Rescue remedies for Ireland’s battered banks
Certainly the Government is showing no mad sense of urgency about taking shares in the banks.
That position has been articulated from the top down, with both the Taoiseach Brian Cowen and his Finance Minister Brian Lenihan making it clear that buying into the banks would be a last resort.
Having rescued AIB in the past from its disastrous purchase of ICI, the state’s dealings with the banking sector have been fraught, and like every other citizen the Government seems to have developed a disdain for banking types given their lead role in feeding the property boom that has now turned to ashes.
Figures provided by the regulator recently showed just how up to their necks in it the banks have been, with about 60% of their lending involving property and related activities.
Recent figures suggest Bank of Ireland’s exposure to the sector was 10% above the average figure at 70% of its total lending.
That massive exposure to property has been the underlying story of the sharp decline in bank share prices and for the scare some weeks ago that forced the Government to guarantee the deposits and borrowings of the six Irish owned financial institutions.
Rumours abound as to which of the banks was about to go under.
Anglo Irish was seen as the number one suspect but there are unconfirmed reports that one of the two major banks, either AIB or BOI, had a huge loan repayment looming that could not be refinanced due to the global scarcity of credit.
However the panic seems to be over at this stage thanks to the guarantee and the relatively confident tone of AIB’s interim management statement this week, where it makes clear that it will not resort to the markets to re-capitalise itself.
This suggests the banks themselves now believe they have time to manoeuvre on the funding issue.
Brokers are suggesting, however, that AIB does have a sense of urgency about the capital question and expect it to sell its M&T bank in the US at the first opportunity. In its statement this week it could be said the bank sounded almost too casual about the capital ratio issue.
It plans to have a Tier 1 ratio of 6% in place by end of 2008 and to improve it further in the years ahead. Given that best practices in Britain and elsewhere now demand a Tier 1 of 10% or more the bank may be forced to move pretty smartly next year to correct the capital base.
After all it was the threat to their balance sheets from over exposure to property that led to the loss of nearly 90% of market value of Irish bank stocks since mid 2007.
AIB’s bad debts for this year have now been put at €950m with more bad news coming. With no sign of an improvement in sight, banks must be under huge pressure to get funding in to gear up their balance sheets.
There is some evidence that this is happening and unconfirmed reports have it that a well-known financier has been chatting up rich sheikhs in Arab states to get them to invest in our banks.
If that is the case nothing has come of it yet and it may be a case of watch that space in the months ahead as pressure mounts and the bad debts start to be revealed.
Mike Soden, who was sacked as boss of Bank of Ireland in 2004, argues that what the country now needs is the merger of Bank of Ireland and Allied Irish Banks.
A key problem now is that banks here are too small with a combined market capitalisation of €10bn. For the record that was one of the first observations Soden made on becoming boss of the bank in 2002, but they shot the messenger and we are paying for the mess.
