STATE INVESTMENT in the banks was "certainly the last option", Minister for Finance Brian Lenihan has said, but he has refused to rule it out, saying he would prefer if the banks raised it privately first.
Speaking after the Irish Banking Federation (IBF) national conference in Dublin, Mr Lenihan said the State bank guarantee scheme, which covers deposits and debts of up to €485 billion at 11 banks, "gives absolute comfort to investors".
He said: "We are implementing the scheme this week. Contracts will be signed by the financial institutions involved in the guarantee scheme and, at that stage, we will be in a much better position to assess what the actual real capital requirements are."
The Minister said that British Bankers' Association chief executive Angela Knight, a speaker at the conference, had expressed the view that the UK may have "gone too far" in providing state capital to some of the country's banks and that "a balance" had to be struck.
"The State would like, of course, the private sector to capitalise the banks in the first instance, but clearly, in a changing banking landscape, we have to keep the position under constant review."
Mr Lenihan told the conference that smaller EU countries had preferred to copy the Irish bank guarantee rather than invest capital into their banks, while larger countries chose to "pump massive amounts of money into the financial sector through capitalisation".
"It is noticeable that smaller countries liked the guarantee approach because there is less financial exposure and they don't have the huge capital reserves as states that allow them to invest in financial institutions on a grand scale," he said.
Bank shares slumped yesterday due to concerns that they would be forced to raise fresh capital from the State.
Bank of Ireland dropped 14 per cent to €1.65, falling to its lowest level since July 1994. The bank, which has fallen 84 per cent this year, is valued at €1.6 billion.
Anglo Irish Bank declined 13 per cent to €1.80, the bank's lowest price since November 2001.
AIB lost 8.8 per cent, while Irish Life Permanent fell 7.8 per cent.
Con Horan, prudential director at the Irish Financial Services Regulatory Authority, told the conference it was adopting a wait-and-see approach on whether the banks would need to raise extra capital as a buffer against unknown losses, following state investment in some UK banks. He said that "a new paradigm" had been created with state intervention in the banks.
"It remains to be seen what's going to happen. As some degree of calmness returns to markets, we'll have to see where things settle down. There are clearly decisions being made in haste now."
He said the regulator was working "very closely" with the financial institutions to ensure they were "properly providing" for losses on their loan portfolios.
He said that State investments in banks had "not been adopted universally across Europe so we have to see how that calms down".
Ms Knight said the UK government's decision to raise bank capital levels was to "bullet-proof" the banks to ensure they can "ride out the difficult time ahead". "We are in a flexible situation but the very fact that the capital hike was so high was making a real big statement to the market."
Speaking prior to the conference, ECB board member Jose Manuel Gonzalez-Paramo said the Irish bank guarantee complied with the EU approach for dealing with market turmoil. He told RTÉ that he believed the Irish authorities were watching to see if the banks needed capital injections.
"I am convinced that the authorities here are looking into it, are analysing the situation of banks and if they arrive to the conclusion that they should offer capital injections, they will do that," he said.
