Irish bank shares weaker after Central Bank orders extra buffer

Irish bank shares fell in early trading on Friday after the Central Bank ordered lenders to hold more capital as a buffer against future shocks.

The financial authority said banks must hold the equivalent of 1 per cent of risk-weighted assets as a so-called countercyclical capital buffer (CCyB) from July 2019.

The move saw the value of AIB and Permanent TSB shares fall by up to 2 per cent to €4.74 and €1.93.

Shares in Bank of Ireland were less affected, falling by only 0.5 per cent to €6.71.

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Justifying its decision, the Central Bank said that the high level of household debt and overhang of nonperforming loans on the balance sheets of banks increases the vulnerability of the Irish financial system to shocks.

Davy Stockbrokers said the move was “somewhat unexpected and appeared conservative given that new lending remains at suboptimal levels”.

However, the Central Bank said new credit growth was being masked by deleveraging from from crash.

“While aggregate credit growth is close to zero, continued deleveraging in the SME and buy-to-let sectors obscured positive growth in home loans, consumer lending and loans to large enterprises,” the Central Bank said.

Since its inception in December 2015, the Irish CCyB has been set at zero per cent.

"As a small, open economy vulnerable to a range of external risks, the CCyB is an important tool to promote a more stable financial system that is less prone to boom-bust cycles," said Central Bank governor Philip Lane.