By Padraic Halpin
DUBLIN (Reuters) – Ireland’s Central Bank has requested from government the power to activate a so-called systemic risk buffer that would impose additional capital requirements on banks to further protect the economy, Governor Philip Lane said on Tuesday.
Systemic risk buffers have been applied in some other European Union economies. Lane said that, for Ireland, the aim would be to add resilience against “tail risks” – economic shocks unlikely to occur but which would have a significant impact on the economy and financial system if they did.
Lane said the main such risk facing Ireland – leaving aside Brexit – is its high dependence on multinational firms and that if there were a persistent shock to that sector, the cumulative economic decline “would dwarf a normal cyclical recession.”
Ireland is the European home for firms such as Google and Facebook that account for around one-in-ten jobs among the country’s two million workers, and contribute almost 20 percent of the state’s total tax revenues via corporation tax.
“Imagine a scenario in which some of that faded away. It would be amplified by the fact that if some of these firms contracted or left, then people would leave as well because a lot of them hire international workers and the technology embedded in those firms would leave too,” Lane said.
“A firm that is doing well now may not necessarily be doing well five years from now. It is for that reason we do think we want to examine whether the Irish financial system is resilient enough in the event of that being a structural problem.”
The calibration and timing of the systemic risk buffer – if permitted by government – will be based on a thorough, evidence-based assessment, Lane added, indicating that would be left for his successor when he leaves to become the European Central Bank’s chief economist in June.
Along with other central banks, Ireland has forced lenders to be more conservative since the last financial crisis through the introduction of mortgage lending limits and, from this July, an additional capital buffer that must be set aside as extra protection against risks from future crises.
(Reporting by Padraic Halpin; Writing by Kate Holton; Editing by Stephen Addison/Mark Heinrich)