Plan based on best information available, says Lenihan

Minister for Finance Brian Lenihan said today the assessment that Bank of Ireland and AIB required €7 billion in capital was based on the best information available.

He was responding to claims that the sum may be insufficient.

A number of observers reacted to the Government’s recapitalisation plan announced last night by suggesting the move may not mark the end of the State’s intervention in the Irish financial sector.

Davy analyst Scott Rankin said in a research note today that “investors believe that this will not mark the end of Irish government intervention” and that it is highly likely that the state will have to proceed with a 'bad bank'/insurance scheme in order to fully deal with this problem”.

“So today's announcement is very welcome and will give comfort to bond investors and liquidity providers alike, but it may not represent the end of the Government’s efforts to win the battle,” Mr Rankin said.

Mr Lenihan said the Government had examined the loan books of Bank of Ireland and AIB before deciding that each required €3.5 billion. "We have looked at where the exposures are. We have applied to those exposures the negative trends which do apply to the economy and we have come to a conclusion in relation to how much capital is required", he told RTE's Morning Ireland.

He described the recapitalisation as a “very good solution to a lot of the problems facing those two particular banks, the Bank of Ireland and the AIB” and added it was equally important not to place too much capital into the banks.

The capital would provide a substantial buffer against future losses and would give them the confidence to lend, Mr Lenihan said, stressing that the money being injected into these banks would not “be used exclusively to simply protect the banks against future losses”.

The Minister added that one of the preconditions of the recapitalisation was that Bank of Ireland and AIB “come clean about their future losses”.

This morning Bank of Ireland reported a 60 per cent increase in its loan loss provisions over the next three years to €6 billion in an interim management statement.

Bank of Ireland said it expected its loan loss impairment charge for the three years to March 31st, 2011, to hit €4.5 billion, up from a previous estimate of €3.8 billion given in November.

The bank also warned that the revised forecast had a downside risk of up to €1.5 billion if economic conditions deteriorate further.

Bank of Ireland also said it expected to make an underlying loss in the second half of its financial year, which ends on March 31st 2009, but for the full-year it said it expected to make an underlying profit due to cost savings.

The finance union IBOA said the recapitalisation was “as a necessary step to ensure the stability of Ireland’s two major financial institutions”.

General secretary Larry Broderick said, however, it was only the first step to putting the Irish banking system on a sound footing for the future. He again called for an independent investigation into the issues at Anglo Irish Bank.

The Institute of Certified Public Accountants in Ireland (CPA) said the banks supported by the plan needed to immediately start 'real' lending to business, and to SMEs in particular.

Norman J. Adams, CPA president said: "There needs to be clear and decisive action to ensure that money is released and business has immediate access to urgently needed working capital. Freeing up of cash is the single biggest issue facing the economy."