The Central Bank announced on 18 March 2020 that it is effectively releasing the counter cyclical capital buffer that banks which are prudentially regulated by the Central Bank are required to hold.
The counter cyclical buffer is a layer of CET1 capital, calculated as a percentage of a bank's total risk exposures, which CRD IV requires banks to accumulate so as to be able absorb losses during periods of stress. In Ireland the counter cyclical buffer had been set at 1% since July 2019. The Central Bank has announced that the buffer will be reduced to 0% by no later than 2 April. This reduction has the effect of allowing banks to release capital in order to provide credit to households during the stressed economic conditions caused by the COVID-19 outbreak.
The Central Bank has made clear that the sole purpose of the release of capital is to support the economy generally rather than to fund dividend distributions or executive remuneration.
Credit Institutions will be conscious of the Central Bank's previous statement on COVID-19, in which the regulator made clear that financial institutions are expected to have appropriate contingency plans in place to be able to deal with major operational events. The Central Bank also indicated that firms are expected to respond effectively to the evolving situation.
With an estimated 140,000 individuals out of work in the last two weeks, there will be strains on personal finance lines, mortgage repayments, managing direct debit payments and access to cash. This will obviously present a challenge in terms of resources in branch and on telephone and online platforms. Lenders must be mindful of the usual suitability requirements and other consumer protection requirements when responding to the urgent needs of customers.
Small and medium enterprises are heavily impacted and lenders will be acutely aware of the difficulties faced by their business customers. Managing cash flow, access to credit and automated payments to creditors are key concerns. Providing support to these customers while balancing the duties owed to bank employees is particularly challenging.
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