IS the Central Bank powerless to force banks and building societies to adhere to the current mortgage lending guidelines and must it therefore rely only on "moral persuasion"? The answer is no. Under current legislation, the Central Bank has a number of direct and indirect ways to enforce the lending criteria.

Firstly, under statute it has the power to make the voluntary guidelines legally binding and enforceable. Secondly, it may make breach of the guidelines commercially unattractive, by requiring those who breach the guidelines to have greater capital than those who comply. Neither solution is however entirely without problems.

The Central Bank, in addition to being in charge of monetary policy, is the regulator of banks and building societies and, as such, has wide powers to protect their soundness and to promote prudent banking practices. Insofar as breach of the current criteria raises questions about the soundness of banks and building societies, the Central Bank is empowered to act. If house prices were to fall, for whatever reason, banks and building societies would no longer be fully protected, by their security.

The first and most direct response to the problem of excessive mortgage lending is to make the current voluntary guidelines legally enforceable. Under Central Bank and building societies legislation, the Central Band has the power to impose what are called "conditions", where this is conducive to the proper and orderly regulation of banks and building societies.

If the lending criteria were mad into conditions for the conduct of business, the Central Bank would have a armoury of disciplinary measures to enforce them.

Making the guidelines mandatory is not without its problems. Banks and building societies would probably seek to invalidate any such conditions by means of judicial review.

A further problem is that any conditions would place Irish banks at a competitive disadvantage in relation to foreign banks and building societies operating in Ireland.

A second way in which the Central Bank may act is by way of rules regarding capital adequacy. The Central Bank could require banks or building societies breaching guidelines to have more capital for the conduct of their businesses than those who complied.

Insofar as the provision of extra capital is expensive for banks and building societies, the breach of guidelines would be made somewhat unattractive.

The Basle criteria, as adopted by the European Union and applied in Irish law, require that credit institutions maintain a minimum capital ratio own funds (ie shareholder funds and certain subordinated debt) must be at least 8 per cent of assets adjusted for risk.

Two salient points should be noted firstly, the figure of 8 per cent is a minimum figure and may be increased by the Central Bank at its discretion; secondly, a concession is made for mortgage lenders in that a residential loan is discounted by 50 per cent for capital adequacy purposes, if it is fully and completely secured.

These points suggest two courses open to the Central Bank. One option is that it could increase the general capital ratio applicable to those institutions which fail to abide by the guidelines in relation to salary multiples. However, as Irish banks and building societies are quite comfortably capitalised they may not be particularly susceptible to increases in the minimum ratio.

A second option open to the Central Bank is that it could clarify its position on what residential loans will benefit from the 50 per cent adjustment referred to above. It is open, to the Central Bank, under European law to define when it regards a residential loan as being fully and completely secured so as to benefit from the concession. The Central Bank could, if it so wished, specify how mortgages were to be valued. In particular, it could reject current market valuations as the basis for saying that a loan was fully secured.

It could, for example, specify that the valuation take into account the price realisable under conditions of widespread loan default, such as occurred in England in the late 1980s.

In conclusion, the Central Bank has more powers than it claims, although they may only to used to ensure the soundness of banks rather than to enforce monetary policy. It is thus highly unlikely that the powers mentioned above will be used, until the Central Bank becomes genuinely concerned about a significant and persistent fall in house prices.