THE MINISTER for Finance will propose a ground-breaking restructuring of the banks today as the results of Central Bank stress tests will signal the virtual nationalisation of the Irish banking sector.
The results of the tests will lead Michael Noonan to undertake “a radical new approach” to fix the banks, a Government source said.
Mr Noonan will make a “watershed” argument for a EU-wide solution around passing bank losses on to bondholders in response to the tests on Bank of Ireland, AIB, Irish Life and Permanent and EBS building society. Government colleagues last night described it as the first radical policy departure from the previous Fianna Fail-led government.
The Minister will speak for 20 minutes in the Dáil immediately after the announcement of the test results by the Central Bank.
Mr Noonan told Fine Gael TDs and Senators at the party’s parliamentary party meeting last night that the test results would be of major significance and would dominate the news over the weekend.
The results are expected to push Irish Life and Permanent and Bank of Ireland into majority Government control, given the cash requirements they will face. The tests assess the ability of the banks to cover losses arising from unanticipated shocks in the economy.
The banks are expected to require a further €18 billion to €23 billion, pushing the cost of bailing out the banks to well in excess of €60 billion.
This will be the fifth attempt to recapitalise the banks, which have so far cost the State €46 billion.
Bank of Ireland, which is already 36 per cent State owned, has intensified efforts to sell more international businesses in an attempt to reduce the potential size of Government ownership. The bank, which is valued on the market at about €1 billion, may require between €4 billion and €5 billion based on estimated losses under the tests.
Share trading in the State’s two main banks, Bank of Ireland and Allied Irish Banks, will be temporarily suspended today, pending the stress test results this afternoon and any subsequent related announcements by the banks.
The Central Bank sought the suspension “to avoid the possibility of a disorderly market due to the circulation of information or rumours during the day”.
Shares in Irish Life and Permanent were suspended yesterday morning after it emerged the company is expected to cede majority control to the Government due to the severity of the tests. The company – the only Government-guaranteed bank to avoid taking State cash – is expected to sell its profitable pensions and investments business, Irish Life, to raise cash to cover losses at its banking business Permanent TSB.
Irish Life and Permanent is expected to require more than €3 billion – about 30 times its market value – to meet worst-case mortgage losses estimated in the tests.
The proposed sale of building society EBS to the Cardinal private equity group was halted yesterday after the Government said the consortium’s bid was “not sufficiently commercially attractive” to the State.
The sale process was ended by the National Treasury Management Agency, which manages the Government’s interests in the banking sector, after 15 months of negotiations between the parties.
Cardinal had planned to invest €600 million in EBS but the Government was uncomfortable with the potential cost of future unexpected losses under its proposal. The Cardinal consortium expressed its “extreme disappointment” at Mr Noonan’s decision.
EBS is expected to require about €1 billion, while worst-case losses under the stress tests could push AIB’s bailout significantly higher than its existing €4.7 billion bill.
The requirements of the banks may still change given that talks between the Central Bank and the banks were continuing last night.
BlackRock, the consultants hired by the Central Bank to verify the tests, have used mortgage losses in the US state of Nevada, one of the worst-hit in the subprime crisis, to assess Irish losses.
Senior European sources said last night that the final scope of the tests was a “done deal” following prolonged talks between the Central Bank and the bailout troika of the European Central Bank, the EU Commission and the IMF.
ECB chief Jean-Claude Trichet chaired a teleconference meeting of the bank’s governing council from China yesterday to discuss the situation in the Irish banks. A further meeting may be held today as the ECB finalises its response.