Banks get €8bn boost for reserves

A TOTAL of €8 billion is to be pumped into Irish banks to boost their capital reserves resulting in the state becoming the largest shareholders in the country’s major financial institutions.

The state will own close to 98% of Allied Irish Bank (AIB), and between 70% and 80% of Bank of Ireland (BoI) at the end of this latest refinancing exercise. This will see a total of €89bn in bad loans transferred to NAMA and an extra €13bn in capital raising by the banks. AIB has to raise €9.765bn of Core Tier 1 capital and BoI an additional €2.199bn by end-February 2011 under new requirements from the Central Bank.

In a reversal of policy as much as €16bn in non-performing development loans valued up to €20 million each will be transferred to NAMA. This will require special post-election legislation to permit the transfer of the 3,000 individual loans involved on a block by block basis as necessary to the “bad bank”.

The increased cost of funds to the banks is almost certain to result in an increase in the cost of borrowing to Irish Bank customers according to the Trinity College associate professor of economics Antoin Murphy.

As a result of the joint EU-IMF emergency funding programme for Ireland the Government is committed to introducing “a special legislative regime to resolve distressed credit institutions will be introduced early in 2011”.

And the banks will be required to “promptly and fully provide for all non-performing assets”.

Taoiseach Brian Cowen said there will be a substantial downsizing of the banking system which will be achieved through early and decisive actions including:

* Selling-off non-core assets and investment portfolios.

* NAMA taking the remaining vulnerable land and development loans from BoI and AIB by April 2011.

* The swift completion, for EU state aid approval, of the restructuring of Anglo Irish Bank and Irish Nationwide Building Society.

Some €2bn has been set aside for capital enhancement guarantees to ensure that there will be no fire-sales of non-core assets by the banks and that full value can be achieved when these are sold on.

The Government also revealed last night that a significant strengthening of the regulation and stability of the credit union sector will be carried out by end-2011 and that specific legislation to support immediate restructuring actions is in preparation.

The Taoiseach said the outcome will lead to a smaller banking system more proportionate to the size of the economy, capitalised to the highest international standards, with renewed access to normal market sources of funding and focused on strongly supporting the recovery of the economy.

The Central Bank’s head of financial regulation, Matthew Elderfield, said the measures provide significant strengthening of the capital position of the Irish banking sector and mean considerable contingent capital facilities are also in place as a further backstop for the banks.

“Similarly, the programme of deleveraging that is being accelerated will ensure the banking system is smaller and fitter, with better compliance with international liquidity standards. These actions will result in a stronger and more stable banking system for the benefit of depositors and investors.”