Shares in Bank of Ireland closed more than 6 per cent lower this evening after the Government took a 15.7 per share in the bank through the National Pension Reserve Fund.
The bank's stock closed at €1.18.
The transfer, which requires the bank to issue new ordinary shares, is the result of a European Commission ban on the bank making certain interest payments. The move will automatically dilute the positions of other shareholders in the bank.
The governor of the Central bank Patrick Honohan said today more State investment in the banks was expected.
"There will be more I'm quite sure," he told a session of the British-Irish Parliamentary Assembly in Co Cavan, adding that the size of the Bank of Ireland transaction was "a relatively small [amount] which could have been deferred and put as part of the overall recapitalisation of the banks and restructuring of their balance sheets”.
Taoiseach Minister Brian Cowen said today at the same event that, while Ireland's fiscal crisis was not over, decisive steps taken to stabilise the economy would see a return to year-on-year growth in 2011.
Earlier today, Minister for Finance Brian Lenihan said work on valuing the loans to be transferred to the National Asset Management Agency (Nama) was ongoing.
The transfer of loans to Nama, which the Government estimates it will pay €54 billion for, was originally meant to start in December.
"It will take until the end of March, but it is very important we get the valuations right. We also have to get our EU approvals and they are going very well," Mr Lenihan told Newstalk radio.
A source said the EU commission is expected to make its decision by Friday, where approval would ultimately force banks to raise fresh capital due to write-downs caused by asset transfers.
Mr Lenihan also acknowledged this morning that taking the shares in Bank of Ireland was not the Government's first preference, but he said the option to take shares was negotiated with the banks when the Government took out the initial stake.
"We arranged that if they weren't in a position to pay cash, we would get shares of equivalent value," he said.
"The EU has decided that because the structural plan is before them they have to decide whether in fact the Bank of Ireland can pay cash in these circumstances. As an immediate step, we've insisted on payment of the shares we're entitled to this morning. Those shares will go into our pension fund. It's not am issue of realising the shares next week, or cash needed for expenditure next month. It's a pension fund that's not being realised for several decades."
Speaking on RTÉ's Morning Ireland, Mr Lenihan said he expects the European Union to make a decision on Ireland's banks within a matter of weeks.
"There's been a huge international welcome for what we are doing in tackling these problems," he said.
Last week, Bank of Ireland said it would give the State shares instead of cash in respect of a dividend payment. The bank had been due to pay €250 million to the State by the weekend under the terms of the Government’s €7 billion bank recapitalisation scheme.
Under the scheme, which has seen the Government invest €3.5 billion in both AIB and Bank of Ireland, the State is entitled to receive annual “coupon” payments of up to €280 million from each bank.
However, the European Commission has placed a “coupon-stopper” on the banks while it considers their restructuring plans. Under Bank of Ireland’s internal regulations, this automatically triggers payment in shares.
Mr Lenihan said he had made it clear he would prefer banks raise required capital themselves, with the Government taking a larger stake in the banks only if they could not do this. Mr Lenihan said he opposed the State imposing legislation on the banks to force them into nationalisation, as it would have cast "serious doubts" over the country's creditworthiness.
"We have to ensure that we have a viable banking system in this country; ultimately if that means the State has to own the system, then that is where events will run," he said. "The banks themselves maintain, and have maintained, that they can raise some funds. I believe there is scope for asset disposals within the banks themselves, there is also scope for the realisation of other assets that they have overseas.
"Certainly the taxpayer cannot be expected to take the whole burden of capitalisation, but it is possible that the taxpayer will have to inject further sums of capital into the banks."
Fine Gael finance spokesman Richard Bruton accused Mr Lenihan of making up banking policy, claiming huge numbers of businesses are being starved of credit.
“This is not a credible basis for economic recovery,” Mr Bruton said. “Ireland needs a thriving small and medium enterprise sector to drag itself out of recession and back into sustainable growth.
“Every lost business is a lost opportunity, and throws yet more people on to the dole queues. But the banks are still hoarding capital and trying to protect their own independence.”
Fine Gael again called for the Government to consider its proposal for a National Recovery Bank.
Labour finance spokeswoman Joan Burton this morning claimed the Government’s bank strategy was running aground and dismissed Mr Lenihan’s assertion that shares were as good as cash.
“As they say, a bird in the hand is worth two in the bush,” she said. “The Government is hiding behind the delay in EU approval of the banks’ restructuring plans. It is clear, however, the delay in EU approval arises because, despite the minister’s rhetoric, the Irish banks are in an extremely weakened state.”