Ireland’s regulator moots new capital facility for banks

The Central Bank of Ireland is considering introducing further measures to beef up its banks' capital buffers in the wake of the announcement that the country will receive a loan thought to be worth €80 billion ($108 billion) from the European Union (EU) and the IMF.

Matthew Elderfield, the head of financial regulation at the Central Bank of Ireland, on Monday said the possibility of further losses beyond those assessed by the central bank's stress tests, known as prudential capital assessment reviews, in March had forced the central bank to "actively" consider additional policy measures that could be categorised as "overcapitalising" its banks. Elderfield said a standby contingent capital facility was one idea under consideration that would provide a backstop to banks. However, he said given Ireland's current budgetary position, the facility would need to be provided by "external sources".

Elderfield said the facility could be used to allow banks to top up their capital to meet current or future target levels as base loss estimates were periodically revised. He added that immediate additional capital injections could be made to make progress to full compliance with new international standards faster. However, Elderfield said the exact balance between these different options needed to be carefully considered in light of the implications for taxpayers and long-term government finances.

Lorcan Roche Kelly, an independent financial researcher in Dublin, told CentralBanking.com the facility should reduce bondholders' fears the banking sector will run out of cash. "This is all aimed at the bond market to reduce contagion worries between the Irish banking system and the Irish state. The hope is that markets will look at it and say there is loads of capital for the banks," Kelly said.

On Sunday Ireland agreed to apply for a financial aid package from the EU and IMF in a bid to tackle its budgetary crisis. Although the size of the bailout has not yet been announced, the package is expected to amount to more than €80 billion. The government application for assistance from the IMF and the EU is aimed at enabling the Irish banking sector to restructure to a smaller size with more sustainable funding ratios and may involve further deleveraging of its banks over time through asset disposals.

Elderfield also said steps were already being taken to prepare for the next prudential capital assessment reviews in early 2011. The first round of stress tests carried out in March required its banks to satisfy both a standard of 8% core tier one capital and 7% equity capital by the end of 2010. It also required the banks to take account of both losses from portfolios with assets bought by the National Asset Management Agency (Nama), Ireland's bad bank, and of projected expected losses on non-Nama portfolios, including mortgage portfolios, through 2012.

However, he said that in light of economic conditions in Ireland a more granular review of expected losses under base-case and stressed scenarios at the banks would need to be taken. One area the central bank will focus on is the non-Nama portfolios of banks. Although there had not been any hard evidence to revise capital buffers, he said existing measures were not sufficient to restore market confidence. Elderfield said more transparency around the assessment calculations and the involvement of third party validation of the data from banks would provide greater assurance to market observers.