Business

Monday 16 July 2018

Central Bank rolls back banks' ability to lend or pay dividends

Central Bank Governor Philip Lane. Photo: Stephen Collins/Collins Photos
Central Bank Governor Philip Lane. Photo: Stephen Collins/Collins Photos
Donal O'Donovan

Donal O'Donovan

The Central Bank has rolled back banks' ability to lend or pay dividends by forcing them to set aside extra capital as a cushion against losses.

The Central Bank of Ireland today triggered the so called countercyclical capital buffer (CCyB). From July 5 next year, banks will be required to hold an extra capital buffer equivalent to 1pc of their Irish risk-weighted exposures. The change requires a one year notice period to the banks affected.

The new financial cushion is in addition to the standard capital all banks in the Euro area must hold.

The CCyB was among new rules brought in after the crash giving the Central Bank greater ability to modulate. The idea is that forcing banks to retain capital while the economy is on the up can dampen over-heating, while lending could be increased during periods of weakness to stimulate growth.

Alternatively, banks could hit the target without tightening lending, by paying fewer or smaller dividends to shareholders.

The Central Bank has used its other main lending tool, the macro-prudential policy for residential lending, better known simply as the Central Bank mortgage rules.

While the mortgage rules mainly look at borrowers' finances, the CCyB is calculated as a share of banks' core equity tier 1 (CET1) capital - the cash, regardless of the economic climate, that they must set aside to cover losses.

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