Credit ratings agency Moody's has downgraded Bank of Ireland's senior bonds and its deposit rating over concerns that the bank may need to raise additional capital to cover potential bad debts.
In a statement, Moody's said the downgrade reflects its view that the provisions made by Bank of Ireland to account for losses on non-performing loans may prove inadequate.
Non-performing loans are those mortgages, personal and business loans where borrowers are not meeting repayment terms and which are unlikely to be paid back in full.
The provisions made so far, it said, "remain low by comparison with BOI's peers in Ireland and some other countries facing similar challenges such as Spain".
The statement also refers to the recent Balance Sheet Assessment by the Central Bank which also concluded that Bank of Ireland would need to make additional provisions.
Moody's said it "took some comfort" that the rate at which non-performing loans are building up is slowing. It also noted "some positive signs stemming from the return to growth in the Irish economy".
It said, however, that the bank is in a more vulnerable position to face the stress tests that will be conducted by the European Central Bank in 2014.
Should Bank of Ireland find itself being forced to raise new capital following the test, Moody's said it can not take for granted it will be able to source such funds easily despite recent success in raising money to buy back preference shares from the Government.