bank (Ireland) plc SUMISEI ABN AMRO Umbrella Fund Sumisei ABN AMRO Fund Managers (Ireland) Ltd SEI Investments Trustee and Custodial Services (Ireland) Limited Super Hedge Fund Daiwa Europe Fund Managers Ireland Limited Daiwa Europe Trustees Ireland Limited Super Phoenix Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Super Phoenix Fund II Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Super Venture Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited The Alphagen Selector Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited The Baring Currency Umbrella Fund Baring International Fund Managers (Ireland) Limited Barings (Ireland) Limited The Baring Europe Select Feeder Fund Baring International Fund Managers (Ireland) Limited Barings (Ireland) Limited The Baring Korea Feeder Fund Baring International Fund Managers (Ireland) Limited Barings (Ireland) Limited The Esron Fund Dolmen Securities Limited Barings (Ireland) Limited The ICC Venture Trust Fund ICC Venture Capital Managers Limited The Governor & Company of the Bank of Ireland The Nomura Asset Management Institutional Global Trusts Nomura Asset Management Ireland Limited The Governor & Company of the Bank of Ireland The Salomon Euro Bond Fund Salomon Brothers Asset Management (Ireland) Limited Citibank International plc, Ireland Branch The Taj Performance Fund Fortis Fund Services (Ireland) Limited J.P. Morgan Bank (Ireland) plc Ulster Bank Fixed Interest Portfolios Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited Ulster Bank Global Strategy Fund Northern Trust Fund Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited Yuki Taiwan Fund Deutsche International Fund Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Yume Barep Asset Management (Ireland) Limited Société Générale 212 Annual Report 2001 Appendix 6 Authorised Designated Investment Companies Under the powers conferred on the Central Bank of Ireland by the Companies Act, 1990 Part XIII the Bank has authorised the following schemes as investment companies designated under Section 256(5) of the Act as companies which may raise capital by promoting the sale of their shares to the public as follows. Name of Company Name of Management Company Name of Trustee Abbey National Dublin Investment Fund plc Scottish Mutual International Fund Managers Limited Citibank International plc, Ireland Branch Abbey National Dublin Investment Fund II plc Scottish Mutual International Fund Managers Limited Citibank International plc, Ireland Branch Abbey National Dublin Investment Fund III plc Scottish Mutual International Fund Managers Limited Citibank International plc, Ireland Branch Abbey National Dublin Investment Fund IV plc Scottish Mutual International Fund Managers Limited Citibank International plc, Ireland Branch ABN AMRO Emerging Europe Private Equity Fund plc — Deutsche International Custodial Services (Ireland) Limited ABN AMRO Institutional Funds plc — SEI Investments Trustee and Custodial Services (Ireland) Limited ACM European Enhanced Income Fund plc — Deutsche International Custodial Services (Ireland) Limited ACTA International Funds plc — Brown Brothers Harriman Trustee Services (Ireland) Ltd Advance Equity Linked No. 1 plc — Citibank International plc, Ireland Branch Aequilibrium Absolute Return Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited AHL Alpha Fund plc MAN Fund Management Limited J.P. Morgan Bank (Ireland) plc AHL Diversified plc MAN Fund Management Limited J.P. Morgan Bank (Ireland) plc AIG International Funds plc AIG/SunAmerica Asset Management Limited SEI Investments Trustee and Custodial Services (Ireland) Limited AIG Multistrategy Investments plc AIG/SunAmerica Asset Management Limited AIG Global Investment Trust Services Limited AIG-Hyperion EURIBOR ABS Fund plc AIG/SunAmerica Asset Management Limited J.P. Morgan Bank (Ireland) plc Al Meezan Commodity Fund plc — J.P. Morgan Bank (Ireland) plc Alpha Portfolio plc INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc ALPRO Emerging Markets Fund plc — PFPC Trustee & Custodial Services Limited 213 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Alternative Investment Managers Selection plc — Bermuda Trust (Dublin) Ltd Alternative Strategies Fund plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Amerindo Investment Advisors International Umbrella Fund plc — Barings (Ireland) Limited AMI Value Protected Fund plc Cresvale International Asset Management (Dublin) Limited The Governor & Company of the Bank of Ireland Andrea Investments plc — HSBC Global Investor Services (Ireland) Limited Andrea/EUR Investments plc — HSBC Global Investor Services (Ireland) Limited Apollo Fund plc — Barings (Ireland) Limited Arbat Arbitrage Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Asian Gateway Fund plc — Allied Irish Banks plc Aspect Capital Funds plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Athena Investment Capital I plc — AIB/BNY Trust Company Limited Atlantis KOSDAQ Fund plc Atlantis Investment Management (Ireland) Limted Barings (Ireland) Limited Auda Classic plc Auda Management (Ireland) Limited PFPC Trustee & Custodial Services Limited AXA New Horizon Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Axent Long/Short Macro Fund — Daiwa Europe Trustees Ireland Limited Axent Long Short Quantitative Fund plc — Daiwa Europe Trustees Ireland Limited Baltics Small Equity Fund plc — Investors Trust & Custodial Services (Ireland) Limited Bank of Ireland Liquidity Funds plc — Bank of Ireland Trust Services Limited Banorte Money Market Fund plc — PFPC Trustee & Custodial Services Limited Barclays Global Investors Alternative Investment Funds plc — PFPC Trustee & Custodial Services Limited Barclays Global Investors Secured Equity Fund