Irish banks require an extra €24 billion recapitalisation

 

Ireland’s beleaguered banking sector is to be recapitalised by a further €24 billion and restructured around two core retail banks under the Government's plan to draw a line under the banking crisis.

This is the fifth attempt to recapitalise the banks and brings the total cost of bailing out the sector from €46 billion to €70 billion.

Uunder the plan, Minister for Finance Michael Noonan said the Government would reduce the number of domestic banks to two “pillar banks”, based around AIB and Bank of Ireland.

Bank of Ireland will be forced to sell off €30 billion of assets by 2013.

The restructuring will also see Allied Irish Bank - once the country’s biggest bank - merged with the EBS building society to form the second banking group. Irish Life & Permanent will be restructured and forced to sell its lucrative pensions division Irish Life.

"This radical restructuring of the banking system is designed to put the banking system on a firm footing for the future and break the bonds with our toxic banking past,” Mr Noonan told the Dáil this evening.

He also indicated the Government would seek "significant contributions" from subordinated bondholders in the banks to contribute to the cost of recapitalising the sector.

Mr Noonan also signalled the Government was no longer considering the imposition of losses on senior bondholders in Bank of Ireland and Allied Irish Banks. However,

he said the Government but would re-examine the possibility of imposing losses on senior bondholders at Anglo Irish Bank, if that lender required additional capital.

The two banking divisions will be forced to reorganise their operations into core and non-core functions, with the former serving the growth needs of the domestic economy and the latter being sold off over time, Mr Noonan said.

The €24 billion recapitalisation figure for the banking system was determined by the Central Bank’s long-awaited stress tests on the banks.

The extra capital requirements means the State will need substantially more of the €35 billion earmarked for the banks under the EU-IMF bailout deal than previously envisaged.

The tests, which gauged the banks’ ability to cope with unanticipated downturns in the economy, indicated AIB will need a further €13.3 billion to cope with future loan losses.

Bank of Ireland, which is already 36 per cent State-owned, will require a further €5.2 billion while Irish Life and Permanent will need a further €4 billion, bringing both lenders into majority Government ownership for the first time.

EBS will require €1.5 billion despite being merged with AIB. Anglo Irish Bank and Irish Nationwide were not tested as they are to be run down over time.

At a Central Bank briefing on the stress tests, governor Patrick Honohan said the further recapitalisation requirement had resulted from "one of the costliest banking crises in history."

He said the intensive nature of the tests were designed to respond to "market scepticism" about the Irish banks. "This is what we regard as an adverse and unlikely scenario but we don't expect it to be this bad.”

Prof Honohan warned against imposing losses on banks' senior bondholders without the agreement of other EU states. "Unilateral action would not be a net gain for Ireland," he said.

Share trading in BoI and AIB was temporarily suspended today, pending the stress test results and any subsequent related announcements by the banks.

The Central Bank had sought the suspension “to avoid the possibility of a disorderly market due to the circulation of information or rumours during the day”.

Taoiseach Enda Kenny said this evening there was no point in playing down the scale of the problem that the Government had inherited. “The legacy we’re dealing with is a dysfunctional bank system that has become completely dependent on the European and Irish central banks for short term funding.”

Mr Kenny said the sector was "starving" enterprise of the critical credit needed to finance economic recovery and seriously undermining confidence in the country’s public finances. The decisions announced today by the Government drew a line under the failed policies of the past, he said.

Fianna Fáil’s finance spokesman Brian Lenihan broadly welcomed the Government’s action but said that under the terms of the new stress tests the banks would be “stuffed with capital”.

Responding to Mr Noonan's announcement in the Dáil, Mr Lenihan, warned the extreme scenario that underlay the stress tests were potentially dangerous for the economy and were more pessimistic than tests adopted in other EU states.

Under the worst case scenario, the Central Bank's stress test model provided for a 17.4 per cent drop in house prices this year and a further 18.8 per cent fall in 2012. This scenario also provided for a 1.6 per cent drop in GDP this year and a 0.3 per cent rise in 2012.

Mr Noonan said the European Central Bank would provide Irish banks with liquidity funding over the medium term although there will be no formal facility created for that purpose.

Euro zone official sources told Reuters news agency this evening that due to internal disagreements within the ECB's governing council, plans to announce a new liquidity facility for Irish banks had been scrapped.

Seperately a statement from Brussels tonight said extra capital Ireland needs to beat the financial crisis can be funded “comfortably” under existing European Union-International Monetary Fund schemes.

The joint declaration from the European Commission, the European Central Bank and the ECB, described the new banking plan as: “A major step toward restoring the Irish banking system to health which is crucial for sustained revival of growth and employment.”

The statement said the Commission, the ECB and the IMF endorsed the strategy of focussing on the development of “a few strong pillar banks with sound business models, able to serve the Irish economy’s needs”

The Department for Finance confirmed the country's debt to GDP ratio would increase to 111 per cent in 2013 before falling to 109 per cent in 2014 if €24 billion of additional capital is pumped into the banks.