Ireland's government said Tuesday it will help banks raise nearly 22 billion euros ($30 billion), much of it from taxpayers, to meet stiff new capital requirements that are part of a plan to resolve the nation's banking crisis.
Finance Minister Brian Lenihan also announced terms for the first tranche of transfers of bad loans, around 16 billion euros ($21.5 billion) worth, to the new "bad bank" — the National Asset Management Agency.
Discounts, or "haircuts," on the valuation of those loans — ranging from 35 percent for Bank of Ireland to 58 percent for Irish National Building Society — will force the banks to write down billions of losses, Lenihan said.
"The banks will now have to recognize these losses upfront," Lenihan said.
Bank of Ireland and Allied Irish Bank are both due to report their 2009 earnings this week.
"We now have a clear path to saving the banking system," Lenihan said.
The state already has a 16 percent stake in Bank of Ireland and a 25 percent indirect stake in Allied Irish, and it was unclear how large the stakes might grow.
Before Lenihan revealed his plans to the Dail, the Irish parliament, the Financial Regulator announced that by the end of the year, banks must reach a level of 8 percent tier 1 capital, of which 7 percent must be equity.
The 8 percent target matches the rule in Britain, but it requires only 4 percent equity capital.
The government's plans are subject to approval by the European Commission, Lenihan said.
Bank of Ireland must raise 2.7 billion euros, and might be able to raise it privately, Lenihan said. The state will convert preference shares to ordinary shares, but he did not indicate how large a stake the government would hold in the bank.
Allied Irish Bank, which needs 7.4 billion euros in new capital, was ordered to sell assets in the U.S., where it offers services to nonprofit institutions; in Britain where it offers a full range of banking services, and in Poland, where it owns Bank Zachodni WBK.
The state will put 8.3 billion euros into Anglo Irish Bank, in the form of long-term promissory notes, but another 10 billion euros may be required, Lenihan said.
Winding up Anglo Irish, which is already fully nationalized, would cost up to 70 billion euros and is not an option, Lenihan said.
"I understand why many want us to close this bank. I understand the impulse to obliterate it from the system," Lenihan said.
However, he said Anglo Irish might be able to return to private ownership in five to seven years.
The state will inject 2.7 billion euros into Irish Nationwide Building Society, and 100 million euros into EBS Building Society.
The 16 billion euros in bad loans being transferred represents about a fifth of the total, Lenihan said.
Anlgo Irish has about 36 billion euros worth of eligible bad loans, Allied Irish as 23 billion euros and Bank of Ireland 12 billion euros.
Allied Irish shares fell 8.8 percent on Tuesday and Bank of Ireland shares were down 2.8 percent.
Ireland's banking crisis has been marked by resignations of several senior executives, state investments of billions to shore up the industry and, earlier this month, the arrest of Anglo Irish Banks' former chief executive, Sean FitzPatrick, and former finance director William McAteer. Both were quickly released and the investigation continues.
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