Central Bank issues rules on capital buffers for banks

The Central Bank has issued decisions to Allied Irish Banks and Bank of Ireland on new EU rules which determine the level of capital buffers that banks must set aside to mitigate risks to financial stability.

The regulations on macro-prudential buffers come into force from January 1st as part of the European effort to prevent another credit boom and to fortify the wider economy against any failure of systemically-important banks.

AIB and BofI will each be required to set aside 1.5 per cent of their risk-weighted assets between 2019 and 2021 to boost their resilience as systemically-important lenders.

The two pillar banks much set aside 0.5 per cent of risk-weighted assets under the “other systemically important institutions buffers” regulation from July 2019, increasing in steps of 0.5 per cent per year until 2021. The maximum possible buffer under these rules if 2 per cent.

However, the Central Bank has decided to set at zero its initial requirement for a “counter-cyclical capital buffer” for Irish lenders.

All member states will be obliged from January 2016 to set a counter-cyclical buffer for major banks on a quarterly basis, the objective being to protect the banking sector from excessive growth.

Such buffers can be set at a level between zero and 2.50 per cent total risk exposures, or higher in exceptional circumstances.

The application of a zero rate to Irish lenders follows a Central Bank assessment which found that credit conditions in Ireland right now are “subdued” with no indication of any build-up of systemic risk.