Tuesday 6 December 2016

Central Bank gets new powers to restrict credit flow in economy

Published 09/12/2015 | 02:30

The Central Bank headquarters in Dublin
The Central Bank headquarters in Dublin

The Central Bank will able to force the State's main banks to set aside extra cash to cope with losses if it believes credit is flowing too fast into the economy, under new regulatory powers.

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Officials in Dame Street said the new rules will help identify "systemic risks" and would have mitigated the effects of the financial crash had they been in place earlier.

There are currently no signs of excessive credit in the economy, but this will be reviewed every three months, officials said.

However, Bank of Ireland and AIB will have to carry more capital, a guard against losses, under separate rules because of the two lenders' systemic important to the economy.

By 2021 both banks will have to hold extra capital of 1.5pc percentage points of risk weighted assets. The tougher standard will be phased in from July 2019. However, it's expected that both banks will, at that time, have capital levels significantly exceeding minimum requirements anyway.

Analyst John Cronin of specialist bank Investec said the decision to phase in the higher standard was a positive development.

"[This is] good news for the banking sector as the regulator appreciates that ever-increasing capital requirements will only serve to choke credit growth," Mr Cronin said. Davy Stockbrokers said the new requirements are "entirely manageable" in the context of both current and future capital positions of both AIB and BOI.

"The systemic buffer of 1.5pc, phased in over three years from 2019, is entirely manageable in the context of current and future capital positions of both Bank of Ireland and Allied Irish Banks, while a 0pc Countercyclical Capital buffer is unsurprising given the current lending landscape," Davy said.

The measures were announced yesterday at the publication of the Central Bank's latest Macro Financial Review.

Mark Cassidy, head of financial stability at the Central Bank, said the requirement for Bank of Ireland and AIB is being phased in to ensure there is no adverse effect on the economy.

"When credit conditions start to cause concern, we will raise this buffer and the ECB can do likewise.

"There is now a structure in place to identify systemic risks and we have new powers available to us to take concrete actions to reduce these risks," Mr Cassidy said.

"If these buffers had been in place in the build up to the crisis in Ireland, I would have no doubt that the effects would have been much less."

Yesterday, Moody's changed the outlook on the Irish banking system to positive from stable, citing the rating agency's expectation that banks' credit fundamentals will continue to improve over the next 12-18 months.

However, weak loans, including mortgages, will continue to impede a return to a full normalisation of the banking sector, Moodys said.

The Central Bank said growth in the economy has accelerated and become more broadly based.

The latest forecast for GDP growth for this year is 5.8pc, two percentage points higher than at the time of the last Macro Financial Review, but debts are still high.

"Private debt remains a burden for many households and acts as a constraint on consumption and investment," the review noted.

"As highlighted in the last review, Central Bank household finance data have shown that mortgage indebdtedness is proving to be a particular drag on the budgets of those aged 18-34 and 35-44," the review added.

Irish Independent

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