II plc — AIB/BNY Trust Company Limited Barclays International Korea Fund plc — The Governor & Company of the Bank of Ireland 214 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Bas-Ex Currency Fund plc — Deutsche International Custodial Services (Ireland) Limited Bas-Ex US$ Currency Fund plc — Deutsche International Custodial Services (Ireland) Limited Bear Stearns Funds plc — PFPC Trustee & Custodial Services Limited Benchmark Alternative Investment Fund plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Berkshire KITC Growth Fund plc — Bermuda Trust (Dublin) Limited Berkshire Korea Fund plc — Bermuda Trust (Dublin) Limited BFS Traded Endowment Fund plc — The Governor & Company of the Bank of Ireland BIAM Investments plc — J.P. Morgan Bank (Ireland) plc Blevins Franks International Investments plc Blevins Franks Managers Ireland Limited AIB/BNY Trust Company Limited Bordier Invest Korea Fund plc Bordier Invest (Ireland) Limited Clydesdale Trustee and Custodial Services (Ireland) Limited BT & T Focus 1 Fund plc BT&T Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland BT & T Focus 3 Fund plc BT&T Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland BT & T Focus 4 Fund plc BT&T Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland BT&T Investment Fund plc BT&T Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland BT & T Life Fund plc BT&T Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland CABEI Central American Fund plc — Investors Trust & Custodial Services (Ireland) Limited Calfund plc — Deutsche International Custodial Services (Ireland) Limited Capital Balanced Fund plc — KEB (Ireland) Custodial Services Limited Capital Investment Group plc — Deutsche International Custodial Services (Ireland) Limited Castle Alternative Invest (International) plc LGT Fund Managers (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Castle Private Equity (International) plc LGT Fund Manager (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited CB Vermogensverwaltung plc CICM Fund Management Limited Allied Irish Banks plc 215 Annual Report 2001 Name of Company Name of Management Company Name of Trustee CDC Long/Short European Equity Fund plc — PFPC Trustee & Custodial Services Limited Census Investments plc — Citibank International plc, Ireland Branch Census Investments 3 plc — Citibank International plc, Ireland Branch Census Investments 4 plc — Citibank International plc, Ireland Branch Census Investments 5 plc — Citibank International plc, Ireland Branch Census Investment 6 plc — Citibank International plc, Ireland Branch Census Investments 7 plc — Citibank International plc, Ireland Branch Census Investments 8 plc — Citibank International plc, Ireland Branch Census Investments 9 plc — Citibank International plc, Ireland Branch Census Investments 10 plc — Citibank International plc, Ireland Branch Census Investments 12 plc — Citibank International plc, Ireland Branch Census Investments 14 plc — Citibank International plc, Ireland Branch Census Investments 15 plc — Citibank International plc, Ireland Branch Census Investments 18 plc — Citibank International plc, Ireland Branch Census Investments 19 plc — Citibank International plc, Ireland Branch Census Investments 20 plc — Citibank International plc, Ireland Branch Census Investments 22 plc — Citibank International plc, Ireland Branch Census Investments 23 plc — Citibank International plc, Ireland Branch Census Investments 24 plc — Citibank International plc, Ireland Branch Census Investments 25 plc — Citibank International plc, Ireland Branch Central Asia Regional Growth Fund plc Global Euro-Asia Investment Management Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited 216 Annual Report 2001 Name of Company Name of Management Company Name of Trustee CERCI Fund plc State Street Ireland Limited The Governor & Company of the Bank of Ireland Chesapeake Property Finance Fund II plc Alex Browne Realty Management Limited Allied Irish Banks plc CICM Global Portfolios plc CICM Fund Management Limited Allied Irish Banks plc CICM Midas plc CICM Fund ManagementLimited AIB/BNY Trust Company Limited CIPM Global Fund plc — Barings (Ireland) Limited CITC Balanced Fund plc — BT Trustee Company (Ireland) Limited CITC Select Fund plc — BT Trustee Company (Ireland) Limited CL Managed Futures Fund plc — Bermuda Trust (Dublin) Limited Close FTSE 100 Income and Growth Fund plc — Citibank International plc, Ireland Branch Compass (Ireland) Investment Funds plc — Barings (Ireland) Limited Controlfida Base Fixed Income Fund plc Controlfida Management Company Limited Barings (Ireland) Limited Controlfida Equity Fund plc Controlfida Management Company Limited Barings (Ireland) Limited Controlfida Investment Fund plc Controlfida Management Company Limited Barings (Ireland) Limited Controlfida SuperSwiss Fund plc Controlfida Management Company Limited Barings (Ireland) Limited Cowen Enterprise Global Healthcare Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited CPR Multi-Fonds plc — Allied Irish Banks plc CTC Global Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Daiwa Alternative Investments plc — Daiwa Europe Trustees Ireland Limited DB Brazil Investment Fund plc Deutsche International Corporate Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Delfin Global Funds plc Emerging World Asset Management Limited Barings (Ireland) Limited Delphi Funds plc — Citibank Trustees (Ireland) Limited Delta Investment Capital 1 plc — AIB/BNY Trust Company Limited Derivative Market Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Deutsche Balanced Asset Allocation Sterling Fund plc — Deutsche International Custodial Services (Ireland) Limited 217 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Deutsche