Coronavirus: Central Bank under pressure to let banks tap rainy-day capital

Move could release funds for lending as economy grapples with fallout from virus

The Central Bank is under mounting pressure to allow banks to tap capital reserves set aside for a rainy day to allow them to continue to lend during the coronavirus crisis, according to analysts. Lenders in the UK have already been given the go-ahead to do so.

The Bank of England accompanied an announcement of an emergency 0.5 percentage point interest rate cut on Wednesday by saying it was lowering a capital buffer that banks are required to build up in a buoyant economy to zero.

UK banks had been required since late 2018 to hold so-called counter-cyclical capital buffer of 1 per cent of their risk-weighted assets, and this had been set to rise to 2 per cent by the end of this year. The Bank of England estimates that the capital relief would free banks up to provide up to €190 billion of lending to businesses, equivalent to 13 times their net business lending in 2019.

"The Central Bank of Ireland is now under pressure to remove its counter-cyclical capital buffer requirement as monetary authorities need to demonstrate actions," said Diarmaid Sheridan, an analyst with Davy.


Goodbody Stockbrokers analyst Eamonn Hughes estimates that a removal of the 1 per cent buffer that Irish banks have had to hold since last July could support about €10 billion of additional lending in the economy as households and businesses grapple with the effects of the spread of Covid-19.

Central banks and regulators across the EU have been obliged since the start of 2016 to make lenders ringfence funds as a counter-cyclical capital buffer when they judge that credit growth is becoming excessive. The buffers are in addition to normal capital reserve demands, and are part of a raft of new rules designed to avoid a future crisis.

EU variations

The extent to which the buffer applies varies across the EU. Swedish banks have to hold a 2.5 per cent buffer, while lenders in Germany, Italy, the Netherlands and Spain have not yet been asked by their domestic supervisors to hold such capital reserves.

Mr Sheridan said that the immediate threat of Irish banks being forced to hold another layer of capital – called a systemic risk buffer – has also eased.

A spokeswoman for the Central Bank declined to comment other than to point to a statement it issued last week in relating to Covid-19, which said: “We stand ready to work with our counterparts in the ECB and across the wider central banking community to take appropriate and targeted measures, as necessary and commensurate with the underlying risks.”

The European Central Bank is expected by economists to lower its deposit interest rate by 0.1 percentage point to minus 0.6 per cent on Thursday as part of a package of measures to deal with economic fallout from the spread of the virus.

Meanwhile, AIB, Bank of Ireland and Ulster Bank said on Tuesday that they would offer short-term payment breaks on mortgages and other loans to customers affected by Covid-19. However, lenders said that interest would accrue for the period of the deferral and added along with the deferred payments to the principal of the loan at the end of the payment holiday period.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times