Government's €17.5bn bank injection gets Commission approval

THE EUROPEAN Commission yesterday gave the Government the green light to inject emergency funds of up to €17.5 billion in capital into Anglo Irish Bank, Irish Nationwide Building Society and Allied Irish Banks to help the companies meet new capital ratios set by the Central Bank on September 30th.

The commission has approved an injection of €4.946 billion into Anglo Irish Bank, which will take the total amount of State aid to the nationalised institution to €29.3 billion.

A capital injection of €2.7 billion has been approved for Irish Nationwide, taking its total bailout from taxpayers to €5.4 billion. The building society is expected to sign the documentation today to allow the release of the funds.

The commission said yesterday that both Anglo and Irish Nationwide would have to submit their plans to restructure their activities early in 2011.

AIB, meanwhile, has been approved for a recapitalisation of up to €9.8 billion. This comprises an injection of €3.7 billion by the end of this year to allow it meet a Core Tier 1 ratio of 8 per cent set by the Central Bank.

This will be funded by the National Pensions Reserve Fund (NPRF). This is separate to the €17.5 billion that the NPRF will inject into the main Irish banks as part of the bailout agreed with the International Monetary Fund and the EU.

The Government has also been cleared to pump an additional €6.1 billion to meet its 12 per cent Core Tier 1 ratio set by the Central Bank for the end of February.

The commission said a final decision on AIB was dependent on it being satisfied that the bank would be “commercially viable” in the long term without further injections of taxpayers’ money. It also indicated that there would have to be a “significant contribution” made by the bank’s shareholders and subordinated debt holders to the restructuring costs.

AIB is also expected to reduce its activities to offset the “distortion of competition caused by the aid”.

It now remains to be seen how the Government will proceed with a recapitalisation of AIB. The President’s decision yesterday to sign off the Credit Institutions (Stabilisation) Bill, which gives the Minister for Finance sweeping emergency powers to intervene in the banking sector, opens the door for the Government to delist AIB from the stock market and fully nationalise the company.

Under this scenario, it is not clear if shareholders would be asked to contribute to any capital raising by AIB. But talks with subordinated bond holders on renegotiating their debt downwards are set to take place.

AIB will be required to submit a new business plan to the commission in the new year.

The commission said the new financial aid for the three financial institutions was “indispensable to remedy the banks’ financial difficulties and maintain confidence in the Irish financial markets”.

It said approval of these emergency measures did not “prejudge” future decisions on restructuring for AIB or a “resolution” to Anglo Irish and Irish Nationwide.

Commission vice-president for competition Joaquín Almunia said: “There is no doubt that the Irish banking sector is experiencing profound difficulties at the moment. The measures approved by the commission today for Anglo Irish Bank, INBS and Allied Irish Bank are necessary to ensure that these institutions meet their respective obligations and will help to preserve financial stability in Ireland.”