'Overcapitalisation' policy considered for banks

The Financial Regulator, Matthew Elderfield, has said that the policy of “overcapitalisation” for Irish banks is under active consideration.

Speaking at the annual conference of the Association of Compliance Officers in Ireland this lunchtime, Mr Elderfield said that he has “not seen hard evidence” that would initiate a revision of the capital assessment of the banks that has been undertaken by his office.

Referring to the assessment of the banks’ capital position – known as the Prudential Capital Assessment Review (PCAR)- undertaken by his office in March, Mr Elderfield said that “the most recent data on loan losses does not suggest that existing capital is inadequate”.

However, he said that “market expectations on bank capitalisation have risen globally”, while concerns about government finances, the current macroeconomic environment and the future prospects for growth and employment in Ireland have “impacted confidence in Irish banks”. As a result, it is “desirable that additional measures are now taken covering both capital and balance sheet size”.

In March this year, the Financial Regulator undertook a Prudential Capital Assessment Review (PCAR) of the main financial institutions in the state. Credit institutions were required to satisfy both a base case and a “stressed target” capital requirement over a three-year period.

At the end of September the Office of the Financial Regulator announced that it had advised the Irish banks that the demands that were required under the PCAR assessment would remain in place despite developments in international capital standards.

Today, however, Mr Elderfield has confirmed that “additional policy measures” , including ‘overcapitalisation’ are now under active consideration.

Mr Elderfield also said that the Financial Regulator’s new Corporate Governance Code will become effective on January 1st 2011, and institutions will be given until June 30th to introduce the necessary changes. Where changes to board membership are necessary, that period will be extended to the end of 2011.