ECB, IMF endorse banking shake-up

Thursday 31 March 2011 21.17
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Michael Noonan - No losses for senior bondholders at big two banks
Michael Noonan - No losses for senior bondholders at big two banks
ECB reaction - Will continue to provide funding for banks
ECB reaction - Will continue to provide funding for banks

Finance Minister Michael Noonan has told the Dáil about Government plans for a restructured banking system. This is to be based on two universal, 'pillar' banks and a restructured Irish Life & Permanent.

Minister Noonan said the banking system needed to be restructured, and reduced to a size appropriate to the economy.

This evening, he told RTÉ's 6.1 News that the banks were being 'stuffed' with capital. He also said the ECB had ruled out imposing losses on senior bondholders in AIB and Bank of Ireland, but added that he would be 'back at the negotiating table' on the issue if Anglo Irish Bank needed more capital.

He added while there would be 'no formal structure', he believed medium and not short-term funding would be made available to the Irish banks via the ECB.

Mr Noonan was speaking after the results of stress tests were published by the Central Bank.

The European Central Bank has welcomed the stress tests carried out on the banks and the Irish Government’s commitment to inject €24 billion into them. It also welcomed moves to reduce the size of the banks.

‘This will substantially strengthen the banks and give them a sound capital basis,’ an ECB statement said. It added that, against this background, it would continue to provide liquidity to banks in Ireland.

The ECB also announced that it was loosening lending criteria for Ireland, saying that any debt instruments issued or guaranteed by the Irish Government would now be accepted as collateral in return for funding.

In a separate joint statement, the ECB, European Commission and IMF also welcomed the tests, saying they were ‘a major step’ towards restoring the banks to health. The three bodies also endorsed the Government’s plans for restructuring the banking system.

Two main 'pillars' in new structure

The first 'pillar' will be a restructured Bank of Ireland, while the operations of AIB and EBS will be combined to form a 'second pillar' bank. Irish Life & Permanent is to be restructured, with the state likely to take a majority stake. IL&P will also immediately start a process to sell its Irish Life Assurance business, as well as other non-banking assets.

Mr Noonan said what was left of IL&P would then trade as a small niche bank, as a deposit taker and mortgage giver. If successful in that form, it may continue, but he said it could be taken over by a larger entity.

The banks are to reorganise their operations into core and non-core assets, with the core parts designed to provide the economy with the credit and services it needs. The non-core assets will be run off over time.

Bank of Ireland will shed €30 billion of assets by 2013. It will mainly be a domestic bank, but will keep its operations in Northern Ireland and its Post Office business in the UK. Bank of Ireland's management is to be given until June to raise capital from private sources and reduce the State's need to invest.

AIB will retain its Northern Ireland business. It will shed €23 billion of assets by 2013. IL&P, which will also be split into a core and non-core business, will shed €10 billion of assets.

The restructuring plans are to be submitted to the European Commission for approval.

Minister Noonan said there should be 'no half-measures' in restructuring the banking system. He said there was no immediate need for additional money for Anglo Irish Bank nor Irish Nationwide. He assured bank depositors that their funds remained safe, and added that those with funds guaranteed by the State would continue to be protected.

The National Pensions Reserve Fund will provide €10 billion towards recapitalising banks, while a further €7 billion would come from Exchequer funds on deposit with the banks.

He said the Government would make 'very significant changes' in the boards of banks and their management structures. Minister Noonan said the banking expertise in the Department of Finance would also be strengthened.

The Central Bank's director of consumer protection Bernard Sheridan said there would not be any immediate change in how the banks dealt with their customers' accounts, and customers could continue to access banking services as normal.

No mention of ECB move - Lenihan

Fianna Fail's Brian Lenihan said today's stress test results came exactly a year after similar tests done by the Central Bank last year, and he hoped today's results would stand up.

The former Finance Minister noted that, despite reports that there was to be a new €60 billion medium-term facility in the ECB for Ireland, there was no mention of such a facility in today's announcements.

He also noted that the only burden-sharing that was happening was by the sub-ordinated bondholders. He said the question of senior debt-holders sharing the burden was not mentioned. But if the Minister was working on that in private, then he would respect that.

Sinn Féin's Pearse Doherty said today drew a line in the sand in relation to changing the EU/IMF deal - he said clearly there would be no change. He said the veil had been lifted and the Government's strategy was a continuation of the past government's strategy.

Deputy Doherty said it was within the minister's gift to apply burden-sharing to the senior bondholders, but the gamblers, not the people, would be paid by the State.#

Socialist TD Joe Higgins said the debt imposition on the Irish people would be unsustainable. He accused the Government of having capitulated to the financial markets, adding that the 'giant casinos of the markets' had won again.