The Central Bank has introduced new capital requirements for banks in a move designed to add further protection to the financial system.
The new measures give the Central Bank the power to reduce the amount of lending banks do, if it feels a credit-fuelled bubble is building in the economy again.
The CBI has brought in two new capital buffers designed to protect individual banks and the wider financial system from losses and prevent excessive lending.
From 1 January a new counter cyclical buffer comes into effect, with an initial rate of 0%.
This will be reviewed quarterly and can be increased up to 2.5% of total risk if the Central Bank judges lending to be excessive.
The effect of the additional capital buffer would be to reduce the amount of lending capacity a bank has.
The level of additional capital can be varied up and down by the Central Bank depending on lending conditions, and is designed to act as a counterweight against excessive lending in a boom or excessive contraction of lending in a downturn.
The Central Bank’s new capital requirements for banks explained in less than a minute https://t.co/pA0Cx2ojHd— RTÉ Business (@RTEbusiness) December 8, 2015
The second capital buffer, known as O-SII, recognises the importance of certain banks as systemically important to the country.
Both Bank of Ireland and AIB are identified as systemically important. From 2019 these banks will have to increase their capital by 0.5% each year until they reach an O-SII buffer of 1.5% (the maximum is 2%).
This requirement is not being introduced immediately because credit conditions remain subdued (there is a low level of lending) and the Central Bank sees no need to introduce the O-SII buffer now, as it would constrain lending in the short term.
The same rationale is behind the decision to set the counter cyclical buffer at an initial rate of 0%.
The Central Bank's Head of Financial Stability Mark Cassidy said: "If these buffers had been in place before the crisis, the effect of the bubble would have been much less."
In a research note on the new capital buffers, Davy analysts said: "The systemic buffer of 1.5%, phased in over three years from 2019, is entirely manageable in the context of current and future capital positions of both Bank of Ireland and Allied Irish Banks, while a 0% counter cyclical capital buffer is unsurprising given the current lending landscape.
“While Pillar 2 requirements have not been disclosed, strong forecast organic capital generation provides comfort that actual capital levels will comfortably exceed total minimum capital requirements," it added.
Both AIB and Bank of Ireland have already increased their capital ratios significantly since the financial crisis.
Bank of Ireland's Core Tier 1 capital adequacy ratio stood at 10.6% of assets at the end of September under industry rules known as fully-loaded Basel III.
AIB guided that its ratio would have been 12.2% in September had a capital reorganisation it has since undertaken been completed.
The two banks also returned to profit for the first time since the crisis last year but the Central Bank said that they still compared poorly to weak European counterparts once write backs of impairment provisions were excluded.
This highlighted the need for banks to develop business models capable of producing sustainable profitability and income in the future, it said.
Shares in both AIB and Bank of Ireland were lower in Dublin trade today.