COVID-19: Back to 0 % for the Counter Cyclical Capital Buffer Rate (CCyB)

In an attempt to avoid a COVID-19 related credit crunch, the Central Bank of Ireland (the “CBI”), has announced that the CCyB is to be reduced to 0% no later than 2 April 2020.  The reduction is intended to free up bank capital to support further lending to businesses and households and help alleviate economic disruption arising from COVID-19. The Minister for Finance has also decided to defer the introduction of the Systemic Risk Buffer (the “SyRB”).

The CCyB

The CCyB is a time varying capital requirement which applies to banks and certain investment firms (“Banks”). Essentially, it aims at making the banking system more resilient by increasing capital requirements during cyclical upturns, and subsequently releasing the buffer during downturns, with a view to ensuring a sustainable provision of credit to the real economy. Banks have been required to hold a 1% CCyB on Irish exposures since 5 July 2019.

According to Government estimates, the CCyB reduction will free up in excess of €1 billion of bank capital, which has the potential to support approximately €13 billion of restructured lending to bank customers that need assistance. In keeping with the fundamental purpose of the CCyB, the CBI expects Banks to use the positive effects of the reduction solely in support of the economy and not for dividend distributions.  

The CBI does not intend to announce any subsequent increase in the CCyB until the first quarter of 2021 at the earliest and any such decision will depend on prevailing macroeconomic and financial conditions.

You may access the CBI’s announcement, which is dated 18 March 2020, here.

Several other countries have also announced a reduction in their CCyB, including Belgium, Denmark, Norway, Sweden and the United Kingdom.

The Systemic Risk Buffer

Last summer the Minister for Finance and Public Expenditure and Reform announced that he would transpose the SyRB into Irish law, following a request from the CBI.

The SyRB is one of the four Capital Buffers provided for in the Capital Requirements Directive 2013/36 and forms part of the Macroprudential Toolkit. It is designed to mitigate long-term, non-cyclical, systemic or macroprudential risks which may have serious negative consequences for the financial system and the real economy and which cannot be covered by other measures in the Macroprudential Toolkit.

The decision to postpone the introduction of the SyRB (here) further supports efforts to ensure that capital is used for lending to the households and businesses and mitigating the economic shock associated with COVID-19.

Comment

Combined with the relaxation of Pillar 2 guidance and the Capital Conservation Buffer by the European Central Bank, the reduction in the CCyB and the postponement of the SyRB should ensure that banks have significant resources at their disposal to support borrowers during the COVID-19 crisis.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.