EU inquiry into state’s €14bn funding of nationalised bank

THE European Union has launched an investigation into €10.44 billion of state money for Anglo Irish Bank.

The in-depth inquiry will consider various issues, including if the bailout is the cheapest way of solving the problems of the state-owned bank, remuneration for the new management, and whether it will create unfair competition for other banks.

The commission has also asked for a revised restructuring plan for the bank by the end of May and said that the changes will have to be “profound” and ensure it can become viable.

Earlier this year, they cleared the €4bn the state originally gave Anglo Irish last year as emergency aid.

In December, the state put in a further capital injection of €8.3bn, to be paid in successive tranches over 10 years. This is to cover the capital needs of the bank as of end March, 2010.

The Government applied for approval for an additional €2.14bn as a contingency for the future, bringing the amount to €10.44bn, which has received temporary clearance from Brussels. Finance Minister Brian Lenihan warned on Tuesday that Anglo may need an additional €10bn. The commission said it will take this into account in the investigation once they have been notified of it.

They also cleared €2.7bn support for the Irish Nationwide Building Society (INBS) which the Government is also taking into state ownership as 80% of their loan book is being transferred to NAMA.

Competition Commissioner Joaquin Almunia said both Anglo and INBS need significant recapitalisation. “The measures are also necessary to preserve financial stability in Ireland. However, INBS needs to establish a viable restructuring plan and Anglo Irish Bank has to restructure profoundly in a way that effectively tackles the weaknesses of the past business model and ensures a sustainable future without continued state support.”

A commission expert said they need to be convinced that there is not a cheaper or less distorting option to giving the additional funds to Anglo. Asked if they would recommend that the bank be wound up, he said they were still looking at it from the point of view of restructuring.

But they will look at all the figures produced by Anglo and Mr Lenihan, showing it would be more expensive to wind up the bank or let it go out of business over a number of years.

On the plan to divide it into a good and bad bank, he added: “We have to see if there is something good that can be put into the good bank.” British bank Northern Rock was reduced by two thirds – he expected there would be substantially less left of Anglo Irish.

He warned that the greater amount of money the state puts into Anglo Irish, the greater reduction they will demand in the size of the good bank to ensure it is not able to unfairly take business away from other Irish banks.

The spokesperson said they would not force Ireland to put more money in to save bond holders. “We have seen the consequences of the Lehman collapse, so there are systemic issues.”

The commission is also considering restructuring plans for AIB, submitted in November, and Bank of Ireland, submitted last September. They will add to their inquiry whether the haircut on the loans this week will require new capitalisation and what the consequences of this will be for the amount of aid and a return to viability.