The Government has decided that Anglo Irish Bank will be split into a funding bank and an asset recovery bank.
The state-owned bank – €8.2bn in the red and in need of a potential €25b bail-out – will be divided in two with one wing holding deposits and the other dedicated to managing good loans which will be run down over time.
The new bank divisions will not lend money.
Finance minister Brian Lenihan, who spent the last two days in tough talks with European Commission chiefs and European counterparts, said the move should help restore confidence in the financial system.
“Today’s decision by the Government will provide certainty about the future of Anglo-Irish Bank,” he said.
“Resolution of this, our most distressed institution, is essential to the promotion of confidence and stability in our financial system.”
Anglo Irish Bank has not expanded its loan book since it was nationalised in early 2009 and this will remain the case.
It is intended that the recovery bank will be sold in whole or in part or that its assets will be run off over an unspecified period of time.
Anglo management had favoured a good-bank bad-bank split with 80% of the toxic lender shut down and a new viable bank created from the good loans.
Mr Lenihan said Anglo’s proposal had been put forward in good faith but warned it would not have provided the most viable and sustainable solution to ensure the stability of Irish banking.
Taoiseach Brian Cowen had warned a quick wind-up of the bank would leave the taxpayer with a bill for €70bn.
The Cabinet was briefed on the plan to create a Funding Bank with Government backing and guarantees to operate as a specialist deposit bank.
The Government said it will be completely separate from the loan assets and people who leave money in the bank will be totally insulated from the performance of the second wing of the bank.
The Assets Recovery Bank will be focused on running down the loan book which is not being transferred to the state controlled National Asset Recovery Agency (Nama) bad bank.
The total cost of setting up the two new divisions and ensuring they are viable will be worked out by experts from the Central Bank and announced in October.