THE GOVERNMENT is in discussions with a number of international private investors about injecting fresh capital into Irish banks as the share price of a second bank, Anglo Irish Bank, collapsed to below the €1 mark.
Anglo dropped 25 per cent to 83 cent, its lowest price in a decade.
Several private equity firms, including multi-billion dollar US company JC Flowers, which has a track record of investing in distressed banks, have been in contact with the Government about the possibility of buying into a bank.
Taoiseach Brian Cowen told the Dáil that investing cash in the banks was not the only solution and that the Government was considering all options. The Government is thought to be close to a decision on recapitalising the banks, which will pump more cash into the institutions.
Minister for Finance Brian Lenihan held meetings with the Financial Regulator and the Central Bank last night.
The Government is open to a private investment in an Irish bank in tandem with a State cash injection. However, it is likely to insist on bank mergers as a condition of any State investment in a bid to strengthen the sector further.
Shares in AIB fell 17.7 per cent to €2.18 as the State's biggest bank and Bank of Ireland were placed on review for possible downgrade in their credit ratings - a measure of financial strength - over concerns about their loans to builders. Bank of Ireland rallied 12 per cent from a 17-year low on Monday.
As Anglo and AIB fell sharply, Opposition parties claimed small businesses were being starved of credit and called on immediate action to avoid job losses.
Mr Cowen said the Government was examining whether the banks needed capital and refused to rule out recapitalisation as an option.
"The Government is at an advanced stage on all of these matters. There are commercially sensitive matters. I am constrained in terms of what I can say at this particular time," Mr Cowen said.
"But the Government is looking at all options and seeking to ensure we come up with a situation where lines of credit remain available to Irish business going forward.
"The idea that bank recapitalisation is the solution to that problem is not the full picture."
The six Irish-owned banks and building societies have until tomorrow to submit revised business plans under the guarantee.
One senior banker said recapitalisation would not necessarily lead to a greater flow of credit to cash-starved businesses, as banks would still reduce lending in a bid to ease their reliance on the turbulent wholesale funding markets.
An investment by JC Flowers in Bank of Ireland is considered possible, though contacts with Government have been described as tentative. The Government has received other approaches from Europe and the Middle East about private investments in the banks.
New York investment bank Sandler O'Neill has been involved in one approach to the Government.
The withdrawal of the US plan to buy "toxic" assets from American banks has prompted private equity firms to look overseas for alternative deals. A Department of Finance spokesman declined to comment.
Fresh capital would strengthen the banks ability to absorb projected higher losses in the coming years.
AIB, Bank of Ireland and Anglo will need to raise between €3 billion and €13 billion in capital, depending on the capital benchmarks applied to the banks. Goodbody Stockbrokers estimated that bad debt losses at AIB, Bank of Ireland and Anglo would total €19 billion in a four-year cycle until 2012, though profits would absorb most of these losses.