Government to shore up banks

A €10bn initiative to shore up Ireland’s banking sector was underway today.

A €10bn initiative to shore up Ireland’s banking sector was underway today.

The Government announced the plans to recapitalise financial institutions last night to help ensure “the long term sustainability” of the republic’s banks and other lenders.

Funds will be available to firms such as AIB, Anglo-Irish, Irish Life & Permanent and Bank of Ireland, which owns the Bristol & West bank.

The scheme mirrors a larger version carried out by the British government in recent months to help shore up several UK banks’ balance sheets and boost their lending.

The Department of Finance said the state may use money from the National Pension Reserve Fund for the scheme. Existing shareholders and private investors will also contribute.

It is intended to help boost the flow of funds to the beleaguered economy and limit the impact of financial market turmoil on businesses and individuals.

Finance minister Brian Lenihan said the state was prepared to “deploy its wealth to secure the banking sector in the interests of the whole economy”.

“Some financial institutions are so embedded in our economy in terms of their borrowing and in terms of their deposits that they are of systemic importance to our economy,” he told RTÉ News.

“It’s very important that our banking system is seen to sustain our economy and support our economy.

“If capital is required to demonstrate that confidence, capital will be provided, but on strict terms and on terms that will ensure a full return to the tax payer and to the pension fund.

“There will be no exposure to the tax payer on this.”

Financial institutions, some of whose share prices have slumped markedly this year amid the global financial turmoil, are being asked to submit their proposals for the scheme by next month.

The Irish Business and Employers Confederation (IBEC) welcomed the recapitalisation announcement.

Turlough O’Sullivan, Ibec director general, said the banking sector was vital to business and the economy in general.

“The successful recapitalisation of the banks will ensure their long-term stability and have a positive impact on the ability of large and small businesses to acquire finance and trade successfully,” he said.

But opposition party Labour branded the government’s announcement a non-decision on recapitalisation.

Finance spokesman Joan Burton said setting a deadline of next month for proposals from the banks was just deferring action.

“What is it that the banks are going to be able to tell the minister in January that they cannot tell him now?” Ms Burton asked.

Ireland became one of the first countries to tackle the global credit crunch by unveiling a 480 billion-euro two-year bank guarantee scheme.

The scheme, hastily constructed in late September amid international banking turmoil, covers Irish-owned institutions: Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent and Permanent TSB, Irish Nationwide Building Society and the Educational Building Society.

Other banks later added to the scheme included Ulster Bank, First Active, Halifax Bank of Scotland, IIB Bank and Postbank, a joint venture between An Post and Fortis Bank.

Mr Lenihan initially said last month that he was reluctant to use public money to recapitalise the banking system.

But after a series of talks with banking chiefs Mr Lenihan said in certain circumstances it would be appropriate for the state, through the National Pensions Reserve Fund or otherwise, to consider supplementing private investment with state participation.

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