Wednesday 22 May 2019

Regulator poised to put a brake on lenders

Central Bank
Central Bank

Peter Flanagan and Gavin McLoughlin

Irish banks are set to be forced to hold more capital to cope with a future economic downturn, according to a source.

The Central Bank is leaning toward increasing the so-called counter cyclical capital buffer from 0pc in coming months, according to the person, who asked not to be identified as the information is not yet public.

The bank could announce an increase within the next 10 days, when the latest buffer review is due to be published, though no final decision has been taken.

Last month the Central Bank said it saw a growing argument for building buffers, as home prices rise and the economy strengthens.

Introduced in 2015, the buffer is meant to guard against banks' tendency to boost lending in boom times and then slash it in a bust, potentially exacerbating a slowdown by denying companies credit when they need it most. It's designed to be built up when risks are growing, and released during times of stress.

In Ireland, the Central Bank is weighing a range of factors as it considers increasing the rate. Most Irish banks already hold more capital than strictly necessary, so could handle an increase in the minimum requirement, which would take a year to fully implement.

In addition, a move now may not hurt the buoyant economy.

Unlike other tools, the buffer targets general lending rather than a particular area of credit such as mortgages. In a downturn, the buffer can be reduced. Generally, the Central Bank may set it at between 0pc and 2.5pc.

Introducing the buffer now "would indicate that the Central Bank believes a [buffer] at the higher end of the scale would be more appropriate in time, should credit growth normalise," Davy analysts Stephen Lyons and Diarmaid Sheridan said.

That may "apply upward pressure" to lenders' management capital targets, "which would in turn have implications for both the cost and supply of credit to the economy."

If the first-ever increase has a more negative-than-anticipated economic impact, it could be reversed any time, the source said.

Meanwhile Central Bank Governor Philip Lane backed the principle of further fiscal integration between EU states at an event yesterday.

While acknowledging that it's a "politically sensitive area", Mr Lane said "anything being talked about in a realistic way should not be seen as a dramatic issue because we have a lot of existing fiscal linkages."

He cited the European Stability Mechanism - a Eurozone bailout fund -which members have to pay into. "We already have a fair amount of fiscal union so it's not some kind of leap really. It's an incremental step forward to think about a central fiscal capacity," Mr Lane said. (Bloomberg)

Irish Independent

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