Cash and Money Market Fund plc Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Deutsche Equity Asset Allocation Sterling Fund plc — Deutsche International Custodial Services (Ireland) Limited Deutsche Fixed Income Funds plc Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Deutsche Profunds plc Deutsche Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Diamond Sentinel One plc — Citibank International plc, Ireland Branch Dijon Fund plc Barep Asset Management (Ireland) Limited Société Générale Discoverer Umbrella Fund plc — Bermuda Trust (Dublin) Limited Discovery Fund plc — SEI Investments Trustee and Custodial Services (Ireland) Limited DITC Balanced Fund plc — Northern Trust Custodial Services (Ireland) Limited DKR Funds (Ireland) Public Limited Company — Brown Brothers Harriman Trustee Services (Ireland) Limited Dresdner RCM Global Investment Fund plc Dresdner International Management Services Limited J.P. Morgan Bank (Ireland) plc dSAM Global Value Fund II plc — BT Trustee Company (Ireland) Limited Eastern Gate Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited EDM Investment Funds plc EDM Asset Management Limited Northern Trust Custodial Services (Ireland) Limited Eligis Investments 1 plc — Citibank International plc, Ireland Branch Eligis Investments 2 plc — Citibank International plc, Ireland Branch Eligis Investments 3 plc — Citibank International plc, Ireland Branch Espirito Santo Funds of Funds plc Espirito Santo Capital Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc Europe/America Select Private Equity (Ireland) plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Europe/Americas Select Private Equity (Ireland) II plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited European Financial Equities plc — J.P. Morgan Bank (Ireland) plc Falcon Investment Company plc — Barings (Ireland) Limited 218 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Falcon Market Fund plc — Barings (Ireland) Limited Faraday Investments plc — Citibank International plc, Ireland Branch Faraday Investments 2 plc — Citibank International plc, Ireland Branch Faraday Investments 3 plc — Citibank International plc, Ireland Branch Faraday Investments 4 plc — Citibank International plc, Ireland Branch Faraday Investments 5 plc — Citibank International plc, Ireland Branch Faraday Investments 6 plc — Citibank International plc, Ireland Branch Faraday Investments 7 plc — Citibank International plc, Ireland Branch Fedsure International Global Funds plc Fedsure International Fund Management Limited PFPC Trustee & Custodial Services Limited FFTW Emerging Market Debt Fund plc — Investors Trust & Custodial Services (Ireland) Limited FFTW — Freddie Mac Gold PC Mortgage LIBOR Fund plc — Investors Trust & Custodial Services (Ireland) Limited FFTW Global Debt Fund plc — Investors Trust & Custodial Services (Ireland) Limited FFTW Mortgage Libor Fund plc — Investors Trust & Custodial Services (Ireland) Limited FFTW Mortgage Total Return Fund plc — Investors Trust & Custodial Services (Ireland) Ltd Fiduciary Emerging Markets Bond Fund plc Fiduciary International Ireland Limited Investors Trust & Custodial Services (Ireland) Limited Financial Equity Plus I plc — The Governor & Company of the Bank of Ireland Financial Equity Plus II plc — The Governor & Company of the Bank of Ireland Financial Equity Plus III plc — The Governor & Company of the Bank of Ireland Focus Absolute Return Fund plc — Bermuda Trust (Dublin) Limited Foreign & Colonial Emerging High Yield Investment Company plc — The Governor & Company of the Bank of Ireland Foreign & Colonial Romanian Investment Company plc — Brown Brothers Harriman Trustee Services (Ireland) Limited 219 Annual Report 2001 Name of Company Name of Management Company Name of Trustee ForexConcept Fund plc — Investors Trust & Custodial Services (Ireland) Limited Forsyth Funds plc — Bermuda Trust (Dublin) Limited Fortis Alternative (Dublin) Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Frank Russell Alternative Investment Funds plc Frank Russell Investments (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Frank Russell Institutional Funds plc Frank Russell Investments (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Frank Russell Qualifying Investor Fund plc Frank Russell Investments (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Franklin Floating Rate Fund plc — J.P. Morgan Bank (Ireland) plc Franklin US Long-Short Fund plc — J.P. Morgan Bank (Ireland) plc Gamma Capital Funds plc — Investors Trust & Custodial Services (Ireland) Ltd Gartmore Korea Fund plc — Northern Trust Custodial Services (Ireland) Limited Gartmore Liquidity Fund plc Northern Trust Investor Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited Gem International Fund plc FG Asset Management (Ireland) Limited Dexia Banque Internationale à Luxembourg S.A., Dublin Branch Gemini Fund plc Barep Asset Management (Ireland) Limited Société Générale Gensec Global Multi-Manager Fund plc Gensec Asset Management (Dublin) Limited Deutsche International Custodial Services (Ireland) Limited Gensec Umbrella Fund plc Gensec Asset Management (Dublin) Limited Deutsche International Custodial Services (Ireland) Limited GLG First Portuguese Investments plc GLG Partners Asset Management Limited Allied Irish Banks plc GLG Global Convertible Fund plc GLG Partners Asset Management Limited Allied Irish Banks plc GLG Investments II plc GLG Partners Asset Management Limited Allied Irish Banks plc Global Balanced Strategies plc GLG Partners Asset Management Limited Allied Irish Banks plc Global Trading Fund I plc Barep Asset Management (Ireland) Limited Société Générale GMO Overseas Fund plc — Brown Brothers Harriman Trustee Services (Ireland) Limited