THE GOVERNMENT is preparing to bring forward the recapitalisation of Allied Irish Banks (AIB) and Bank of Ireland in a concerted effort to convince the markets neither will be nationalised. The possibility the weakest loans on the books of both banks will be transferred into the newly nationalised Anglo Irish Bank is also on the table.
AIB and Bank of Ireland were to be recapitalised before the end of March under the original Government plan. Following the collapse of their shares since the decision to take Anglo into public ownership last week, Minister for Finance Brian Lenihan is now likely to release State money into the banks much sooner.
In line with the original terms of the plan, the Government will provide a further €1 billion upfront to each bank, in addition to the €2 billion it has already resolved to provide if they indicate they have no prospect of raising the money from private investors. The collapse in their shares suggests this is not now possible.
However, the Government remains convinced that both AIB and Bank of Ireland are fundamentally strong institutions, embedded in the community throughout the State and with a diversity of business that will provide a cushion against any significant increase in bad debts on developer loans exposed to the collapse of the property market.
A Department of Finance spokesman declined to comment on the timing of the recapitalisation initiative. However, he indicated the Government remains determined to proceed with the recapitalisation plan.
“The Government has reiterated its commitment to underwrite or otherwise support a further €1 billion of core capital to each of the banks. The Government has clearly set out its strategy in relation to the recapitalisation,” he said.
Although it remains open to the Government to take ordinary shares in both banks with the third billion it will provide, the State is far more likely to take preference shares yielding a fixed annual dividend to avoid taking a majority position in either bank.
High-level sources with knowledge of the deliberations within Government said Mr Lenihan is examining a proposal to transfer the two banks’ toxic loans to Anglo. This “bad bank” option would enable the State to protect the money it provides to AIB and Bank of Ireland as the €3 billion in Government capital each receives would deplete as their bad debts rise.
Central to the debate is an acceptance of the necessity to provide strong protection to the taxpayer against the risk that Anglo’s existing debtors – and any debtors it inherits from AIB and Bank of Ireland – would seek to avoid their obligations if they saw the State as a soft touch.
