By Eamon Quinn
A leading mortgage broker welcomed a Central Bank move that forces lenders to put aside more capital, but warned it could also herald more stringent mortgage lending controls, making it even tougher for first-time borrowers to buy a home.
The Central Bank confirmed it was raising, for the first time, the amount lenders will have to put in reserve to safeguard lending should the economy go into reverse in future years.
The so-called contracyclical buffer was brought in in 2015 as part of a battery of measures to strengthen the financial system following the collapse of the banks 10 years ago.
The capital buffer has been raised for the first time from zero to 1%. It comes into force in July next year.
The move reflects the potential risks that are building in the economy as the Central Bank pledges there will be no repeat of the conditions that led to the boom and bust of the economy in the past.
Capital buffer requirements are designed to bolster the financial system from future shocks and are not meant to target house prices.
Given the role that over-inflated commercial and residential property market played in the economic collapse, the Central Bank referenced house prices in its statement.
Experts say that at this stage, increasing the capital buffer will be unlikely, by itself, to restrict the amount of mortgage lending or corporate lending flowing into the economy.
“The domestic economy has grown strongly over recent years and is moving closer to capacity limits. There has also been a considerable recovery in asset values in the commercial and residential real estate,” stated the Central Bank.
“The high volatility of the Irish economy means that phases of strong economic growth may be suddenly followed by substantial downturns.
“Moreover, the high level of indebtedness of Irish households and the overhang of non-performing loans on the balance sheets of banks increases the vulnerability of the Irish macro-financial system to cyclical reversals.”
However, the risk of house prices in the future getting out of line had risen, said the Central Bank.
Michael Dowling, director at mortgage broker Dowling Financial and a former Irish Brokers’ Association mortgage committee chairman, welcomed the increase as showing the Central Bank is intent on not letting the economy slide back into another crisis.
He said he was concerned the move could be a signal the Central Bank was, separately, also considering tightening its mortgage lending rules which would make it much more difficult for borrowers to qualify for a mortgage “without necessarily controlling house prices”.
Mr Dowling said the market for new mortgage lending has increased significantly and could reach €10bn this year, up from €7.3bn in 2017.
Conall Mac Coille, chief economist at Davy, said raising the capital buffer was “a bit odd” at a time when credit growth is still weak.
Describing the increase as reflecting “a conservative” policy by the Central Bank, the increase would have some effect on the amount of lending injected into the economy, he said.
Any further increases would lead to increased costs for mortgages and corporate lending, warned Mr Mac Coille.