Minister for Finance Brian Lenihan has said he has not ruled out the State investing in a bank but would prefer Irish financial institutions to raise capital privately first.
Speaking after the Irish Banking Federation (IBF) annual conference in Dublin, Mr Lenihan said that the Government was keeping possible State investment in the banks under review while the State guarantee scheme, which covers up to €485 billion in liabilities at 11 Irish banks, comes into effect.
“The State would like of course the private sector to capitalise the banks in the first instance but clearly in a changing banking landscape we have to keep the position under constant review.” He later added that State intervention can “only be a last resort”.
Investors have responded negatively to Mr Lenihan’s comments as Irish bank shares have fallen sharply. Bank of Ireland was down 12.5 per cent to €1.68 at 4.30pm this afternoon, after falling almost 22 per cent earlier.
Anglo Irish Bank is down 8.1 per cent, while AIB and Irish Life & Permanent are both 6.5 per cent lower.
“We are now implementing the scheme this week. Contracts will be signed by the financial institutions involved in the guarantee scheme and at that stage we will be in a much better position to assess what the actual real capital requirements are,” said Mr Lenihan.
The Minister said that British Bankers’ Association chief executive Angela Knight, a speaker at the conference, had expressed the view that the UK may have “gone too far” in its capitalisation of some of the country’s banks and that there was “a balance to be struck in these areas”.
The Government issued a blanket guarantee on September 30th covering ¤440 billion in deposits and debts at six Irish-owned banks and later extended the scheme to five foreign-owned Irish banks, covering an additional ¤45 billion in liabilities at those institutions under the scheme.
European countries introduced moves similar to the Irish guarantee scheme but in some cases went a step further, agreeing bailouts and nationalisations of their banks. This has raised concerns that the Irish Government would have to follow suit by injecting fresh capital into the banks.
Mr Lenihan told the IBF conference that he was “disappointed at the negative reaction” to the Irish bank guarantee scheme from some European countries.
“It was in very striking contrast to the response of the United States - there was universal acclaim for our move in the United States and indeed in the wider world, with many of the Gulf state and in the Far East. They saw it as a quick decision action which a small state could take to promote confidence.”
He said that there were many in the treasury section of the European Central Bank who privately agreed with the Irish guarantee, despite the public opposition to the scheme in Europe.
“There was a fair degree of public criticism in Europe. We will have to reflect again on how Lisbon has brought us to a position in Europe where I think we are viewed more negatively than we were. That is a political problem that we have.”
Mr Lenihan said that many countries copied the Irish bank guarantee or implemented variations of it. “Immitation is the sincerest form of flattery,” he said.
He added that smaller EU states preferred to guarantee their banks rather than invest capital into their financial institutions, while larger countries chose to “pump massive amounts of money into the financial sector through capitalisation”.
He said: “It is noticeable that smaller countries liked the guarantee approach because there is less financial exposure and they don’t have the huge capital reserves as states that allow them to invest in financial institutions on a grand scale.”
He said: "We are clearly in a changing, evolving time in European banking.”