THE GOVERNMENT will inject up to €7.5 billion into the State's three main banks - Allied Irish Banks, Bank of Ireland and Anglo Irish Bank - under plans announced last night to recapitalise the banks.
The Government is effectively taking over Anglo Irish with an investment of €1.5 billion for a 75 per cent control of the bank, while it is investing €2 billion each in AIB and Bank of Ireland (BoI).
In return for its investments in AIB and BoI, the Government will have a 25 per cent say in "key issues" at the banks, including the power to appoint two more directors to their boards in addition to the two board members appointed under the bank guarantee scheme.
The State's investment could rise to €7.5 billion, as the Government will underwrite the issue of further shares, and both AIB and BoI have "indicated an interest" in the State underwriting up to €1 billion worth of new shares at each bank.
This means the Government will acquire any new shares issued that are not taken by private investors.
Minister for Finance Brian Lenihan said it would be "a very important test for the banks" to show they can raise cash privately.
Asked if up to €7.5 billion would be enough to cover higher loan losses at the banks, Mr Lenihan said: "The investment reflects our assessment of what is required to meet the challenges they face."
The Government said that AIB and BoI had "indicated an interest" in raising cash from shareholders through State-guaranteed rights issues, contrary to AIB's stated position that it would not seek to raise external capital.
Department of Finance officials said the State could earn an annual return of €470 million from its investments in the banks.
Anglo Irish is being charged 10 per cent a year interest by the State, reflecting the higher risks posed by the bank, while AIB and BoI are each being charged 8 per cent a year interest. This is less than the 12 per cent the UK government charged its banks under a similar rescue scheme. Mr Lenihan said he "didn't want to charge too high a price to restrict lending".
Anglo Irish's shareholders must agree to the recapitalisation plan at an extraordinary general meeting expected in mid-January.
The Government said there was "a substantial pool of additional capital available" to underwrite and support the further raising of capital at the banks and that it would provide more capital to Anglo Irish "if required so that it remains a sound and viable institution". The Minister said Anglo had been taken into "majority State ownership" as the bank's prospects of raising money privately from investors was "poor" given its low stock market value.
The three banks can redeem the preference shares, which the Government is taking, within five years at the price they were issued or at 125 per cent of the issue price after five years. This is to incentivise the banks to repay the State within five years. By taking preference shares in the banks, the Government will receive annual dividend payments ahead of ordinary shareholders whose interests will not be diluted.
The Minister also announced that the banks would provide 30 per cent more in mortgages to first-time buyers and 10 per cent more in loans to small businesses. The banks will also help struggling mortgage holders by waiting at least six months from the time they fall behind on repayments before they take legal action.
Mr Lenihan refused to comment on the Financial Regulator's handling of the Seán FitzPatrick loan controversy and in particular the point at which Pat Neary, the chief executive of the regulator, became aware that the former Anglo Irish chairman had hidden €87 million worth of loans from the bank.
The regulator's staff uncovered the loans last January but three top officials in the Financial Regulator's office, including Mr Neary, have given different versions of whether or not Mr Neary was informed at the the time.
Mr Lenihan said he learned after last Thursday's Dáil debate on the banks that "at some level within the regulator's structure there had already been an awareness of the particular role of Mr FitzPatrick - that is a very, very serious matter".
"I am not aware whether Mr Neary knew, or not, but, again, there are different versions of events," said Mr Lenihan.
The board of the Irish Financial Services Regulatory Authority decided on Saturday to set up an inquiry into its handling of the Anglo loans controversy. It will be headed by board member Dermot Quigley, a former head of the Revenue Commissioners. A spokesman for the authority had no comment yesterday when asked if Mr Neary personally knew about the loans since January of last year, when officials from his office first learned of the matter.
It was announced yesterday that a subcommittee of Anglo Irish's board chaired by another former chairman of the Revenue, Frank Daly, is to conduct an inquiry into loans at the bank.