Central Bank will keep capital buffer at zero in order to encourage lending
The central bank will continue to encourage lending by maintaining a zero key capital buffer until at least next year.
The cushion is the part of banks’ own funds that must be readily available in the event of future crises, in addition to the basic capital requirements. Keeping it at zero frees the banks to lend more.
The countercyclical capital cushion will eventually be restored to 1pc, Central Bank Governor Gabriel Makhlouf said, as long as the recovery continues. An announcement on the gradual replenishment of the tampon is expected next year.
âAs it stands, it would be my expectation – that we would go back to where we were before the pandemic.
“Obviously, we will look at the facts and conditions of the economy as they emerge before making a final decision,” Makhlouf told reporters yesterday at the launch of the latest stability review bank financial.
The review found that business lending is picking up, but remains subdued for non-financial corporations.
New loans to small and medium-sized enterprises (SMEs) in the real estate and manufacturing sectors more than doubled in the second half of the year, but loans in sectors such as retail trade or business administration only increased by around 10 %.
The central bank lowered the capital cushion after the SME lending collapse last year.
There will be no change in the additional cushion in place for the state’s six largest banks: AIB, Bank of Ireland, Bank of America, Barclays, Citibank and Ulster Bank.
The move underscores a Central Bank assessment that SMEs will be able to weather the pandemic with a lower risk of ‘debt distress’ than their European peers due to the nature of state support here, which has spilled over into it. focused on direct subsidies and wage subsidies.
Meanwhile, the Central Bank is trying to stay ahead of potential risks in the property market by introducing leverage limits on foreign funds buying offices in Ireland.
Real estate funds now hold 40pc – or 23 billion euros – of all ‘investable’ commercial real estate in Ireland, the bank said, with Irish resident funds tending to profit more than their European peers.
This creates “additional vulnerability” to price drops, which could lead to fiery sales later, the central bank said.
“We want to get ahead rather than wait for problems to arise,” Makhlouf said.
The news comes as the European Central Bank (ECB) weighs in on the riskiest part of banks lending to indebted companies amid fears of a potential market explosion, according to people with knowledge of the matter.
Officials at the ECB’s supervisory board have discussed capping newly created highly leveraged transactions to a certain share of individual bank balance sheets, they said, asking not to be identified as the matter is private.
Still, some members are reluctant to go this route if banks can show they are managing risk well, they said. Talks are still in their early stages and caps may not be the chosen action, they added.
Bloomberg Supplementary Reports