DUBLIN (Reuters) - The amount of capital Irish banks must set aside as extra protection against risks from future crises was increased for the first time on Thursday, with the central bank citing rapid economic growth and Ireland’s vulnerability to external shocks.
Along with other central banks, Ireland introduced a countercyclical capital buffer (CCyB) in 2016 to enable them to force banks to build a cushion of capital in periods of economic normality that would make them less exposed during a downturn.
The CCyB, which is calculated as a proportion of a bank’s core equity tier 1 (CET1) capital and can be increased to as high as 2.5 percent, will rise to 1 percent from zero from July 5 next year, the central bank said.
The central bank had signalled in May that it was considering following a number of other European countries in setting a positive CCyB rate, saying the arguments to do so early in the economic cycle were “compelling”.
On Thursday it said the strengthening of a range of credit indicators, rapid domestic economic growth and the vulnerability of the Irish economy to external risks were all factors in the decision.
It said the banking sector has sufficient capital to absorb the increase and that the impact on the wider economy would be relatively small.
But Davy Stockbrokers analyst Stephen Lyons said the move was earlier and higher than expected and therefore creates upward pressure to banks’ medium-term capital targets.
“However, banks should hopefully be able to absorb this pressure if they get rewarded for a continued de-risking of their operations, principally through reduction of non-performing loans,” he added.
Reporting by Padraic Halpin and Conor Humphries; Editing by Robin Pomeroy and David Goodman