Goldman Sachs Institutional Funds plc — J.P. Morgan Bank (Ireland) plc 220 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Goldman Sachs Global Alpha Fund plc — Investors Trust & Custodial Services (Ireland) Limited Goldman Sachs Global Equity Long/Short plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Goldman Sachs Global Event Driven plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Goldman Sachs Global Relative Value plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Goldman Sachs Global Trading plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Gordon House Optimal Services Fund plc — Bermuda Trust (Dublin) Limited Green Way Select Fund plc — Investors Trust & Custodial Services (Ireland) Limited GROUPAMA Special Opportunities Fund plc — Fortis Global Custody Management and Trustee Services (Ireland) Limited GT Emerging Markets Bond Fund plc INVESCO Asset Management Limited J.P. Morgan Bank (Ireland) plc Hambros Commodities Fund plc Hambros Fund Managers (Ireland) Limited Barings (Ireland) Limited Hamilton Lane Private Equity Fund plc — Barings (Ireland) Limited HSBC Equity Growth 1 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Equity Growth 2 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Equity Growth 3 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Equity Growth 4 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Equity Growth 5 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Equity Growth 6 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Fixed Income 1 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Fixed Income 2 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Fixed Income 3 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Fixed Income 4 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited 221 Annual Report 2001 Name of Company Name of Management Company Name of Trustee HSBC Fixed Income 5 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Fixed Income 6 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC Fixed Income 7 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Equity Plus 1 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Equity Plus 2 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Equity Plus 3 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Equity Plus 4 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Equity Plus 5 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Equity Plus 6 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Equity Plus 7 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Equity Plus 8 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC International Technology 1 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Equity Plus plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Equity Plus II plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Equity Plus III plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Equity Plus IV plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Equity Plus V plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Equity Plus VI plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Equity Plus VII plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Equity Plus VIII plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Income 1 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited 222 Annual Report 2001 Name of Company Name of Management Company Name of Trustee HSBC UK Income 2 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited HSBC UK Income 3 plc HSBC Fund Administration (Ireland) Limited HSBC Global Investor Services (Ireland) Limited ICFI Corporate Securities Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited IIBU Fund II plc — Barings (Ireland) Limited IIU Convertible Fund plc IIU Asset Strategies Limited Barings (Ireland) Limited Independent Strategy European Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Indosuez Korea Fund plc — Citibank Trustees (Ireland) Limited INVESCO AsiaNET Fund plc INVESCO Asset Management Ireland Limited J.P. Morgan Bank (Ireland) plc InvestmentPlus plc — The Governor & Company of the Bank of Ireland Investment Strategies Fund plc FG Asset Management Ireland Limited Dexia Banque Internationale à Luxembourg S.A., Dublin Branch IO Investors Alternative Investment Strategies plc Gensec Asset Management (Dublin) Limited Fortis Global Custody Management & Trustee Services (Ireland) Ltd Irish Iberian Fund plc AIG/SunAmerica Asset Management Limited The Governor & Company of the Bank of Ireland Irish Life International Global Funds plc Irish Life International Fund Managers Limited PFPC Trustee and Custodial Services Limited J.P. Morgan Vista Funds plc — J.P. Morgan Bank (Ireland) plc JPMF Capital Protection plc — HSBC Global Investor Services (Ireland) Limited KBC Alpha Fund plc — PFPC Trustee & Custodial Services Limited KDA Invesment Fund 1 plc — Deutsche International Custodial Services (Ireland) Limited KIME Far East Fund plc — Northern Trust Custodial Services (Ireland) Limited Kleinwort Benson Bond Arbitrage Fund plc — Barings (Ireland) Limited Kleinwort Benson Derivative Products Fund plc — Barings (Ireland) Limited Kleinwort Benson Libor Plus 200 Fund plc Kleinwort Benson Capital Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc Kleinwort Benson Libor Plus Fund plc Kleinwort Benson Capital Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc 223 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Kleinwort Benson Symmetric Strategy Fund plc — J.P. Morgan Bank (Ireland) plc Korea Bond Fund plc — Deutsche International Custodial Services (Ireland) Limited Korea CB Fund plc — Deutsche International Custodial Services (Ireland) Limited Korea Growth Yield Fund plc — KEB (Ireland) Custodial Services