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Property-investment funds face new debt limits

The Central Bank has announced plans to introduce new rules for Irish funds that invest in Irish property.

The regulator has also increased the level of capital that banks must hold in reserve to deal with potential financial shocks.

The measures were announced as the bank published its second Financial Stability Review (FSR) of 2022, which warned that the world economy was slowing, and that the Irish economy faced more “downside risks”.

Buffer to rise

“Global financial conditions have tightened amid a pronounced shift in monetary policy, exposing pockets of vulnerabilities,” the review said.

It added, however, that “resilience” built up over the last decade had provided the Irish economy with the capacity to absorb shocks.

The regulator is to increase its Countercyclical Capital Buffer (CCyB) to 1%. The increase takes effect in a year’s time.

The buffer is aimed at ensuring that the banking system has enough in reserve to build up resilience against financial shocks.

The Central Bank had previously announced that it planned to gradually increase the CCyB to 1.5%.

Debt limits

The measures covering property funds are aimed at safeguarding the resilience of “this growing form of financial intermediation”, according to the regulator.

It said the moves would enable property funds to absorb – rather than amplify – adverse shocks.

Their total debt will be limited to 60% of total assets. Existing funds will have five years to implement this measure, but it applies immediately to newly authorised funds.

The regulator is also introducing new guidance to address risks from “liquidity mismatch”. This is aimed at preventing a forced sell-off of assets in the event of a withdrawal of investors’ funds.

Existing funds will have 18 months to comply with this guidance.

‘Episodes of disruption’

Gabriel Makhlouf (Central Bank Governor, pictured) said that regulators had to remain vigilant.

“As we and other central banks take the necessary steps to bring inflation back to target, there are undoubtedly risks of further asset-price falls and, more significantly, potential episodes of disruption in segments of global financial markets,” he warned.

Makhlouf said that, while some mortgage customers were being hit by interest-rate rises, there was “substantial resilience” across the mortgage market.

He cited lower levels of indebtedness, a gradual shift towards fixed-rate borrowing, pandemic savings, and substantial housing equity.