Minister for Finance Michael Noonan has today proposed a ground-breaking restructuring of Irish banks, which he said would "break the bonds with our toxic banking past."
The announcement came shortly after the publication of banking stress tests results which show that a further €24billion in recapitalisation is required for Irish banks.
Speaking in the Dáil this afternoon, Mr Noonan outlined a plan which includes the creation of two "universal service" banks, one of which would be formed from a merger between AIB and EBS.
The Minister also said that Irish Life and Permanent would "in all likelihood" cede majority control to the Government and will be forced to sell its Irish Life Assurance and its life and pensions business.
Making his announcement, Mr Noonan said the radical restructuring of the country's banks was designed to return the banking system to long-term viability and profitability.
"Our banks will need to be smaller, more focused on core operations, better funded and better capitalised," he said.
Mr Noonan said the capital injections announced today would be provided to create a banking system that has two universal full-service banks as its core pillars and a restructured Irish Life and Permanent.
"The first Pillar banks will be created from the already strong franchise of Bank of Ireland and it is our intention to combine the businesses and strengthen the franchises of Allied Irish Bank and the EBS Building Society to form the second Pillar bank.
"Each of these banks will reorganise their operations into core and non-core functions. With a carefully managed programme of deleveraging, by 2013, as the non-core assets which do not serve growth on the island of Ireland disappear, the Pillar banks should start to better serve the economy as functioning banks rather than the oversized, overleveraged banks they now are."
The Minister said the banks' non-core businesses and assets would be sold or run off over time to avoid fire-sales.
"This will allow for a significant reduction of the level of assets relative to deposits over time. With these sales, recapitalisations and other measures the banks will repay their ECB and Central Bank funding and in time will be better able to raise their own funds," he said.
Mr Noonan said BoI would be split into separately managed non-core and core divisions and in doing so would shed €30 billion of assets by 2013. The institution will be more domestically focused and retain its businesses in Northern Ireland, its Post Office deposit venture in the United Kingdom and limited capital markets businesses.
A merger between AIB and EBS will also lead to a largely domesticated bank which will retain its Northern Ireland operations and certain deposit funded operations in the UK. The non-core division of the combined entity will see deleveraging of €23 billion of assets by 2013.
The Minister confirmed that Irish Life & Permanent is expected to cede majority control to the State and will sell its Irish Life Assurance and its life and pensions business.
The Minister said that no additional capital for Anglo Irish or Nationwide is currently needed but said a decision will be taken in May to see whether more is required then.
Mr Noonan said the taxpayer should not be solely responsible for solving the banking crisis and said the Government would seek "direct contributions to solving the capital issues of the banking system by requiring further significant contributions from other sources including from subordinated debt holders, by the sale of assets to generate capital and where possible by seeking private sector investors."
The Minister also announced measures to strengthen and enhance the capacity of the Department of Finance in the area of banking policy.
"It is essential that the Department of Finance has the appropriate policy responsibilities and financial market and banking expertise to be able to advise Government on potential systemic threats and on measures to address and mitigate these."
Mr Noonan said the Government was committed to the EU-IMF programme agreed last November despite wishing to change aspects of it.
"I want to be clear, too, for the benefit of our people and of market participants, that we are committed to the EU-IMF programme. We have issues that we wish to raise and changes that we need to make in the context of ensuring growth and recovery in the Irish economy. But we will respect the overall fiscal parameters of the programme and where adjustments to the programme affect these, we will make appropriate offsetting adjustments."
Fianna Fáil Finance spokesman Brian Lenihan broadly welcomed the Government's action but said that under the terms of the new stress tests the banks would be "stuffed with capital,"
He warned that the extreme scenario that underlay the stress tests were potentially dangerous for the economy and were more pessimistic than tests adopted in other EU states.
