Irish Central Bank Faces Capital Buffer Dilemma as Virus Spreads

(Bloomberg) --

Ireland’s central bank may face pressure to allow lenders release capital set aside to counter economic downturns, as the coronavirus crisis escalates.

Irish banks hold an extra capital buffer equivalent to 1% of their Irish risk-weighted exposures. The so-called counter-cyclical capital buffer guards against banks’ boosting lending in a boom and slashing in a crash. It’s designed to be built up when risks are growing, and allows banks to lend more during times of stress.

“The Irish central bank here needs to be also considering the countercyclical buffers as a possible response to keep credit flowing in the economy,” Goodbody Stockbrokers analysts Eamonn Hughes and Barry Egan said in a research note Tuesday. “The stock market declines are vaguely reminiscent of 2008 and 2009 in brutality and extent.”

Reducing the buffer to zero would release a potential 10.5 billion euros ($11.9 billion) of credit, the analysts said.

The Bank of England reduced its countercyclical capital buffer to zero from 1% on Wednesday alongside a raft of measures to support the U.K. economy, including interest rate cuts. The ECB will meet on Thursday amid expectations it will also cut interest rates, while the U.S. Federal Reserve reduced borrowing rates last week.

“The reduction in the countercyclical capital buffer will provide important headroom to capital requirements in what is a developing and volatile situation,” securities firm Davy said in a note on Wednesday, after the U.K. move.

Bank of Ireland Group Plc shares surged 6.6% in Dublin to 2.84 euros at 9:27 a.m. after the Bank of England move. AIB Group Plc rose 4% to 1.65 euros. Both Bank of Ireland and AIB have U.K. businesses. The Euro Stoxx Banks Index gained 4.1%.

There are now more than 118,000 confirmed cases of coronavirus worldwide, with more than 4,200 deaths. Ireland has 34 cases so far, with that number expected to rise.

To contact the reporter on this story: Peter Flanagan in Dublin at pflanagan23@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Dara Doyle

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