Limited Korea Leverage Fund plc — KEB (Ireland) Custodial Services Limited Korea Select Bond Fund plc — KEB (Ireland) Custodial Services Limited Korea Special Opportunities Fund plc Oriens Capital (Ireland) Limited Barings (Ireland) Limited Korea Super Fund plc — Barings (Ireland) Limited Lazard Diversified Strategies Fund plc — PFPC Trustee & Custodial Services Limited Lazard Emerging Managers Fund plc — PFPC Trustee & Custodial Services Limited Lazard Strategic Yield Fund plc Lazard Investment Funds Limited The Governor & Company of the Bank of Ireland Legal & General European Extra Growth plc — HSBC Global Investor Services (Ireland) Limited Legal & General European Extra Growth II plc — HSBC Global Investor Services (Ireland) Limited Legal & General European Extra Growth III plc — HSBC Global Investor Services (Ireland) Limited Legal & General European Extra Growth IV plc — HSBC Global Investor Services (Ireland) Limited Legal & General Fixed Rate plc — HSBC Global Investor Services (Ireland) Limited Legal & General Fixed Rate 2 plc — HSBC Global Investor Services (Ireland) Limited Legal & General Income and Growth plc — HSBC Global Investor Services (Ireland) Limited Legal & General International Growth plc — HSBC Global Investor Services (Ireland) Limited Legal & General UK Extra Growth plc — HSBC Global Investor Services (Ireland) Limited Legal & General UK Extra Growth II plc — HSBC Global Investor Services (Ireland) Limited Legal & General UK Extra Growth III plc — HSBC Global Investor Services (Ireland) Limited 224 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Legal & General UK Performance plc — HSBC Global Investor Services (Ireland) Limited Legal & General U.K. Performance II plc — HSBC Global Investor Services (Ireland) Limited LeggMason Investors 20/20 Hindsight plc — Deutsche International Custodial Services (Ireland) Limited LeggMason Investors Fixed Income plc — Deutsche International Custodial Services (Ireland) Limited LeggMason Investors Safeguard plc — Deutsche International Custodial Services (Ireland) Limited LeggMason Investors Superchip plc — Deutsche International Custodial Services (Ireland) Limited Man-Fidex Diversified plc MAN Fund Management Limited J.P. Morgan Bank (Ireland) plc Marriott Singer Investment Funds plc Singer & Friedlander Total Asset Management Limited Barings (Ireland) Limited Matrix Fund Company plc — Bermuda Trust (Dublin) Limited Maxime Fund plc Barep Asset Management (Ireland) Limited Société Générale MCIV Multicurrency Funds plc State Street Ireland Limited The Governor & Company of the Bank of Ireland Medinvest plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited MeesPierson Gonet Absolute Return Fund of Funds plc MeesPierson Gonet Fund Management Limited Fortis Global Custody Management & Trustee Securities (Ireland) Limited Mellon Global Alternative Investments Fund plc Mellon Global Management Limited Daiwa Europe Trustees (Ireland) Limited Merrill Lynch Defined Income and Growth plc — Citibank International plc, Ireland Branch Merrill Lynch Defined Returns plc — Citibank International plc, Ireland Branch Merrill Lynch Defined Returns II plc — Citibank International plc, Ireland Branch Merrill Lynch Japan Enhanced Performance plc — Citibank International plc, Ireland Branch Millennium Arbitrage Fund plc — KEB (Ireland) Custodial Services Limited Millennium Global Equity Funds plc Millennium Asset Management (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Millennium Master Fund plc Millennium Asset Management (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Mont Blanc Trading plc Barep Asset Management (Ireland) Limited Société Générale 225 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Morgan Stanley Multi-Strategy Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Multivest plc — HSBC Global Investor Services (Ireland) Limited NatWest Korea Fund plc Northern Trust Investor Services (Ireland) Limited Northern Trust Custodial Services (Ireland) Limited New Energy and Power Investment Company plc — Allied Irish Banks plc New Target Fund plc — Bermuda Trust (Dublin) Limited NM First Korean Fund plc — Bermuda Trust (Dublin) Limited North American Income Fund plc — Investors Trust & Custodial Services (Ireland) Limited North Stock Company plc — Deutsche International Custodial Services (Ireland) Limited Northern Trust Global Funds plc Northern Trust Fund Managers (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Omam Alternative Strategies plc Omam Management Company Limited The Governor & Company of the Bank of Ireland Omega Trust Umbrella Fund plc — Bermuda Trust (Dublin) Limited Optimal Multiadvisors Ireland plc — Bermuda Trust (Dublin) Limited Oriens Korea Bond Fund plc Oriens Capital (Ireland) Ltd Barings (Ireland) Limited Paragon Income and Growth 1 plc — HSBC Global Investor Services (Ireland) Limited Paragon Income & Growth 2 plc — HSBC Global Investor Services (Ireland) Limited Pareto Partners Umbrella Fund plc Pareto Asset Management (Ireland) Limited The Governor & Company of the Bank of Ireland Parus Fund plc — Barings (Ireland) Limited Payden & Rygel International Bond Fund plc — Northern Trust Custodial Services (Ireland) Limited Payden & Rygel International Short Bond Fund plc — Northern Trust Custodial Services (Ireland) Limited Payden & Rygel Professional Funds plc — AIB/BNY Trust Company Limited Petercam Growth Fund plc Petercam Management Ireland Limited Deutsche International Custodial Services (Ireland) Limited Pioneer DM CashFonds plc Pioneer Global Investments Limited Brown Brothers Harriman Trustee Services (Ireland) Limited Pioneer Global Opportunities plc Pioneer Alternative Investments Limited Investors Trust & Custodial Services (Ireland) Limited 226 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Poalim Global Multi-Manager 20 plc Poalim Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Poalim Global Multi-Manager 35 plc Poalim Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Poalim Global Multi-Manager 50 plc Poalim Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Poalim Global Multi-Manager 70 plc Poalim Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Poalim Global Multi-Manager 90 plc Poalim Asset Management (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited Portuguese Equities Fund plc — Bermuda Trust (Dublin) Limited Premier Pacific Income Fund plc — J.P. Morgan Bank (Ireland) plc Prime Korea Fund plc — Allied Irish Banks plc Prudential-Bache International Futures Fund A plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Prudential-Bache International Futures Fund B plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Prudential-Bache International Futures Fund C plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Prudential-Bache International Futures Fund D plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Prudential-Bache International Futures Fund E plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Prudential-Bache International Futures Fund F plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Quaich Investments 3 plc — Citibank International plc, Ireland Branch Quetzal High Yield Fund plc Emerging World Asset Management Limited Barings (Ireland) Limited RBE Ijara Fund plc — Barings (Ireland) Limited Reims Fund plc Barep Asset Management (Ireland) Limited Société Générale Relative Value Fund plc Scottish Value Management (Ireland) Limited AIB/BNY Trust Company Limited Romanian Growth Fund plc Global Euro-Asia Investment Management Limited Bermuda Trust (Dublin) Limited Roy G Niederhoffer Fund (Ireland) plc R G Niederhoffer Capital Management (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited Salomon Brothers Funds plc — J.P. Morgan Bank (Ireland) plc 227 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Samsung Yamaichi Asia Growth Fund plc — Chemical Ireland Custody and Trustee Services Limited SBC CAPM Strategies plc — The Governor & Company of the Bank of Ireland Schroder Private Equity Funds plc Schroder Investment Management (Ireland) Limited Barings (Ireland) Limited Schroder Russian Region Fund plc Schroder Investment Management (Ireland) Limited J.P. Morgan Bank (Ireland) plc Schroder Structured Income and Growth plc Schroder Investment Management (Ireland) Limited Citibank International plc, Ireland Branch Scottish Widows Stock Market Growth plc — HSBC Global Investor Services (Ireland) Limited Scottish Widows U.K. Stock Market Growth 2 plc — HSBC Global Investor Services (Ireland) Limited Selected European Equities Fund plc — Deutsche International Custodial Services (Ireland) Limited Singer & Friedlander High Income Funds plc Singer & Friedlander Total Asset Management Limited HSBC Global Investor Services (Ireland) Limited Skandia Transparent Investment Management Funds plc Skandia Fund Management (Ireland) Limited Allied Irish Banks plc Smith Barney Campbell Financial, Metals, and Energy Fund plc Smith Barney (Ireland) Limited PFPC Trustee & Custodial Services Limited Smith Barney Sheridan Interestplus Fund plc Smith Barney (Ireland) Limited PFPC Trustee & Custodial Services Limited Smith Barney SJÖ Global Diversified Fund plc Smith Barney (Ireland) Limited Investors Trust & Custodial Services (Ireland) Limited Smith Barney Stonebrook FX Fund plc — PFPC Trustee & Custodial Services Limited South American Income Fund plc Deutsche International Corporate Services (Ireland) Limited Deutsche International Custodial Services (Ireland) Limited St Andrew’s Investment Company plc — Citibank International plc, Ireland Branch St. Andrew’s Investment Company 2 plc — Citibank International plc, Ireland Branch Star MM Funds plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited Stryx Funds plc Seilern Investment Management (Ireland) Limited Bermuda Trust (Dublin) Limited Sunrise Fund plc — Barings (Ireland) Limited SVM Highlander Fund plc Scottish Value Management (Ireland) Limited PFPC Trustee & Custodial Services Limited 228 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Swiss Bank Corporation Derivative Portfolios plc — J.P. Morgan Bank (Ireland) plc Talorcan Equity Pairs Plus Fund plc — Barings (Ireland) Limited Talorcan Forex Fund plc — Barings (Ireland) Limited Talorcan Global Fund plc — Barings (Ireland) Limited Technology 2000 Fund plc — Investor Trust & Custodial Services (Ireland) Limited The 3D Fund plc — J.P. Morgan Bank (Ireland) plc The Antiope Alpha Fund plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited The Baring Umbrella Fixed Income Fund plc Baring Mutual Fund Management (Ireland) Limited Barings (Ireland) Limited The East Europe Frontiers Fund plc AIM Global Management Company Limited Barings (Ireland) Limited The Emerging Markets New Economy Fund Plc — Dexia Banque Internationale à Luxembourg S.A., Dublin Branch The GNI Global Financial Fund Ireland plc GNI Fund Management (Ireland) Limited Barings (Ireland) Limited The Golden Gate Fund plc Kyte Fund Management (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited The Hansberger Global Fund plc Hansberger Global Investors Limited J.P. Morgan Bank (Ireland) plc The Investec Global Investment Portfolio plc — Barings (Ireland) Limited The Korea Growth Geared Fund plc Korea Investment Management Ireland Limited Northern Trust Custodial Services (Ireland) Limited The London Market Fund plc Aberdeen International Management Ireland Limited AIB/BNY Trust Company Limited The Paribas Multi-Manager Global Fund plc — Deutsche