SOME €35 BILLION of the €85 billion rescue fund is being used to bail out the banking system, with €10 billion being injected up front and the remaining €25 billion left in a contingency fund to be drawn upon if bank losses rise further.
The €10 billion for the immediate recapitalisation of the banks will bring their capital ratios up to the new international standards where the banks must hold €12 for every €100 on loan, up from €8 for every €100 on loan.
The upfront recapitalisation will bring the core tier one capital ratios – a closely-watched measure of a bank’s ability to absorb losses – to “at least 12 per cent”.
The €10 billion upfront investment will in turn be split between €8 billion in direct additional capital and €2 billion to be used to help the banks sell “non-core” assets to shrink their businesses and indirectly boost capital.
The €2 billion will be pledged to make up losses incurred by buyers of Irish bank assets – such as loan books – if they turn out to be worth less than is paid for them.
Further capital will be pumped into the banks in the first half of next year as needed following further “stringent” stress tests by the regulator, the Government said. The stress test will look at the worse case scenario for losses on the banks’ remaining assets.
This would be taken “step by step”, Taoiseach Brian Cowen said last night, and the banks would examine “whether they can source these funds themselves”.
Mr Cowen ruled out passing on any losses to the holders of senior bonds in the banks, saying that it would have a damaging effect on other European banks and across the EU banking system.
Legislation to share the burden of bank losses with subordinated bondholders – investors who lend to banks in return for a premium interest rate – can have “wider application,” said the Taoiseach.
The further recapitalisation announced last night amounts to the fourth bailout of the banks and the first with overseas state aid.
Mr Cowen conceded that this would lead to the State taking greater ownership of the banks.
“It will involve an increased level of public ownership of our banking system.”
The plan is aimed at rebuilding international market confidence in the banks so they can borrow in the bond markets and “reduce progressively” their reliance on central bank funding at home and from Europe and State support.
There would be a substantial downsizing of the banking system through early and decisive actions, the Government said.
This would be carried out in a carefully balanced and controlled manner. This would include the run down of non-core assets, the sale of assets on to investors through securitisation deals or the sale of portfolios or divisions.
This would be achieved through credit enhancements provided by the State if needed, the Government said. This would mean the Government agreeing loss-sharing measures and providing guarantees to potential purchasers to encourage the sale of the assets.
Reversing a Government decision last September, vulnerable land and development loans of less than €20 million at AIB and at Bank of Ireland will be moved to the National Asset Management Agency by the end of March.
The Government had decided to leave individual loans of less than €20 million owed by 650 small developers at the banks to speed up the transfers of loans to Nama.
The Government said the banks will be required to promptly and fully provide for all non-performing assets. The restructuring of Anglo Irish Bank and Irish Nationwide Building Society would be swiftly completed and submitted to the EU for approval.
