DUBLIN (Reuters) – Ireland’s central bank signalled that it might increase the amount of capital that banks must set aside as extra protection against risks from future crises, including Brexit.
Along with other central banks, Ireland introduced a countercyclical capital buffer (CCyB) in 2016 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, calculated as a proportion of a bank’s core equity tier 1 (CET1) capital, has been set at zero since its introduction but can be increased to as high as 2.5 percent under parameters set by the central bank.
Central Bank Deputy Governor Sharon Donnery said on Thursday that it was timely for the bank to consider wider aspects of its policy toolkit and the arguments for raising the CCyB early in the economic cycle were “compelling”.
“While we remain a long distance away from the worst of the excesses in 2004-2007, it is important for us as policymakers to recognise the risks related to the stage of the economic and financial cycle. If necessary, we should also be willing to take actions to offset those risks,” Donnery said in a speech.
“The arguments in favour of setting a positive CCyB sufficiently early in the cycle, to build in resilience and mitigate pro-cyclicality in a downturn, are compelling.”
The bank’s next quarterly review of CCyB will take place at the end of June.
Donnery said Ireland’s economy, Europe’s fastest growing for the last four years, continued to perform strongly but the relatively low unemployment rate, rising property prices and a turn in the credit cycle were indicative of potential emerging cyclical risks.
She also pointed to external threats to the open economy, including the potentially significant challenges posed by neighbour Britain’s departure from the European Union and moves towards protectionism, particularly in the United States.
The minimal impact on credit growth and economic activity, as well as the time needed for implementation and a lag effect in data relevant to decision making are all reasons in favour of an early activation of the CCyB, Donnery said.
She also highlighted the example of other European countries such as Britain, Sweden and Lithuania who have introduced a positive CCyB rate.
(Reporting by Graham Fahy; Editing by Padraic Halpin and Susan Fenton)