International Custodial Services (Ireland) Limited The Siberian Investment Company plc — Barings (Ireland) Limited The Stryx Global Fund plc Seilern Investment Management (Ireland) Limited Bermuda Trust (Dublin) Limited The US$ Global Currency Fund plc Millennium Asset Management (Ireland) Limited Fortis Global Custody Management & Trustee Services (Ireland) Limited The Yellow Sea Investment Company plc SEI Investments-Global Fund Services Limited SEI Investments Trustee and Custodial Services (Ireland) Limited Themis Global Index Funds plc Aberdeen International Management Ireland Limited The Governor & Company of the Bank of Ireland Topiary Fund (Ireland) plc — Fortis Global Custody Management & Trustee Services (Ireland) Limited 229 Annual Report 2001 Name of Company Name of Management Company Name of Trustee Turkish Smaller Companies Fund plc Global Euro-Asia Investment Management Limited Bermuda Trust (Dublin) Limited UAL International Funds plc — J.P. Morgan Bank (Ireland) plc Ulsan Fund plc — KEB (Ireland) Custodial Services Limited Universal Investment Fund plc — Deutsche International Custodial Services (Ireland) Limited US Financial Equities plc — J.P. Morgan Bank (Ireland) plc US Value Investment Company plc Singer & Friedlander Total Asset Management Limited J.P. Morgan Bank (Ireland) plc Waverley Stock Market Growth plc — HSBC Global Investor Services (Ireland) Limited Waverley Stock Market Growth 2 plc — HSBC Global Investor Services (Ireland) Limited Waverley Stock Market Growth 3 plc — HSBC Global Investor Services (Ireland) Limited World Equity Fund Portfolio (Ireland) plc — Investors Trust & Custodial Services (Ireland) Limited Worldwide Opportunity Fund plc — Allied Irish Banks plc WP Stewart Global Funds plc WP Stewart Fund Management Limited Bermuda Trust (Dublin) Limited WP Stewart (Distributor) Funds plc WP Stewart Fund Management Limited Bermuda Trust (Dublin) Limited Yamaichi International Investments plc — BT Trustee Company (Ireland) Limited Yasuda Portfolio Fund plc — Citibank International plc, Ireland Branch Zurich Global Umbrella Fund plc Zurich Investment Management (Dublin) Limited The Governor & Company of the Bank of Ireland 230 Annual Report 2001 Appendix 7 Authorised Non-Designated Investment Companies Under the powers conferred on the Central Bank of Ireland by the Companies Act, 1990, Part XIII, the Bank has authorised, up to 31 December 2001, the following schemes as non-designated investment companies under Section 256 of the Act. These companies may not raise capital by promoting the sale of their shares to the public. Name of Company Aesthetic Investments Fund plc Ashdowne Investment Company Ireland Limited Asia Growth Fund plc Asia Ultra Fund plc DB Foreign Lease Limited Dedalus Securities Trading Company Limited Dragon Korea Fund plc Ecurent I Securities Trading Company Limited Emerging Market Growth Fund plc Europa Re International Limited Evergreen Korea Fund plc Gulfstream Securities Trading Company Limited KI Limited Korea Gearing Fund plc Korea Index Fund plc Korea Plus Fund plc Lauterberg Securities Trading Company Limited Liffey Securities Trading Company Limited Meininger Securities Trading Company Limited Nordinvest Securities Trading Company Limited Olearius Securities Trading Company Limited Orient Balanced Fund plc Rhein II Securities Trading Company Limited Starlight Securities Trading Company Limited The First Chesapeake Property Finance Fund plc The Second Chesapeake Property Finance Fund plc The Third Chesapeake Property Finance Fund plc Vega Invest Fund plc Wexford Institutional Investments Limited WHI Securities Trading Company Limited Wuerttembergische Investment Co (Ire) Limited 231 Annual Report 2001 Appendix 8 Authorised Investment Limited Partnerships Under the powers conferred on the Central Bank of Ireland by the Investment Limited Partnerships Act, 1994 the Bank has authorised the following schemes as investment limited partnerships under Section 8 (6) of the Act. Name of Partnership Name of General Partner Name of Custodian Hibernia Development Capital Partners I Hibernia GP Limited 88 St Stephen’s Green Dublin 2 Deutsche International Custodial Services (Ireland) Limited George’s Dock House IFSC Dublin 1 Hibernia Development Capital Partners II Hibernia GP Limited 88 St Stephen’s Green Dublin 2 Deutsche International Custodial Services (Ireland) Limited George’s Dock House IFSC Dublin 1 232 Annual Report 2001 Appendix 9 Undertakings for Collective Investment in Transferable Securities (UCITS) Authorised in Other Member States of the European Union and Marketing in Ireland The following schemes, which have been authorised in other Member States of the European Union, have notified the Central Bank of Ireland of their intention to market in Ireland. They have complied with Part X of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 1989 (the Regulations). At least two months have elapsed since that compliance and they are, therefore, entitled to market shares or units of their schemes in this country. UCITS ABN AMRO Funds Aberdeen Atlas Fund Aberdeen Global AIB Govett American General Fund AIB Govett UK Equity General Fund AIB Govett European General Fund AIB Govett Corporate Bond Fund AIB Govett Japan General Fund AIB Govett FTSE Mid 250 Index Fund AIB Govett American Strategy Fund AIB Govett European Strategy Fund AIB Govett Pacific Strategy Fund AIB Govett Greater China Fund AIB Govett International Growth Fund AIB Govett UK Smaller Companies Fund AIB Govett Global Strategy Fund AIB Govett Latin America Fund AIB Govett Asia Pacific Fund Asia Super Growth Fund Asia Tiger Warrant Fund Baillie Gifford UK and Balanced Funds ICVC Baillie Gifford Overseas Growth Fund ICVC Barclays