Despite credit growth, cycle remains subdued, says Lane

Despite a pick-up in lending, most notably Central Bank governor Philip Lane says Ireland's credit cycle remains "subdued".

As a result, he said the bank’s counter-cyclical capital buffers - the mechanism by which the Central Bank’s controls lending here - has been kept at 0 per cent.

However, in a speech to the annual CEO Breakfast Forum, hosted by Business in the Community Ireland, Prof Lane said the buffers were a vital tool in maintaining macro-financial stability and would be closely looked at in the coming years.

“We can activate a counter-cyclical capital buffer (CCyB) by raising the minimum capital ratio for banks during periods of above-normal credit growth and lowering it during periods of below-normal credit growth,” Prof Lane said.

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“ This both increases the resilience of banks to unexpected reversals in credit dynamics and could also act to dampen credit cycles and increase both the sustainability of lending and the stability of financial institutions,” he said.

The Governor said a small but increasing number of EU countries had raised the counter-cyclical capital buffer in recent times.

Prof Lane said t macro-financial stability was a necessary pre-condition for the implementation of a meaningful sustainability agenda.

“At both domestic and international levels, this basic lesson has been painfully illustrated by the boom-bust credit cycle during 2003-2009, the European sovereign debt crisis during 2010-2012 and extended post-crisis recovery dynamics that has dominated the European policy agenda in recent years,” he said.

During a crisis, public and private decision makers delay investment plans; crucial resources are diverted while the bandwidth of the political system is absorbed by crisis management.

These acted as barriers to making progress on the sustainability agenda, he said.

“To take an obvious example, the history of the construction sector in Ireland over the last 15 years provides a basic case study of how untamed credit can contribute to severe mis-allocation of resources, across time and across geographies,” he said.