Majority State stake in BofI imminent

Wed, Nov 24, 2010, 00:00

FINANCIAL SECTOR:BANK OF IRELAND faces the prospect of majority Government control, and Allied Irish Banks ending up being 99.9 per cent State-owned and almost fully nationalised under the €85 billion EU-IMF rescue plan for the banks, The Irish Timeshas learned.

Senior executives from Bank of Ireland, AIB, and Irish Life and Permanent were the first banks to meet with  the Central Bank which has been in intense negotiations with the EU-IMF team as it determines how much capital they will need to draw up front from the €85 billion external fund.

The other banks are expected at meetings over the coming days.

Lenders are being asked to provide up-to-date information on loans and expected bad debts.

A large part of the €85 billion will be used to allow the Government to avoid borrowing in the bond markets over three years.

Under proposals, the banks will be forced to take enough capital up front to raise their cash reserves to the new norms that are expected at banks internationally.

In addition, they can borrow from a contingency fund as part of the €85 billion bailout to keep capital levels around this level should they incur further losses.

The measures are being introduced to reassure the markets that the banks have enough to cover bad debts so they can stand on their own without State support.

Officials from the International Monetary Fund, the European Central Bank and the European Commission have found that the Central Bank’s stress tests had set aside enough capital for the banks.

However, the team has decided that the banks will need to raise capital levels to 12 per cent, up from the 8 per cent level set by the Financial Regulator last March, to ease market fears of higher losses.

This broadly means that they must set aside €12 in reserve for ever €100 they have on loan – an increase from the regulators previous €8 level.

If losses increase, the banks can draw on the contingency fund to maintain capital levels above at least 10.5 per cent.

Analysts estimated that Bank of Ireland and AIB would each require at least €3.2 billion.

This would push the bailout of the banking sector towards €60 billion and possibly higher under the contingency part of the rescue.

This is in addition to the €7 billion that AIB still requires under the previous target.

The Government was set to take a stake of 94 per cent under this second bailout.

The third bailout under the EU-IMF rescue will push the State ownership of the bank to 99.9 per cent where AIB will be left with a small listing on the stock market.

The additional recapitalisation of Bank of Ireland, which raised in excess of the regulator’s previous target of €2.7 billion, will bring the State’s shareholding to a majority stake of more than 50 per cent.

The Government holds a stake of 36 per cent in Bank of Ireland after it converted part of the first €3.5 billion bailout of the bank.

EBS building society and Irish Life and Permanent may need about €400 million each. Anglo Irish Bank and Irish Nationwide Building Society are being wound down so will not have to meet these higher levels.

To reduce the size of the banks, they will be forced to divide themselves into core and non-core businesses, effectively good and bad banks, and to wind down the non-core operations by selling them.

They will be compelled to offload those non-core businesses in a purposeful way over time.

They will be urged to provide indemnities against losses to attract buyers for these assets and should they incur further losses through this, they can draw down cash from the contingency fund.

The banks must provide lists of overseas businesses and troubled or uncertain loans which they aim to sell in a bid to shrink their business so they don’t have to borrow as heavily from outside investors.

AIB’s UK bank is among the businesses earmarked to be sold.

The bailout plan is still the subject of discussions between the banks and the EU-IMF team.

There have been talks about re-opening the National Asset Management Agency to take other loans such as tracker mortgages out of the banks but this is regarded as unlikely to happen.