Central Bank warns banks to only use cash buffers to support economy

The Central Bank has told Irish banks that they must only use funds released by the relaxing of required capital and liquidity buffers to support households and businesses during the coronavirus crisis, not to ramp up dividends or bonuses.

Governor Gabriel Makhlouf said the series of measures announced by the European Central Bank (ECB) governing council would allow for the “smooth provision” of credit throughout the disruption to the economy caused by the spread of Covid-19.

"The Central Bank of Ireland expects banks to use the positive effects of these measures to support the economy and not increase dividend distributions or variable remunerations," he said in a statement on Friday.

The governor described the pandemic as “a major shock” to economic growth prospects across the world.

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“It is clear that the pandemic is disrupting economic activity, both internationally and in Ireland, with adverse implications for the financial position of households, businesses and the financial system in the near term,” he said.

“The necessary containment measures on public health grounds will have a significant impact on the euro area and Irish economies, in particular on tourism, transport and recreational services.”

Fiscal measures, such as those announced recently by the Government, will be “the primary policy tool” to deal with this type of shock, he added.

But this will be backed up by the monetary policy measures outlined on Thursday by ECB president Christine Lagarde, as well as decisions made by the ECB’s supervisory board that will enable banks to “fully use” their capital and liquidity buffers to cope with the crisis.

The ECB has agreed to let banks operate with less capital than normal and eased the amount of liquidity they need to hold, while it also said national regulators would be enhanced by national regulators relaxing their counter-cyclical capital buffers, meaning they can release the reserves they have built up in order to keep lending during this shock.

Minimising fallout

Minister for Finance Paschal Donohoe welcomed the Central Bank’s statement as well as separate remarks by the Revenue Commissioners, which he said sought to give “clarity and reassurance” to businesses and households affected by the outbreak of Covid-19.

“I welcome the statements by the Central Bank of Ireland and the Revenue Commissioners this morning outlining the measures that are being introduced at a national and international level to ensure that the negative impact of the fallout from this disease are minimised,” Mr Donohoe said.

“Acknowledging people’s concerns is the first step in assuaging them. People should be reassured that Ireland is coming at this from a position of strength and that everything that can be done is being done to deal with this public health crisis. We can, and we will, get through this.”

The Minister drew attention to the usual lag between what is happening in the economy and the publication of data confirming it, but said his department would make “the most timely information possible” available on its website for the foreseeable future.

Buffer issue

Bloomberg earlier reported that the Irish regulator was considering cutting this buffer from the 1 per cent it is set at currently.

Reducing the buffer to zero would free banks to lend a potential €10.5 billion into the economy, Eamonn Hughes and Barry Egan, analysts at Goodbody Stockbrokers wrote in a research note.

The Bank of England reduced its counter-cyclical capital buffer to zero from 1 per cent on Wednesday alongside a raft of measures to support the UK economy, including interest rate cuts.

Retaining the buffer is "untenable," Stephen Lyons and Diarmaid Sheridan, analysts at Dublin-based securities firm Davy, said in a note on Thursday.

Reducing the buffer to zero would lower capital requirements by 60 basis points (bps) for Bank of Ireland, 70bps for AIB and 100bps for Permanent TSB, they added.

Bank of Ireland shares rose 8 per cent in Dublin, while AIB rose 4.7 per cent, before giving up some those gains.

“We continue to monitor the evolving situation and to assess the impact on the economy and the financial system,” Mr Makhlouf said.

“Our focus is on ensuring monetary and financial stability and that the financial system operates in the best interests of consumers and the wider economy. We are engaged with the financial sector to ensure that firms are responding effectively to the evolving situation.”

He also acknowledged “the exceptional efforts” of health professionals in dealing with the public health emergency. – Additional reporting: Bloomberg