Central Bank freeing up rainy day money could facilitate up to €16 billion in lending

The Central Bank’s decision to release almost €1 billion in liquidity to the banking sector could facilitate lending of up to €16 billion, a note published by the regulator says.

Last month, the Central Bank released the countercyclical capital buffer (CCyB) from 1 per cent to zero. The buffer effectively acts as a rainy day fund, requiring banks to hold capital in good times and release it in bad times.

According to the financial stability note, written by Giorgia De Nora, Eoin O’Brien and Martin O’Brien, the release of the buffer frees up €940 million across the domestic banking sector.

This, they said, provides greater scope for the sector to absorb coronavirus-related losses and support the economy. “If used entirely to fund new lending, the capacity for new lending could range from between €10 billion and €16 billion,” the authors said.

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Central Bank governor Gabriel Makhlouf, who is working remotely from Athens, said: "This is a very uncertain time for everyone and in the Central Bank we are keenly aware of the worry and concern being felt in households and businesses across the country. The impact of Covid-19 on the Irish economy has been swift and severe. It is difficult to assess how severe the final impact will be and when the recovery will begin."

Effects

But, he said the bank will “spare no effort to contain the economic effects of the crisis and do everything in our power to protect consumers, households and businesses”.

In an economic letter also released by the regulator on Tuesday, it was suggested that the main Irish retail banks could potentially borrow just over €20 billion through a mechanism that offers banks long-term funding at attractive rates. This funding could be used for any purpose by the lenders.

In the letter, written by Sarah Holton, Gillian Phelan and Rebecca Stuart, European Central Bank policies were discussed. The authors noted that ECB asset purchases for the remainder of this year will amount to about 7.3 per cent of euro zone GDP, adding that monetary policy can prevent the current crisis from "morphing into another sovereign debt crisis".

“In addition to the monetary policy decisions taken by the ECB Governing Council, our immediate response has included measures that minimise the impact of the crisis including the release of capital buffers to support the ongoing provision of credit to the economy and practical measures to help households with mortgage repayments,” Mr Makhlouf said, commenting on the publications.