THE IRISH banking sector will be radically reshaped into just two banks, Bank of Ireland and a merged institution comprising AIB and the building society, EBS.
The restructuring of the banks was the third plank of the new Government’s attempt to draw a final line under the banking crisis following the Central Bank’s stress tests on bank capital and funding.
Minister for Finance Michael Noonan said that the restructuring aimed to break with the country’s “toxic banking past” and to put the banks “on a firm footing”.
“In essence, our banks will need to be smaller, more focused on core operations, better funded and better capitalised,” he said.
The stress tests showed that AIB, Bank of Ireland, Irish Life and Permanent and EBS must raise €24 billion to cover potential losses on loans and asset sales to reduce in size to viable levels.
AIB must raise €13.3 billion, Bank of Ireland €5.2 billion, Irish Life and Permanent €4 billion and EBS €1.5 billion. They will be given time to raise cash privately.
This brings the bill facing the banks to €70 billion and will lead to the almost outright nationalisation of the Irish banking system.
Central Bank governor Patrick Honohan said the scale of the capital bills at each bank would leave them in majority State ownership.
The Government would “in all likelihood” end up with a majority stake in Irish Life and Permanent, Mr Noonan told the Dáil.
Some €72.8 billion in loans and other assets must be sold by the four banks to bring their loans closer in line with their deposits so they can fund themselves without the support of Government or the Irish and European central banks.
Bank of Ireland and AIB will be split into core and non-core divisions and their non-core businesses and assets sold or run off over time to avoid fire sales. Mr Noonan said the Republic’s first “pillar bank” will be designed from Bank of Ireland.
The bank will shed €32.6 billion of assets by 2013 and will become “a significantly more domestically focused bank”, said Mr Noonan.
The bank will retain its businesses in Northern Ireland, its deposit venture with the Post Office in the UK and “limited” capital markets businesses, he said.
Following the cancellation of the sale of EBS to the Cardinal private equity consortium, the lender will be merged with AIB “to build a second pillar bank”, also largely domestically focused.
The combined bank will retain AIB’s First Trust operations in Northern Ireland and certain UK deposit-funded operations.
The non-core division of the combined AIB-EBS bank will also offload loans and other assets – €19.4 billion from the AIB side and €4.9 billion from the EBS side.
Irish Life and Permanent, the only bank to have avoided Government cash and State ownership until now, will be broken up.
The company’s profitable investments and pensions business, Irish Life and fund manager Irish Life Investment Managers, will be sold.
The company estimates that it will generate €1.1 billion from these sales and other measures, leaving €2.9 billion still to be raise.
Prof Honohan said he was “reasonably relaxed” that the banks would reduce their emergency loans at the Central Bank over time through the deleveraging.