Investment Funds (Luxembourg) Baring American Growth Trust Baring American Smaller Companies Trust Baring Convertibles Trust Baring Eastern Trust Baring Equity Income Trust Baring Europe Select Trust Baring European Growth Trust Baring German Growth Trust Baring Global Bond Trust Baring Global Growth Trust Baring Japan Growth Trust Baring Japan Sunrise Trust Baring Korea Trust Baring Portfolio Fund Baring Sterling Corporate Bond Trust Baring UK Growth Trust Baring UK Smaller Companies Trust CMI Global Network Fund CMI Managed International Fund Fidelity Funds Fidelity Funds II Five Arrows Portfolio Fund Fleming Funds Fleming Series II Funds Franklin Templeton Investment Funds Gartmore SICAV Guinness Flight Blue Chip Portfolio Trust Guinness Flight Emerging Companies Trust Henderson Horizon Fund HSBC Global Investment Funds INVESCO European Warrant Fund INVESCO GT SICAV INVESCO Maximum Income Fund JPMorgan Fleming Lux Funds JPMorgan Fleming Investment Funds J.P. Morgan Luxembourg Funds Mercury Selected Trust Mercury World Bond Fund Morgan Stanley SICAV Nippon Warrant Fund Premier International Investments Save and Prosper American Income and Growth Fund Save and Prosper American Smaller Companies Fund Save and Prosper Capital Units Save and Prosper Commodity Share Fund Save and Prosper Eastern Discovery Fund Save and Prosper Energy Industries Fund Save and Prosper European Growth Fund Save and Prosper European Income and Growth Fund Save and Prosper Financial Securities Fund Save and Prosper Gilt and Fixed Interest Income Fund Save and Prosper Gold and Exploration Fund Save and Prosper International Bond Fund Save and Prosper Japan Growth Fund Save and Prosper Japan Smaller Companies Fund Save and Prosper New Technology Fund Save and Prosper Scotbits Save and Prosper Select International Fund Save and Prosper South East Asia Growth Fund Save and Prosper US Growth Fund Save and Prosper Universal Growth Fund Von Ernst Global Portfolio 233 Annual Report 2001 Appendix 10 Foreign Collective Investment Schemes (other than UCITS) Marketing in Ireland The following collective investment schemes have been approved by the Bank to market in Ireland under Section 256(8) of the Companies Act, 1990 and Section 9 of the Unit Trusts Act, 1990. NAME AHL Guaranteed Capital Markets Limited AIB Grofund Currency Funds Limited Alliance & Leicester International Fund plc Athena Guaranteed Currencies Limited Bank of Ireland British Overseas Trust Bank of Ireland Capital Growth Trust Bank of Ireland Global Funds Limited Bank of Ireland International Portfolio Bank of Ireland Worldwide Opportunity Trust Barclays Investment Funds (Channel Islands) Limited Barclays Unicorn Multicurrency Fund Limited Davy Growth Trust Emerald Equity Company plc Fidelity Currency Funds Limited Five Arrows Currency Fund Limited Five Arrows International Bond Fund Limited Five Arrows International Investment Funds Five Arrows International Reserves Limited Gartmore Capital Strategy Fund Limited Govett Securities & Investments Limited Hill Samuel Offshore Funds Limited Hill Samuel Offshore High Yield Fund Limited Hill Samuel Sterling Fixed Interest Fund Limited Investec Global Strategy Fund Investec International Accumulation Fund Limited Irish Permanent International Funds plc Lloyds TSB Money Fund Limited MAP Guaranteed Limited Mellon Newton Universal Growth Funds Limited Mercury International Bond Fund Mercury Offshore Balanced Portfolio Mercury Offshore Growth Portfolio Mercury Sterling Fund Mercury World Trader Fund — European Equity Bull Trader Fund Mercury World Trader Fund — Japanese Equity Bull Trader Fund Mercury World Trader Fund — UK Equity Bull Trader Fund Mercury World Trader Fund — US Equity Bull Trader Fund Mint Guaranteed Currencies 2001 Limited (Mint Guaranteed Currencies 2001) Mint Guaranteed Global Financial 2003 Limited Old Mutual International Funds Limited Old Mutual International Total Income Fund Limited The Royal Bank of Scotland International Money Market Funds Limited Ulster Bank Global Funds plc Appendix 11 Moneybrokers, as at 31 December 2001, which have been authorised under Section 110 of the Central Bank Act, 1989 Addano Limited (trading as Davy Moneybroking) Caradas Currency Brokers Limited Davy International EBS Service Company Limited Money Markets International Limited NCB Moneybrokers Limited Reuter Transaction Services Limited 234 Annual Report 2001 Appendix 12 Bureaux De Change Authorised in the State Listed hereunder are all entities authorised under Section 29 of the Central Bank Act, 1997, to carry on bureau de change business as at 31 December 2001. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. AIB CURRENCY BUREAUX LIMITED FEXCO THOMAS COOK RETAIL LIMITED JOE WALSH TOURS BUREAU DE CHANGE (FOREX) LIMITED FIRST RATE ENTERPRISES LIMITED AMERICAN EXPRESS INTERNATIONAL INC CITIBANK NA (LONDON BRANCH) EMEX-CHANGE ALISON RICE BOLAND KINSALE INTERNATIONAL CURRENCY EXCHANGE PLC LINHILL LIMITED MARGARET BURNS EUROSTER EXCHANGES LIMITED Appendix 13 Memoranda of Understanding to which the Bank is a Signatory as at 31 December 2001 Authority The Banking and Finance Commission (Belgium) Finanstilsynet (Denmark) The Commission Bancaire and the Comite des Etablissements de Credit (France) Bundesaufsichtsamt für das Kreditwesen (Germany) Banca d’Italia (Italy) Institut Monetaire Luxembourgeois (Luxembourg) De Nederlandsche Bank NV (Netherlands) Financial Services Authority & Building Societies Commission (United Kingdom) The Hong Kong Securities and Futures Commission The Forum of European Securities Commissions (FESCO)* The Isle of Man Financial Supervision Commission *Subsequently replaced by CESR — see page 84. 235

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