Central Bank will allow banks to free up rainy-day money

Move will enable additional €13bn of lending to distressed economy as Covid-19 spreads

The Central Bank announced on Wednesday that a so-called counter-cyclical capital buffer – equating to 1 per cent of banks’ risk-weighted assets – that lenders have had to hold since last July will no longer apply from next month. Photograph: Alan Betson/The Irish Times

The Central Bank announced on Wednesday that a so-called counter-cyclical capital buffer – equating to 1 per cent of banks’ risk-weighted assets – that lenders have had to hold since last July will no longer apply from next month. Photograph: Alan Betson/The Irish Times

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The Central Bank of Ireland has bowed to pressure to allow banks to tap rainy-day capital, which Minister for Finance Paschal Donohoe estimates will enable the industry to provide an additional €13 billion of lending to the severely distressed economy as Covid-19 continues to spread.

The Central Bank announced on Wednesday that a so-called counter-cyclical capital buffer (CCyB) – equating to 1 per cent of banks’ risk-weighted assets – that lenders have had to hold since last July will no longer apply from next month.

“The banking system has in recent years built up its capital and liquidity buffers, strengthening its resilience to adverse shocks,” the regulator said. “This resilience is precisely for periods like these. The capital buffers are there to be used, to support the businesses, consumers and the wider economy in this difficult time.”

Analysts from Davy to Goodbody Stockbrokers had been calling on the Central Bank to remove the CCyB requirement, after the Bank of England moved last Wednesday to do so as it cut interest rates in an effort to shore up the UK economy.

Deferral

The Central Bank’s move came as Minister for Finance Paschal Donohoe met with the chief executives of the State’s five retail banks, during which lenders agreed to an industry-wide deferral of legal proceedings and repossessions against borrowers in default, and to extend payment holidays to homeowners and businesses hit by the economic crisis sparked by Covid-19.

Both measures are currently scheduled to last for up to three months, though this will be kept under review.

Banking and Payments Federation Ireland (BPFI), whose chief executive Brian Hayes was at the meeting, said that banks “want to ensure” that any Covid-19 application for a payment break and further reviews will not adversely impact the customer’s credit record, and the bank’s reporting of these facilities.

“Banks want to avoid this and are meeting with the Central Bank of Ireland to urgently achieve a solution in this regard,” BPFI said. The country’s main banks are expected to push Central Bank officials on this matter when they meet on Thursday.

Mr Donohoe said that the Central Bank is working with European colleagues “to ensure that bank customers, whether personal or business customers, impacted by Covid-19 are extended forbearance without their loans being classified as defaulting”.

Accounting rule

European regulators are coming under mounting pressure to ease a new accounting rule – known as IFRS 9 – introduced in recent years that requires banks to set aside bad debt provisions once they expect loans to run into problems. Previously, banks were generally only allowed to make such provisions once a loan had soured.

Now, more than ever, banks must support the Irish people. Many are facing an uncertain financial future

Meanwhile, the Minister also said that he was requesting that the financial services industry raise the maximum individual transaction on contactless payment cards to €50 from €30 to make consumers less reliant on cash and reduce their potential exposure to coronavirus.

He has also deferred the collection of stamp duty on credit cards, which is normally levied in April, to July.

“Now, more than ever, banks must support the Irish people. Many are facing an uncertain financial future, and hundreds of thousands are dealing with job losses,” said KBC Bank Ireland chief executive Peter Roebben.

“Businesses need help to survive the difficult period ahead. At KBC Ireland, we are working with the Government and all stakeholders to ensure we do all that we can to support the national effort and to help people as they adapt now and in the future.”