Government may recover some of the €65bn pumped into banking system

The Government has pumped just over €65bn into bailing out the banking system, and while there is no timeframe for the State’s withdrawal from the sector, there is the prospect that over time it may recover some of its capital investment.

The State now owns AIB, Permanent TSB, Irish Life, the IBRC, and 15% of Bank of Ireland, although it has received €4.3bn from the banks in the form of dividends and fees from the Eligible Liability Guarantee scheme.

There are plans to sell Irish Life once market conditions return to normal.

According to the Central Bank’s last Prudential Capital Assessment Review in Mar 2011, the banks are expected to incur net losses of between €19bn and €27bn between 2011 and 2013 through the sale of assets and normal course of business losses.

These losses were consistent with tier one capital of between €13.7bn and €21.4bn that the banks will be holding in 2013.

The Comptroller & Auditor General noted that the Central Bank had agreed as part of the EU/IMF programme to review the banks at the end of this year to see how the losses compare with the original Prudential Capital review of the sector. The assessment will be published.

Under the terms of the bailout programme, all the covered banks are required to bring their loan to deposit ratios down to 122.5% by Dec 2013.

Bank of Ireland and AIB were both on course to meet their targets. Permanent TSB had not met its deleveraging target by the end of 2011 because of the delayed sale of Irish Life.

Deleveraging can be achieved either through an increase in deposits or the sale of loan books.

The C&AG acknow-ledged the IMF’s concerns that if the deleveraging process happened too quickly then it would constrain the supply of credit to the economy. In response to these concerns, the IMF/EU were taking measures to avoid the firesale of assets and excessive deleveraging, particularly through broadening the funding base.

The State is responsible for insurance companies that have gone into liquidation or admin-istration through the Insurance Compensation Fund. Estimates for the full liability of Quinn Insurance were revised up from an initial forecast of €775m to €1.65bn.

There is not enough capital in the fund to cover these losses, so the Government had to apply a 2% levy on gross premiums of all insurance policies at the start of the year to recapitalise the fund.

The Credit Review Office had been set up to ensure that the covered banks complied with their €3.5bn lending targets to the SME sector. In the 197 cases referred to the office between Mar 2010 and Mar 2012, it made 117 judgments and found against the banks in 59% of the cases.

There had been a complete reorganisation of the State’s management of the sector through the establishment of a banking unit within the Department of Finance.

However, each bank will continue to operate at arm’s length from the State with independent management teams that will make commercial and strategic decisions.