THE GOVERNMENT and the Financial Regulator are exploring with Anglo Irish Bank the possibility of granting the nationalised institution a waiver from strict capital rules in an effort to reduce its immediate requirement for new capital from the State.
A tentative engagement between the three parties comes in advance of the publication in the next three weeks of Anglo’s financial results for the six months to March, the first half of its fiscal year. Heavy loan impairments arising from a rapid deterioration of its business will significantly deplete the bank’s capital ratios.
Although the Government committed to provide €1.5 billion in new capital to the bank before its nationalisation in January, a big rise in loan losses since then suggests the bank may yet require €3 billion from the State to stay within capital guidelines set down by the regulator.
This presents a big problem to the cash-strapped Government, given its provision of €3.5 billion each to Bank of Ireland and Allied Irish Bank (AIB) and the looming costs associated with the establishment of the National Asset Management Agency (Nama).
At issue in the discussions is whether Anglo can be accorded a derogation from capital adequacy rules in light of its ownership by the State, which provides additional protection to its creditors. Such a waiver is technically feasible, although it is likely that the bank would have to demonstrate a clear path to a restoration of stability on its balance sheet.
In the face of rising bad loans with no immediate prospects of a recovery in its main market, the extent to which Anglo can do that without recourse to significant new capital from the State is in question. Last July the British Financial Services Authority set a precedent for such a manoeuvre in the case of Northern Rock, the nationalised British lender. At Northern Rock’s request, the FSA temporarily waived the limits on its use of Tier 2 capital. An extension of the waiver last December came ahead of a move by the British government in February to recapitalise the bank to the tune of £3 billion (€3.37 billion).
