The Central Bank may start cranking back banks’ ability to lend into the economy, by forcing them to set aside extra capital as a cushion against losses.
Deputy governor Sharon Donnery said yesterday that arguments for reining in lending earlier in the economic cycle were “compelling”.
New rules brought in after the crash give the Central Bank the ability to modulate the amount of lending into the economy, by ratcheting up and down what is known as the countercyclical capital buffer (CCyB).
The idea is that forcing banks to retain capital while the economy is on the up can dampen over-heating, while lending could be increased during periods of weakness to stimulate growth.
Alternatively, banks could hit the target without tightening lending, by paying fewer or smaller dividends to shareholders.
The new policy tool has been in place since 2016, but the Central Bank has yet to really use it.
Conditions are reassessed every three months and the next update is due in late June.
The Central Bank has used its other main lending tool, the macro-prudential policy for residential lending, better known simply as the Central Bank mortgage rules.
Like CCyB, the mortgage rules can also be tightened or loosened depending on the regulator’s view of the market .
While the mortgage rules mainly look at borrowers’ finances, the CCyB is calculated as a share of banks’ core equity tier 1 (CET1) capital – the cash, regardless of the economic climate, that they must set aside to cover losses.
The CCyB has been set at zero since its introduction but could be hiked to as high as 2.5pc under parameters set by the central bank.
Sharon Donnery said on Thursday that it was timely for the bank to consider wider aspects of its policy tool kit and the arguments for raising the CCyB early in the economic cycle were “compelling”.
“While we remain a long distance away from the worst of the excesses in 2004-2007, it is important for us as policymakers to recognise the risks related to the stage of the economic and financial cycle,” Ms Donnery said. “If necessary, we should also be willing to take actions to offset those risks.
“The arguments in favour of setting a positive CCyB sufficiently early in the cycle, to build in resilience and mitigate pro-cyclicality in a downturn, are compelling.”
Ireland has been Europe’s fastest-growing economy for the last four years, with low and falling unemployment and rapidly rising property prices – all signs the best of the recovery may be behind us.