€12bn cash injection mooted for Irish banks
By Sharlene Goff, Retail Banking Correspondent
Published: November 24 2010 22:56 | Last updated: November 24 2010 22:56
Ireland’s three largest banks could receive an immediate cash injection of about €12bn (£10bn) from the government and be given access to a much larger pool of rescue funds, as they grapple to meet the tough new capital requirements that are expected to form part of Ireland’s bail-out package.
European authorities are still thrashing out the details of how much capital would be needed to lift the banks’ core tier one capital ratios to 12 per cent – the likely new level under the terms of the rescue package.
The capital injection could push the Irish government’s stake in Bank of Ireland up from 36 per cent to more than 80 per cent and effectively nationalise AIB.
The big banks will have a large safety net of contingent capital to fall back on should further losses on loans push their core Tier 1 capital levels below a minimum of 10.5 per cent.
The measures – together with a tough programme of forced asset sales – will form a three-pronged approach to recapitalise the banks, ensure there is sufficient capital to absorb future losses and shrink their balance sheets.
While the Irish government is thought to be reluctant to set a ceiling on how much of the expected €85bn of rescue funds could be used to cover future losses at the banks, analysts believe further writedowns may not be as severe as feared. Once the transfer of commercial loans to Nama, Ireland’s “bad bank”, has been completed, domestic Irish lenders would hold about €300m of gross loans.
While average writedowns on Nama loans have been more than 50 per cent, one analyst expected losses on the remaining loans – which include mortgages and corporate lending – to be much less.
A bigger problem could be finding buyers for the banks’ assets to enable them to shrink their balance sheets. As a condition of the bail-out they are expected to have to scale down their loan-to-deposit ratios from about 150-160 per cent to 110-120 per cent.
As they have already sold subsidiary businesses, the banks will now have to take the axe to their principal loan books. The government is expected to offer buyers some insurance to cover future losses on loans and may look to strip out the most toxic loans from saleable businesses such as AIB’s UK arm to encourage buyers.
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