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Central Bank seeks extra power to force banks to further increase their capital

The Governor of the Central Bank has written to the Minister for Finance asking him to put in place measures that would enable the regulator to force banks to hold more capital if systemic risks increase.

Philip Lane said the extra capital required by the Systemic Risk Buffer (SyRB) would help improve the loss-absorbing capacity of the main lenders here if there was a structural shock to the Irish economy.

However, if given the go-ahead and used, the new power could put further pressure on the interest rates paid by bank customers here, which are among the highest in the euro zone.

The SyRB was put in place when some countries in Europe wanted their banks to have higher capital requirements than those agreed under the 2013 Capital Requirements Directive.

Ireland and Italy were, at the time, the only countries not to transpose the new rules into domestic law.

However, the Central Bank Governor has now written to Paschal Donohoe asking that it be added to the regulatory toolkit here.

In a speech delivered in UCD this evening, Mr Lane said the move would ensure that the banking system would be resilient in the event of a structural shock to Irish economy.

“The advantage of the systemic risk buffer is that extra capital would improve loss-absorbing capacity if a systemic risk event occurred,” the soon to be European Central Bank executive board member said.

“Furthermore, credit supply could be further protected by switching off the systemic risk buffer under such circumstances.”

If the minister agrees to the request, legislation will have to be passed by the Oireachtas to give it effect.

Even then, the Central Bank would still have to carry out a full assessment of the financial risk environment before triggering it.

“With any of our policy instruments, the calibration and timing of the systemic risk buffer will be based on a thorough evidence-based assessment of its benefits and costs,” said Mr Lane.

“Furthermore, we adopt a holistic approach to policymaking, taking an integrated view of the interactions across the full set of macroprudential instruments…and the overall capital position of the banking system”.

The Central Bank also has a number of other macroprudential rules at its disposal, including the mortgage lending rules and the Counter-Cyclical Capital Buffer (CCyB).

The CCyB differs from the SyRB in that the former relates to domestic exposures only, while the latter is based on the whole of a bank’s book.

Countries that already have the SyRB in place require their banks to put aside varying levels of capital under it, with some demanding as much as 3%.

The Governor also told the UCD School of Economics that policymakers must look beyond the short-term horizon of the macro-financial cycle and ensure financial and fiscal resilience against tail risks.

He said it was imperative to build the resilience of both the financial system and the public finances against “tail risks” or events unlikely to occur.

Mr Lane also warned that dependence on high-tech multinational companies could amplify an economic shock here if it led to outflows of capital and labour and the loss of the technology embedded in departing firms.

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