The Central Bank of Ireland has signalled that the effects of the Ukraine war on the global economy have cast doubt over the timing of its plans to make banks hold an additional layer of capital in good times to protect them from a sudden downturn.
The regulator introduced a requirement in mid-2019 that Irish banks ringfence funds to the equivalent of a 1 per cent of their risk-weighted assets as a so-called counter-cyclical capital buffer (CCYB). However, it released banks from their obligation to hold these reserves at the outset of the Covid-19 pandemic in March 2020, in order to give them greater flexibility to lend as the economy went into shock.
While the Central Bank said in November it expected to announce a "gradual rebuilding" of the CCYB across Irish banks in 2022, it said in a note published recently on its website that the future path of the capital requirement will be dependent on the "evolution of macro-financial conditions".
“While that guidance [from November] remains, the current outlook is subject to considerable uncertainty and the implications of the conflict in Ukraine for macro-financial conditions and the impact of the associated economic sanctions and disruption to global trade will continue to be monitored closely,” the bank said.
Davy banking analyst Diarmaid Sheridan said the regulator's current stance was "understandable", given the economic backdrop. The European economy is currently grappling with soaring inflation and the risk, according to some economists, of recession as the war enters its eighth week.
"The Central Bank of Ireland has toned down its rhetoric and buying time with the update and decision to keep the rate at zero," he said.
Surplus capital
Still, the domestic Irish banks currently have enough surplus capital over and above existing minimum regulatory requirements to absorb a reintroduction of a 1 per cent CCYB.
Central banks and regulators across the EU have been obliged since the start of 2016 to make lenders ringfence funds as a CCYB 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.
The six banks in the State judged by regulators to be "systemically important" must hold another capital layer above minimum requirements. The buffer ranges between 0.5 and 1.5 per cent of risk-weighted assets across AIB, Bank of Ireland, Ulster Bank, Bank of America Europe, Barclays Bank Europe and Citigroup's Irish unit.
Irish plans for another capital cushion – known as systemic risk buffer – against hidden risks in the economy were put on hold during the Covid-19 crisis.
Meanwhile, the Central Bank is currently undertaking a review of its bank capital framework and contributing to a wider European review of capital buffers.
