Coronavirus: Central Bank under pressure to allow banks to tap rainy-day capital

The Central Bank is under mounting pressure to allow banks to tap capital reserves set aside for a rainy day to allow them to continue to lend during the coronavirus crisis, according to analysts. Lenders in the UK have already been given the go-ahead to do so.

The Bank of England accompanied an announcement of an emergency 0.5 percentage point interest rates cut on Wednesday by saying that it was lowering a capital buffer that banks are required to build up in a buoyant economy to zero.

UK banks had been required since late 2018 to hold so-called counter cyclical capital buffer (CCYB) of 1 per cent of their risk-weighted assets, and this had been set to rise to 2 per cent by the end of this year. The Bank of England estimates that the capital relief would free banks up to provide up to €190 billion of lending to businesses, equivalent to 13 times their net business lending in 2019.

“The Central Bank of Ireland is now under pressure to remove its counter-cyclical capital buffer requirement as monetary authorities need to demonstrate actions,” said Diarmaid Sheridan, an analyst with Davy.

Goodbody Stockbrokers analyst Eamonn Hughes estimates that a removal of the a 1 per cent CCYB that Irish banks have had to hold since last July could support about €10 billion of additional lending in the economy as households and businesses grapple with the effects of the spread of Covid-19.

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.

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