AIB and Bank of Ireland ‘nothing to fear’ from new buffers introduced by Central Bank

The Central Bank has instructed AIB and Bank of Ireland to hold more capital as a buffer in future years to help protect the country from any repeat of the financial crash.

The measures, taken under initiatives called macro-prudential capital buffers, are part of efforts across the EU to rein in the threat that banks will lend too much during the good times and go bust when the economic cycle turns.

Analysts said, though, that AIB and Bank of Ireland have nothing to fear from the buffers which, in fact, only start to come into force in just over three years.

Though hailing the strong economic growth numbers, the Central Bank again outlined a number of risks facing the wider economy.

Those risks include the possibility that international real estate funds and other investors, in their “global search for yield”, will push up commercial property prices here.

Also, the high level of household and company debt continues to put Ireland at risk of shocks from abroad, the Central Bank said.

AIB and Bank of Ireland were formally identified as the systemically important or “too big to fail” lenders in the State.

They will be required to hold more capital, but only on a phased basis, starting from 2019 to the end of 2021, by which time they must have built a buffer equivalent to 1.5% of their so-called risk-weighted assets.

Shares in Bank of Ireland fell 2.6%.

The two lenders tower above all other rivals to dominate the banking industry here. Despite huge deleveraging during and after the bailout, Bank of Ireland has assets equivalent to almost 70% of the country’s GDP.

AIB’s assets are equivalent to over 55% of Irish GDP, while the loans of all other banking rivals amount to under 10% of GDP, according to Central Bank figures.

“The higher requirement reduces the probability of failure of these [two] banks, recognising the greater impact that the failure of a systemically important bank would have on the domestic financial system and economy,” said the Central Bank.

However, the bank said there was no need at this time to demand lenders across the industry hold additional so-called contra-cyclical buffers of between zero and 2.5% of total risks, because it sees no evidence of a build-up of risk at this time.

Irish banks continue to cut the volume of lending.

Ireland, like all other EU members, is required to strike on a contra-cyclical capital rate every three months.

The Central Bank said experience taught it that the country is susceptible to the cycles of boom and bust in which lenders advance too many loans in the good times and expose themselves and the country to enormous risks when the loans sour during economic downturns.

“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 AIB, while a 0% counter cyclical capital buffer is unsurprising, given the current lending landscape,” said Davy Stockbrokers.

The Central Bank said that with official interest rates at historically low levels, “persistently low interest rates can also pose a threat to financial stability by potentially having a negative impact on the financial system and various economic sectors”.