The spread of COVID-19 is a major shock to growth prospects across the globe. It is clear that the pandemic is disrupting economic activity, both internationally and in Ireland, with adverse impacts on households, businesses and the financial system in the near term. The necessary containment measures on public health grounds will have a significant impact on the euro area and Irish economies.
Monetary policy actions
The European Central Bank has taken a series of monetary policy measures, with the following measures announced at the Governing Council meeting of 12 March 2020:
1. Additional longer-term refinancing operations (LTROs);
2. More favourable terms on the targeted longer-term refinancing operations (TLTROs);
3. Additional net asset purchases under the Asset Purchase Programme (APP).
The ECB’s response to COVID-19 outbreak was further strengthened on 18 March by:
1. A new temporary asset purchase programme announced (Pandemic Emergency Purchase Programme or PEPP);
2. Eligible assets under the corporate sector purchase programme (CSPP) broadened to include non-financial commercial paper of sufficient credit quality;
3. Eligible collateral with respect to refinancing operations expanded to include claims related to the financing of the corporate sector under Additional Credit Claims (ACC).
The Central Bank recently published an Economic Letter that describes the above monetary policy actions taken to combat the crisis, in particular liquidity policies and asset purchases, and outlines what these measures mean for Ireland
(See Holton, Phelan and Stuart, 2020, https://www.centralbank.ie/docs/default-source/publications/economic-letters/vol-2020-no-2-covid-19-monetary-policy-and-the-irish-economy-(holton-phelan-and-stuart).pdf?sfvrsn=4).
Further to these measures, on 7 April the Governing Council of the ECB announced a number of temporary collateral easing measures. The goal of these measures is to facilitate the availability of eligible collateral for banks to allow the banks better access to liquidity operations.
On 30 April, the Governing Council announced further changes to the TLTRO programme with the entry interest rate being lowered to 50 basis points below the average Main Refinancing Operation (MRO) rate over the life of the operation. The Governing Council also announced a new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs). The goals of these operations are to support liquidity conditions in the euro area financial system.
Macroprudential and Supervisory policy actions
European and national policy on capital and liquidity buffers has also been designed to allow banks to withstand stressed situations like the current one.
On 18 March, the Central Bank of Ireland announced that the Countercyclical Capital Buffer, which had been set at 1 per cent effective from July 2019, would be fully released and reduced to 0 per cent. The release of this time-varying capital buffer is appropriate in the current circumstances in-line with its underlying rationale to support the sustainable flow of credit to the economy in both good times and bad. This action will support the continued provision of credit to households and business by the banking system during this challenging time.
The Supervisory Board of the ECB announced on 12 March that it will allow banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR).
Banks will also be allowed to partially use capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital, for example Additional Tier 1 or Tier 2 instruments, to meet the Pillar 2 Requirements (P2R). This brings forward a measure that was initially scheduled to come into effect in January 2021, as part of the latest revision of the Capital Requirements Directive (CRD V).
In subsequent decisions, the Supervisory Board issued a recommendation that banks in the euro area not issue dividends with respect to 2019 or 2020 before October 2020 at the earliest, and there was further capital relief provided with respect to market risk.
The Central Bank recently published a Financial Stability Note outlining the rationale underlying the release of the Countercyclical Capital Buffer (CCyB) in Ireland in the light of the recent COVID-19 developments
(See De Nora, O'Brien and O'Brien, 2020, https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/no-1-releasing-the-ccyb-to-support-the-economy-in-a-time-of-stress-(denora-o'brien-and-o'brien).pdf?sfvrsn=7).
As Minister for Finance, I expect banks to use the positive effects of these measures to support the economy and I know that the Central Bank of Ireland shares this view. The Central Bank continues to monitor the evolving situation and to assess the impact on the economy and the financial system. Their focus is on ensuring monetary and financial stability and that the financial system operates in the best interests of consumers and the wider economy. The Central Bank is engaged with the financial sector to ensure that firms are responding effectively to the evolving situation.