Are capital requirements for Irish banks too high?

In the aftermath of the financial crash of 2008, the European debt crisis, and the Irish banking crisis, in 2014 regulations were passed aimed at promoting higher banking standards to prevent similar crises in the future.

The first of these rules states that all Irish banks have initial starting capital of at least €5 million; they must always be in excess of this amount. Further, lenders have claimed that they must hold up to three times the capital for mortgages relative to average requirements throughout the rest of the EU.

These regulations largely seem to have accomplished the job they were instated, with the Banking and Payments Federation Ireland (BPFI) stating that there has been an increase in high quality loans and a corresponding decrease in problem loans.

However, there has been criticism as of late for the continued implementation of these rules, and for the harsh conditions they impose on lenders. It is possible that borrowers are also adversely affected by extension. For instance, it is claimed by major Irish banks that the high capital requirements are the chief cause for Irish lending and mortgages being so expensive; this leads to a given borrower having to pay much more in interest over the lifetime of a loan.

Another criticism is the static nature of current banking regulation. Despite the marked increase in the overall health of the Irish financial system since the crisis, the rules have stayed static since their initial implementation in 2014. Critics argue that regulations should be loosened in keeping with positive trends in the Irish economy, and that their persistence is having a negative effect on the mortgage market in particular.

It is unclear how true the banks’ argument about lending/mortgage markets really is. There are a number of potential alternative causes; for instance, it may have more to do with the overall lack in competition among Irish lenders, which disincentivizes lowering rates for borrowers. Another cause might be the cashback incentives that banks themselves provide, since such incentives end up costing the bank money over time.

It is difficult for these reasons to definitively state that Ireland’s capital requirements and banking regulation are too strict. They have clearly been effective at addressing the problematic banking practices that caused the lending crisis in the first place. However, they might not need to be so strict anymore, considering how far the Irish economy has come since. Still, it is very possible that the claim they are driving up lending costs is not providing the full picture, and that these regulations are not as detrimental to borrowers as banks might claim.

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