The Central Bank has ordered Irish banks to hold more capital in order to reduce the risk posed by a potential future downturn.
The financial authority has raised its Countercyclical Capital Buffer (CCyB) from 0% to 1%, meaning banks must keep aside the equivalent of 1% of their Irish loans and exposures, adjusted for risk.
The CCyB is one of the levers available to the Central Bank to force a financial firm to take a more cautious approach with its loan book. It requires banks to put more money aside during a period of economic growth so that it is less likely to suffer significant losses in the event of a slowdown or recession.
Banks directed to adhere to new capital requirements from July 2019. We have activated the Countercyclical Capital Buffer #macroprudential https://t.co/bdxOY8tC41 pic.twitter.com/qFV6FEC7rS
— Central Bank of Ireland (@centralbank_ie) July 5, 2018
The Central Bank said it had opted to raise its rate to 1% following the consideration of numerous factors, including rising house prices and debt levels.
The bank said house prices were now roughly in line with what might have been expected given the economic situation and there was now an increased risk of them moving ahead of fundamental values.
Consumer and mortgage lending was also growing, while there remained a high level of indebtedness amongst households; it said.
The Central Bank also noted an improvement in credit availability for businesses, while it said that the domestic economy was moving closer to capacity.
It said that the new rate of the CCyB takes into account the existing headroom in banks' capital reserves, with the move complimenting its mortgage lending limits by reducing risk in other types of lending.
