Q&A

Tue, Nov 30, 2010, 00:00

So where do the banks stand now under the €35 billion plan to rescue the banking sector?

Bank of Ireland has until the end of February to raise a further €2.2 billion on its own and thus avoid Government control. AIB is heading for almost full State ownership – raising a further €9.8 billion is simply beyond it.

The name of Anglo Irish Bank will disappear over the coming weeks and a plan to close it down over several years will be in place by the end of January. Irish Nationwide is likely to follow a similar fate.

Their deposit books – about €16 billion at Anglo and €4 billion at Irish Nationwide – will be moved to bolster other banks.

Irish Life Permanent (IL&P) says it can raise its target of €98 million on its own and again avoid a State bailout. It is still keen on taking over building society EBS.

Will EBS still be sold?

That is the aim, though it might take more time – beyond the current December 22nd deadline – as either buyer, be it the private equity group led by Dublin firm Cardinal or ILP, needs to find another €438 million for EBS to meet the new capital target on top of an earlier target €525 million.

So how much is this latest bank bailout going to cost upfront?

The next recapitalisation will be €10 billion and it will come from the National Pension Reserve Fund – some €8 billion will be injected (if the banks cannot raise it themselves) and €2 billion will go on “credit enhancements” to help the banks sell off assets and loans.

Another €25 billion is being set aside as a contingency if losses rise and the banks need more capital.

What are credit enhancements?

This is where a bank offers a guarantee to cover or share losses on any loans or assets they put on the market.

It is a way of making loans or assets more attractive to lure potential purchasers.

Why force banks to sell assets?

The banks got too big for the State – first to fail and then to save, forcing the Government to look for €67.5 billion in outside help.

On top of injecting further cash into the banks, the €35 billion bank plan involves shrinking the size and number of banks to bring levels of deposits in line with loans. This will improve their capital levels and reduce their reliance on Central Bank funding which had grown far too heavy.

It will also encourage investors to lend to the banks again.

How else will the banks shrink?

A further €16 billion in land and development loans are moving to National Asset Management Agency from AIB and Bank of Ireland, removing all such loans from their books. There may be similar loan transfers out of the banks.

What happens to bondholders who took a risk lending to banks. Should they not foot some losses?

The Government will seek to pass further bank losses on to subordinated bondholders – high-risk investors who were paid more in interest payments than any other lenders to the banks. There is about €10 billion in subordinated debt left at the banks, so not paying back some of this will reduce costs.

Sharing losses with senior bondholders – who with depositors hold a stronger position and are usually the first to be repaid in a bank failure – has been categorically ruled out. This option was considered but Central Bank governor Patrick Honohan said there was “no enthusiasm” for it in Europe. The fear among EU officials was that if you burned senior bondholders in the Irish banks – who are owed about €42 billion (of which €19 billion is not guaranteed by the Government) – it would send a message that no senior bondholder at any of the European banks was safe. This could spark panic among investors who fund EU banks, the last thing that Brussels wanted.