Bank plan to be drawn up over weekend


THE BANKS:DISCUSSIONS ON a rescue plan for the Irish banks between the Central Bank and the International Monetary Fund (IMF) will intensify today to prepare for a possible statement on Monday on a solution for the embattled lenders.

  • How to shrink the size and number of banks so they are not as reliant on outside funding;
  • How to inject further capital into the banks to reassure the financial markets who lend to them that they can absorb any possible losses in the future;
  • How to ensure there is certainty around their liquidity and funding so that they can survive the loss of the tens of billions in deposits that have been withdrawn from them.

The aim of the discussions is to address all three areas in a definitive statement that will reassure the markets that a solution is in place for the banks.

Some of the more technical details on a wide range of measures will be worked out today. The six domestic banks are on standby to meet officials and hear the proposals tomorrow ahead of Monday's announcement, though this schedule may still change.

While strong resistance to the plans is expected from the banks, the involvement of the IMF and the ECB - which is propping them up with loans of more than €100 billion - means they are in no position to negotiate and are likely to have to accept the proposals.

The ECB is thought to be keen on the creation of a second "bad bank" to deal with troubled or questionable assets remaining on the books of the bank after the €73 billion in property and related loans are moved to the National Asset Management Agency.

However, this is being resisted by the Central Bank as such an agency would crystallise further problems at the banks, as the transfer would trigger losses.

One option under discussion is to hive off certain so-called "non-core" assets from the banks.

This would have two positive effects: it would reduce the size of the banks to ensure they are less reliant on market funding and it would help boost their capital as they would hold fewer loans to have to protect themselves against.

Among the assets which could be moved out of the banks, for example, is the tracker mortgage book at Irish Life and Permanent.

These mortgages, which are loss-making as the interest rates on the loans track the ECB base rate, account for about 70 per cent of its €40 billion loan book.

These and other assets deemed to be "non-core" by the Central Bank and the IMF-ECB team would then be sold off at heavy discounts to foreign investors with the backing of guarantees that any losses on the loans would be shared or covered by the State.

These guarantees and loss-sharing measures would be funded by loan facilities from the IMF and EU financial stability fund, which may provide €100 billion to €110 billion to support the banks.

The negotiating teams are working on proposals to address market concerns about the level of capital at the banks.

This may involve an inclusion in the announcement that the Irish banks would meet the capital levels set down in new international rules governing how much banks hold in their reserves.

The so-called Basel III rules will force banks to put aside €11 for every €100 they have on loan, compared with €8 for every €100 set by the Central Bank last March.

The aim is to raise bank capital levels over a period of time.

The carving up and merging of the smaller banks is also being discussed. The transfer of Irish Nationwide's €4 billion deposits to the EBS, which is on the market, is also being considered.

The future of the EBS sale process is also being discussed.

The Government's proposal to split Anglo Irish Bank into a funding bank and asset recovery bank is likely to be shelved, owing to the difficulties in funding this.

AIB, which said yesterday it had lost €13 billion in deposits this year, is expected to be the subject of a major overhaul, but a merger with Bank of Ireland is not believed to be on the cards.

A well-placed source said the proposals would not involve a "big bang" solution to the banks' problems but would outline measures to fix the Irish banking system in a major restructuring over time.