The Government has rejected Anglo Irish Bank management's plan to split the bank into a good bank and bad bank, but has decided on a variation of that proposal.
The Government is to divide Anglo into a funding bank and an asset recovery bank. Current depositors will become customers of the funding bank, which will continue as a regulated bank. It will also be able to take new deposits, but will not be giving out any loans.
The asset recovery bank will eventually be sold or partly sold or its assets will be run off over a period of time.
It is understood the funding bank will remain in existence only until the asset recovery bank has finished its work. Sources have indicated that this could possibly take 10 years, although the Government has not set a firm timetable.
The funding bank will earn money by buying bonds from the asset recovery bank. These bonds will pay interest. The funding bank will also receive the interest from the bonds issued to Anglo by NAMA.
Finality needed, says Lenihan
The statement from the Department of Finance came after Finance Minister Brian Lenihan earlier briefed the Cabinet on the options for Anglo's future. He said it was essential to bring finality to the Anglo problem to promote confidence and stability in the financial system.
Anglo's board had preferred a split into an asset management company and a new good bank. Under this plan, the asset management company would have managed out over time the bank's lower quality assets remaining after the transfers to NAMA. The new good bank would have managed the remaining loans, retained the bank's deposits and sought new lending opportunities.
The Finance Minister said he acknowledged the good faith and hard work of the board in producing a 'credible proposal' for the future of the bank. But he said the Government had concluded that the Anglo plan in its current form 'does not now provide the most viable and sustainable solution to ensure the continued stability of the Irish banking system'.
A formal detailed plan based on today's decision is being prepared to be submitted to the European Commission for approval. The Central Bank will also decide by October on how much finding the two new entities will need. The Government said it was essential to identify the final cost of restructuring Anglo with as much certainty as possible.
Anglo Irish Bank said it welcomed the certainty brought by today's decision. The bank pledged to implement the new plan, saying it would work closely with the Government and other state agencies to deliver the detailed proposals the European Commission.
Anglo also said the funding bank 'would focus on maintaining a viable funding base in support of the recovery bank's needs'.
Taoiseach Brian Cowen said the final bill for Anglo should be known by the end of October after detailed work by the Financial Regulator Matthew Elderfield. Speaking on 6.1 News,
Mr Cowen described today's announcement as a 'strategic decision', but would not be drawn on the overall cost to the taxpayer, which management at the bank has estimated at €25 billion. Mr Cowen said he felt there had been too many numbers bandied about and this was not helpful.
A spokesperson for the National Treasury Management Agency described today's announcement as 'a significant step forward'. The spokesperson said markets would appreciate the increased clarity on the future of Anglo Irish Bank 'and the fact that its final capital requirement will be determined by the Central Bank within weeks'.
Announcement not enough - opposition
Fine Gael's finance spokesman Michael Noonan has described the Government's plan for Anglo as a fudge that will save the taxpayer nothing. He added that it would not bring certainty to the markets.
Mr Noonan questioned how the balance sheet of the funding bank would be backed, and suggested the net cost of the Government plan could be up to €30 billion.
Labour's finance spokesperson Joan Burton said the Government announcement had left a whole series of questions unanswered. She described the Minister's statement as 'unclear and ambiguous'.
'It fails to draw a line under Anglo's mounting losses and does not do enough to dispel the uncertainty hanging over Ireland's public finances,' said Deputy Burton.
She called for more clarity on how the funding bank would work, and asked if existing subordinated bondholders would be made to share some of the burden.
The European Commission said it welcomed the latest proposal, but further clarifications were needed before a final decision could be taken.
In a statement, the EU Competition Commissioner Joaquin Almunia said he viewed the new option positively, as it would deal better with the distortions of competition.
Chris Pryce of credit rating agency Fitch said the announcement was what had been expected. 'It means Ireland will effectively have one bank fewer, which is no bad thing,' said Mr Pryce. 'I don't think it will make much difference because it had been broadly anticipated by the markets.'
He said the move would take things a little closer to some sort of certainty over the future of Anglo Irish Bank.
