The Government has agreed the recapitalisation terms to be offered to AIB and Bank of Ireland.

Read the full statement from the Department of Finance here

Finance Minister Brian Lenihan told a press conference tonight that the Government will provide €3.5 billion in Core Tier 1 capital for each bank. In return for this, the Minister will get preference shares with a fixed dividend of 8% payable in cash or ordinary shares.

The Minister can also appoint 25% of the directors to both banks, while he also gets 25% of total ordinary voting rights in respect of change of control and board appointments.

He said, however, that the state does not intend to take control of the banks.

The Government said the 'comprehensive' recapitalisation package will reinforce the stability of the country financial system, increase confidence in the banking system here, and facilitate the banks involved in lending to the economy.

Mr Lenihan said the recapitalisation programme will be funded from the National Pensions Reserve Fund. €4 billion will come from the Fund's current resources while €3 billion will be provided by means of a frontloading of the Exchequer contributions for 2009 and 2010.

He said the necessary amending legislation to the National Pensions Reserve Fund Act will be introduced shortly.

The Finance Minister said that the two recapitalised banks have reconfirmed a commitment to increase lending capacity to small and medium enterprises by 10% and to provide an additional 30% capacity for lending to first time buyers this year.

Compliance with this commitment will be monitored by the Financial Regulator.

A €100m environmental and clean energy innovation fund is also being established by each bank, while he said the banks have also agreed to each provide €15m to a new seed capital fund with Enterprise Ireland.

They have also committed to abide by prompt payment rules requiring payment within 30 days and an interest charge on late payments.

Code of practice to be published later this week

The Minister also said that the statutory codes of practice on business lending and mortgage arrears have been finalised and will be published by the Financial Regulator later this week.

The business lending code will require banks to offer annual review meetings, to inform customers of the basis for decisions made and to have written procedures for the proper handling of complaints.

Where a customer gets into difficulty the banks will seek to agree an approach to resolve problems and provide reasonable time and appropriate advice.

Under the mortgage arrears code where a borrower is in difficulty the lender will make every reasonable effort to agree an alternative repayment schedule and will not commence legal action for repossession until after six months from the time arrears first arise.

Both AIB and Bank of Ireland will not commence court proceedings for repossession of a home until after 12 months of arrears appearing, where the customer continues to cooperate reasonably and honestly with the bank.

The two banks have also assured the Government that in the normal course of events they will make every effort to avoid repossessions.

Bank bosses facing pay cuts

Mr Lenihan said that both AIB and Bank of Ireland accept that the pay of senior executives will be curtailed. He said that total remuneration for all senior executives will be reduced by at least 33%.

No performance bonuses will be paid for these senior executives and no salary increases will be made in relation to 2008 and 2009.

The two banks have also accepted that, for non-executive directors, fees will be reduced by at least 25%.

'The Government believes that pay restraint is important in the overall context of the economy and the supports being provided by the taxpayer, and will act accordingly,' he said.

Mr Lenihan also said that the Government is also in discussions with Irish Life and Permanent, EBS and Irish Nationwide Building Society concerning their respective capital positions and about the review of the guarantee scheme.

He added that Anglo Irish Bank, now under full public ownership, will continue to trade as a going concern.

Broad welcome for recapitalisation

Bank of Ireland said it welcomes the capital investment package announced tonight by the Government.

In a statement, the bank said the package of measures will enable Bank of Ireland to play a full role in supporting its customers and aiding economic recovery.

'Bank of Ireland's strengthened capital position provides the confidence that the bank has the resilience to withstand the impact of the deteriorating credit environment and to continue to support its customers through this economic downturn', the bank said.

The Irish Banking Federation also welcomed the actions taken by Government to provide stability and confidence to the banking sector.

IBF said it believes that the initiatives to recapitalise Ireland's two largest retail banks will underpin the wider economy at this critical time, provide confidence to the markets and promote Ireland's standing internationally.