No easy options when repairing Anglo


ANALYSIS:All the possible options for Anglo would involve staggering amounts of public money, writes SIMON CARSWELL

REPAIRING A broken bank is a tricky business. Loans must be managed over time and covered with deposits and other sources of funding. Fixing a bank that accounts for a fifth of a domestic banking sector is even trickier.

Mike Aynsley, chief executive of Anglo Irish Bank, noted in an interview with The Irish Times this week that it may appear to members of the public that there is no real reason to keep Anglo open or indeed that it has a future.

However, he said detailed financial examination by the bank and its advisers had shown it would cost between €6 billion and €9 billion – in addition to the €4 billion already invested in the bank – to restructure the lender and run the bank as a going concern.

Liquidating the bank over the course of a year would cost between €27 billion and €35 billion in additional capital, while running it down over a period of 10 years would cost between €18 billion and €22 billion, he said. Both options would also be “extremely expensive” to fund.

For this reason, the bank has sought approval from the European Commission to split into a good bank and a bad bank or asset run-down firm, costing the State up to €9 billion more in capital.

Aynsley believes this is “least worst option which is in essence the best option” as it will allow the bank to run down the bad loans remaining after it moves €35.6 billion development and related loans to Nama.

The bank believes it can recover capital for the taxpayer over time by reinventing the good part as a business lender and by merging it with another bank, selling it or refloating it on the stock market.

This option will also allow the bank to sell the bad loans over time to maximise the best value from them.

The Opposition parties have come out strongly against the bank’s plan. Fine Gael wants Anglo to publish detailed costings of alternatives to its plan, an independent costing of its own plan for the bank and for all these options to be debated by the Oireachtas.

The party wants to split Anglo into a good bank taking with it performing loans and deposits which could operate on its own or merge this into a bigger banking group.

The remaining “bad bank”, including the associated losses, would be left with the shareholders and the investors in the bank’s subordinated debt, which accounts for about €2 billion, and senior debt of €12.3 billion.

In other words, these investors would take some of Anglo’s losses.

One difficulty with this option is that given there is a €200 billion funding gap between the deposits and loans in the Irish banks, the system is heavily reliant on foreign investors to fund the difference.

Failing to repay senior bond holders at Anglo could lead to investors avoiding senior debt issuances at the other Irish banks.

Fine Gael has argued that this may not necessarily be the case.

Aynsley has said the bank had received advice from accountants KPMG in the Netherlands, investment bank JP Morgan and consultancy firm Bain Co, which advised on the restructuring of UK lender Northern Rock.

Four main scenarios were considered – liquidation, a 10-year wind-down, managing Anglo through the crisis as the bank currently stands and splitting the bank into good and bad entities.

The bank weighed up each option based on what would minimise State bailouts and “taxpayer exposure”, which option created the best “exit options” and the option that minimised the impact on the wider banking system.


The cost of liquidating Anglo includes the €4 billion already invested by the State and the €6 billion to €9 billion that would be required at the bank to absorb losses of almost €12 billion that the bank will report next week for the 15 months to the end of 2009.

Further losses would be incurred selling Anglo’s remaining assets at fire-sale prices, based on a likely or base-case scenario and a stress case, with the losses ranging from €15 billion to €23 billion.

Anglo’s advisers said liquidation would also affect the value of assets at other banks and have a negative impact on the wider financial system, increasing borrowing costs both for other lenders and the Government due to the additional risks they would be forced to take on from closing down Anglo.


This option would involve a similar up-front capital loss of between €10 billion and €13 billion, including the €4 billion already invested into Anglo.

The losses on the asset sales over 10 years would be lower than in a liquidation scenario, ranging from €6 billion to €10 billion.

However, in a wind-down, the Government would have provide a loan of up to €30 billion to replace lost capital as retail depositors and wholesale funding providers would withdraw money from the bank.

The Government would also have to provide further guarantees of up to €50 billion to help maintain Anglo’s funding.


Anglo was advised that the option of stabilising the bank would not lead to “a fundamental restructuring” of the bank as demanded by the EU under state aid rules, showing that the bank can remain viable into the future.

“The closing of the bank and the impact systemically is just unpalatable – you don’t want to go there,” said Aynsley.