Regulator says extra bank capital being considered

CENTRAL BANK VIEW:THE POLICY of "overcapitalising" Irish banks is under active consideration, the head of financial regulation at the Central Bank said yesterday.

Speaking at the annual conference of the Association of Compliance Officers in Ireland, Matthew Elderfield said that a standby, contingent facility provided by external sources could be considered if further losses arise in the banks beyond those identified during the prudential capital assessment review process.

Such a facility could allow banks to top up their capital to meet current or future target levels as loss estimates are revised, he said. However, he warned that the balance between these options needed to be looked at carefully because of the implications for taxpayers and the public finances.

Mr Elderfield’s comments echo those of Central Bank governor Patrick Honohan earlier this month who suggested that the policy of overcapitalising banks could be considered to inspire investor confidence, even if the losses of the Irish banks did not ultimately exceed expectations.

Addressing the issue of the Irish banks’ capital position, Mr Elderfield said “additional measures ... covering both capital and balance sheet size” are desirable.

However, he said this was because “market expectations on bank capitalisation have risen globally”, as well as growing concern about the state of the government finances and the future performance of the economy.

He said that he had “not seen hard evidence” that would initiate a revision of the capital assessment of the banks undertaken by his office, as part of the prudential review process. “The most recent data on loan losses does not suggest that existing capital is inadequate,” he said.

Mr Elderfield also said his office was not revising its estimates for the capital requirements of the non-Nama portfolios of the main banks, noting that the recent data on mortgage arrears showed arrears were still inside the base capital assessment and well below the stress level. In March this year, the Financial Regulator undertook a prudential capital review of the main financial institutions in the State. The review directed banks to have 7 per cent equity Tier 1 and 8 per cent core Tier 1 ratios by the end of this year.

Mr Elderfield said the next review exercise, scheduled to take place in 2011, would be “enhanced” in a number of ways, by providing more transparency around the assessment calculations and introducing third-party validation of the data provided by the banks.

He said the prospect of slower growth and the anticipated impact of further fiscal consolidation needed to be taken into account in the next review.

Despositors also received reassurance from the Central Bank’s head of financial regulation. “The protection of both a deposit insurance scheme and the Government guarantee are already in place.

“Depositors have the reassurance that the financial resources and firepower of the European and international financial institutions will be in place to further support the Irish banking system,” he said.