The Minister for Finance Mr Brian Lenihan announced early Thursday morning that the Government will recapitalise Ireland’s two largest banks, Allied Irish Bank and Bank of Ireland, by a combined figure of 7 billion Euro.
It was hoped that this injection would jump start the economy, however, shortly after the announcement, Bank of Ireland declared that in a worst case scenario their estimated 3 billion Euro bad loans could double and they would therefore need an extra 3 billion Euro added to the current 3.5 billion Euro that they will receive in the recapitalisation process.
According to a government spokesperson “In view of the continuing turmoil in global financial markets, the Government initiated further intensive discussions with Allied Irish Bank and Bank of Ireland with a view to securing the position of these two banks.”
In light of these talks the Government has come up with “a comprehensive recapitalisation package which will reinforce the stability of our financial system, increase confidence in the banking system here, and facilitate the banks involved in lending to the economy.”
The Minister said “The State does not intend to take control of these banks.” After the recapitalisation process the Irish Government will not hold ordinary shares in either bank but will have the option in five years time to buy shares in the two main banks at a “predetermined strike price.” This will produce “significant returns” for the Government if bank share prices rise even close to their previous values.
The recapitalisation package was recommended to the Minister by the Governor of The Central Bank, the Financial Regulator, his financial advisers and the National Treasury Management Agency. According to a statement from the Government “The recapitalisation package is subject to regulatory approval and the approval of the ordinary shareholders at general meetings which will be convened without delay.”
The proposals announced to recapitalise the Irish banking system are also subject to European Union State aid approval.
Other Irish Financial institutes such as Irish Life and Permanent, Education Building Society and Irish Nationwide Building Society have been waiting on the Government’s proposals with respect to AIB and BOI before proceeding with their futures plans.
Anglo Irish Bank, Ireland’s third largest lending institute, is now under full public ownership.
The Opposition Parties’ Reaction
Many of the opposition leaders are critical of the Government’s announcement.
“The Government’s recapitalisation plans may leave taxpayers’ dangerously exposed to massive bad debts and the Government should urgently consider other options, including the creation of brand new ‘good banks’ with clean balance sheets,” said Fine Gael Deputy Leader & Finance Spokesman Richard Bruton TD.
“On virtually all the crucial issues it appears that, yet again, the banks have been allowed to dictate the terms.”
Mr Bruton also noted “It is also disappointing that the Government has apparently backed down in the face of pressure from the banks and that only a 12 month, conditional moratorium will be applied to repossession orders on the family home.”
“This approach has not been successful in kick-starting lending in other economies,” concluded Mr Bruton.
Small Business and First Time Buyers
Allied Irish Bank and Bank of Ireland have reiterated their December commitment to increase lending to small and medium sized enterprises by 10 per cent and to provide 30 per cent more funds for first time buyers.
The banks say they are committed to “public campaigns to actively promote their lending to these sectors.”
Ulster Bank has introduced a novel product called “Secure Step Mortgage” which will guarantee customers protection against falling house prices in the first five years after purchase.
Codes of Practice
New statutory codes of practice on business lending and mortgage arrears will be published by the Financial Regulator this week. Banks will be required to offer assistance to both small business and personal borrowers if they get into financial difficulty.
Under the mortgage arrears code where a borrower is in difficulty, the lender will now have to agree an alternative repayment schedule and will not commence legal action for repossession until after six months from the time arrears first arise.
Recapitalisation Package
The Government aim to provide 3.5 billion Euro in Core Tier 1 capital for each bank. In return for this investment the banks will provide preference shares with a fixed dividend of 8 per cent, payable in cash or ordinary shares in lieu. These shares can be repurchased by the banks for the issued price in the first five years and there after at 125% of face value.
The minister for finance will be in a position to appoint up to twenty five per cent of the directors to both banks, but this is not a requirement. He also has a twenty five per cent of ordinary voting rights with respect to changing board appointments.
Warrants attached to the Preference Shares give an option to purchase up to twenty per cent of the ordinary share capital of each bank existing on the date of issue of the New Preference Shares.
The recapitalisation programme will be funded from the National Pensions Reserve Fund, which the Government are planning on topping up with a pension levy.
Four billion Euro will come from the Fund’s current resources while 3 billion Euro will be provided by means of a front loading of the Exchequer contributions for 2009 and 2010. The necessary amending legislation to the National Pensions Reserve Fund Act will be introduced shortly.
