Irish Banks Are Poised to Face Increased Capital Demand

(Bloomberg) -- Irish banks are set to be forced to hold more capital to cope with a future economic downturn, according to a person familiar with the matter.

The country’s central bank is leaning toward increasing the so-called counter cyclical capital buffer from zero percent 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. Earlier this month, French authorities activated the buffer requirement for the first time, setting it at 0.25 percent for French exposures, joining financial powers such as the U.K. and Sweden in raising the rate above zero.

Read more on capital buffers around Europe

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 an economic 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, according to the person. 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.

General Lending

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, allowing banks to release capital back into the economy through lending if needed. Generally, the central bank may set it at between 0 percent and 2.5 percent.

Introducing the buffer now “would indicate that the central bank believes a CCyB at the higher end of the scale would be more appropriate in time, should credit growth normalize,” Davy analysts Stephen Lyons and Diarmaid Sheridan said in a note Tuesday. 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.”

Compelling Case

If the first-ever increase has a more negative-than-anticipated economic impact, it could be reversed any time, the person said. A decision on the buffer will be released shortly, the central bank said in response to questions.

Deputy Governor Sharon Donnery “has recently stated that the arguments in favor of setting a positive CCyB sufficiently early in the cycle, to build in resilience and mitigate pro-cyclicality in a downturn, are compelling, ” the bank said.

Bank of Ireland Group Plc shares fell 1.5 percent in Dublin trading at 11:32 a.m., AIB Group Plc dropped 0.5 percent, while Permanent TSB Group Plc gained 1.5 percent.

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