Irish banks face demand to hike rainy-day capital to above pre-Covid level

The Central Bank has decided to demand again that banks hold an additional layer of rainy-day capital, and gradually build up a buffer to in excess of where it stood before the Covid-19 crisis, in order to improve the resilience of lenders and the economy.

The regulator introduced a requirement in mid-2019 that Irish banks ringfence funds to the equivalent of 1 per cent of their risk-weighted assets as a so-called countercyclical capital buffer (CCyB). However, it released banks from their obligation to hold these reserves at the outset of the Covid-19 pandemic in March 2020, in order to give them greater flexibility to lend as the economy went into shock.

While the bank signalled a few months ago that the effects of the war in Ukraine had cast doubt over the timing of its plans, it said on Wednesday that banks will be required to hold a 0.5 per cent buffer by this time next year, rising to 1.5 per cent in 24 months’ time.

Still, the regulator has decided against introducing a separate capital cushion requirement against hidden economic risks — known as a systemic risk buffer.

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“As a small, highly interconnected economy, Ireland faces greater downside macro-financial risks compared to larger, more diversified economies,” Central Bank governor Gabriel Makhlouf told journalists at the publication of the bank’s semi-annual Financial Stability Review of risks in the system.

“Our new approach is motivated by lessons learned during the pandemic on the importance of buffers that are explicitly releasable during times of stress to support bank lending into the economy.”

Mr Makhlouf dismissed suggestions that the bank is moving at the wrong time to reintroduce the CCyB requirement, as the outlook for the economy is weakening amid heightened inflation and expected rising interest rates.

He said the benchmark was where the economy stood at March 2020, at the height of the Covid-19 shock, when it removed the CCyB requirement. He added that the bank is reintroducing the buffer requirement gradually, with a 12-month lead-in time, and that the regulator will “keep a pretty vigilant eye” on economic developments.

Irish banks currently have enough capital on their balance sheets to cope with the planned higher capital demand.

Meanwhile, the latest Financial Stability Review report highlighted that non-bank lenders, who have increased their share of the domestic mortgage market from 3 per cent in 2018 to 13 per cent last year, may be “more vulnerable” during a downturn, as they finance their activities in the capital markets. Banks mainly rely on deposits to fund their activities.

Non-bank lender ICS Mortgages, owned by Dilosk, Finance Ireland and Avant Money have each moved to increase rates in recent times amid a spike in market borrowing costs.