Central Bank says Irish banks need ‘systemic risk buffer’ against shocks

Philip Lane has written to Minister for Finance Paschal Donohoe seeking extra powers to safeguard the financial system

  Philip Lane: he identified dependence on multinationals and the potential consequences of both global warming and efforts to prevent it as possible sources of tail risks. Photograph: Reuters

Philip Lane: he identified dependence on multinationals and the potential consequences of both global warming and efforts to prevent it as possible sources of tail risks. Photograph: Reuters

 

The Republic’s financial regulator is seeking powers from Government to demand that banks hold extra capital to safeguard against hidden risks to the Republic’s economy.

Central Bank of Ireland governor Philip Lane told the University College Dublin (UCD) school of economics that, alongside normal risks, the Republic’s dependence on hi-tech multinationals left its banks vulnerable to shocks to this industry.

Mr Lane revealed that he has written to Minister for Finance Paschal Donohoe asking that the Central Bank be given the power to call on an extra safeguards for the financial system, dubbed the “systemic risk buffer”.

This would allow the regulator to demand that banks hold capital over and above existing requirements to safeguard against “tail risks”, that is events that are unlikely to occur but which could significantly damage the financial system.

Mr Lane identified dependence on multinationals and the potential consequences of both global warming and efforts to prevent it as possible sources of tail risks.

He explained that the advantage of the systemic risk buffer is that it would improve the banks’ ability to absorb losses if such a shock hit the Republic’s economy.

“Our plan now is to examine the potential additional contribution of the systemic risk buffer in ensuring that the banking system would be resilient in the event of a structural shock to the Irish economy.”

Reserve

In 2012 the Republic introduced new EU rules requiring banks to boost the level of capital that they held in reserve to allow them to absorb large losses from loans and other potential shocks.

This was meant to prevent a repeat of the 2008 financial crisis when a credit freeze aggravated an already sharp recession that followed a property market collapse.

However, the Government did not adopt the systemic risk buffer at that time, making the Republic one of just two EU member states, alongside Italy, not to add this to its banking protections.

In his UCD speech Mr Lane argued that given the potential impact of tail risks on the economy, policy-makers should ensure that the financial system is resilient to such shocks. “A system is resilient if it buffers the impact of the shock.”

Mr Lane warned that a financial system without this protection could worsen any recession that follows.

He also pointed out that once such as a shock occurs, “switching off” the systemic risk buffer would help ensure that banks could keep lending.