Markets still in dark on key matters of cost and timescale

ANALYSIS:SOME 21 months after the nationalisation of Anglo Irish Bank, and after rejecting two plans from the bank's new management team for the future of the institution, the Government has finally decided what it wants to do with Ireland's most toxic bank.

However, the decision to split the bank into a savings bank and asset recovery bank has failed to stem the uncertainty over the final cost of the bank to the State and the damage to the public finances.

“Resolution of this, our most distressed institution, is essential to the promotion of confidence and stability in our financial system,” said Minister for Finance Brian Lenihan.

But the failure to put either a cost on the plan or an exact timeline on how long it would take to heal this running sore has done little to ease the fears of the financial markets that this issue is sorted once and for all.

Lenihan rejected the bank’s own plan to split into a small good bank (which would lend again into the economy) and a bad bank that would be run down over time. Instead, he has chosen to move the €38 billion of loans remaining after the transfer of €35 billion to the National Asset Management Agency (NTMA) into a recovery bank where they will be repaid over time or sold off to another bank.

Some €54 billion of Anglo deposits and funding will be put into a State-backed savings or funding bank – described by Lenihan as a “narrow bank” reflecting its function – but one which will not lend money to any new customers. (It may provide some loans to existing customers if it increases value to the bank.)

The funding will be guaranteed and the aim of this is to retain money in the domestic banking system that would be unlikely to remain in the country in the event of an outright liquidation of Anglo.

The Minister declined to say how long it would take to wind down Anglo but Taoiseach Brian Cowen said later it should take no more than 15 years. Lenihan declined to disclose the cost of the plan, estimates of which have been assessed by the National Treasury Management Agency, he said.

The Financial Regulator at the Central Bank would determine the capital required by both the savings or funding bank and the asset recovery bank, and these figures will be known by October, he said.

Central Bank governor Patrick Honohan and the NTMA are known to have played a crucial role in advising Lenihan on the Government’s alternative plan.

The Minister did acknowledge that the capital required by the savings bank would not be “as extensive” a figure as that required for Anglo’s proposed good bank, estimated by Anglo at €2.5 billion. But he declined to say how much the full plan would cost – the figure the markets are demanding.

Anglo and Honohan have said the cost of the bank to the taxpayer will top €25 billion.

However, the bank said this depended on the losses on the Nama loans not deteriorating further, no unexpected bombshells on its large borrowers and no further property market declines.

“The final bill for Anglo can’t be known yet, so the financial markets will still have concerns,” said banking analyst Sebastian Orsi at stockbrokers Merrion Capital.

Lenihan said that he was simply presenting “a road map” for a further series of decisions over the coming weeks that “will bring clarity and finality to the difficulties posed by this bank”.

A further €19 billion in loans have yet to move to Nama which must complete all loan transfers by next February. Lenihan said there would be “a far greater degree of finality before then”.

The European Commission has also asked for further clarification and a full submission on the plan before sanctioning any approval.

The Government’s decision is undoubtedly a kick in the teeth for the new team at Anglo, led by chief executive Mike Aynsley and chairman Alan Dukes, as their plan has been rejected in full.

While the Department of Finance supported the bank’s plan for an asset run-down company and “a viable new bank” in the revised plan submitted to Brussels last May, Lenihan – the bank’s shareholder – said that he had to allow the bank the “freedom and opportunity to demonstrate and display their expertise”. But he said that he could not dictate their plan and had also to seek the approval of Cabinet colleagues.

While key questions remain unanswered, one thing is certain – the name Anglo Irish Bank will be wiped from the Irish banking landscape and carved up into two new renamed banks that can never lend to new customers again.