€10 billion Irish bank recapitalisation

Why does it feel like Ireland will be seeking IMF assistance within 12 months? This strikes me as a very cack-handed response…

The Government have just put a statement up on the Department of Finance website. Serious stuff.

The Government has today decided on an approach to the recapitalisation of credit institutions. The Government’s objective is to ensure the long-term sustainability of the banking sector in Ireland and to underpin its contribution through the availability of credit to individuals and businesses in the real economy. This initiative will help to foster and encourage the flow of funds to the economy, and limit the impact of financial market difficulties on businesses and individuals.

The Government noted that recapitalisation is recognised by the European Commission as one of the key measures that may be used by Member States to preserve stability and proper functioning of financial markets, and that it believes that in current market conditions even fundamentally sound banks may require additional capital to respond to widespread market perception that higher capital ratios are appropriate for the sector internationally.

The Government decision followed the Minister for Finance’s statement of 28 November 2008 which confirmed the State’s willingness to supplement and encourage private investment in the recapitalisation of credit institutions in Ireland with State participation.

In that context, the Government has decided either through the National Pensions Reserve Fund or otherwise and subject to terms and conditions, to support, alongside existing shareholders and private investors, a recapitalisation programme for credit institutions in Ireland of up to €10 billion.

The State’s investment may take the form of preference shares and/or ordinary shares and the State may where appropriate participate on an underwriting basis. In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government.

A key principle in the operation of such a fund will be to secure the interests of the taxpayers through an appropriate return on, and appropriate terms for, the investment.

The next step in this process will be for the Minister for Finance to initiate detailed engagement with the credit institutions themselves in respect of specific proposals.

In order to safeguard fully the interests of the taxpayer, State investment will be assessed on a case-by-case basis in an objective and non-discriminatory manner, having regard to the systemic importance of the institution, the importance of maintaining the stability of the financial system in the State, and the most effective and economical use of resources available to the State and each credit institution’s particular requirement for capital. Any State investment will be undertaken in line with best practice in the EU and elsewhere and consistent with EU State aid rules and in particular the recent European Commission communication on recapitalisation.

Recapitalised institutions may be required to comply with such requirements as to transparency and commercial conduct as the Minister sees fit.

The National Pensions Reserve Fund Act, 2000 will be amended, as necessary.

Discussions with the relevant credit institutions are ongoing, and the institutions continue to progress proposals for private investment. Institutions are being asked to submit their proposals by early January.

The Government guarantee Scheme remains in place.

You really have to wonder what on earth the people in the Department of Finance are thinking. This strikes me as extremely poorly thought out, and smacks of interference from the banks themselves. Brian Lenihan should resign. (I call for these things an awful lot, don’t I?) And does anyone remember the only recent announcements that Irish banks were well capitalised? Or that PwC report that said they were well capitalised?

RTE link.

7 Responses to “€10 billion Irish bank recapitalisation”

  1. markham says:

    Did Lehmans not claim to be well capitalised just days before they crumbled?

  2. Gavin Sheridan says:

    I guess the difference here is that it is not just the banks who were saying they are well capitalised, but the Government (after looking at the books via PwC) also said the banks were fine. Perhaps this is lying to prevent a run…

    ..but was it not clear that banks were fiddling with their balance sheets to make it look as if they weren’t in quite the hole some claimed?

  3. Ciarán says:

    Gavin: I have a fair sense of what my problem is with this but I’m not sure what yours is. Currently my gripe goes along the kneejerk lines of: these bastards have been bailed out at least once a decade by the taxpayer and yet they – and their friends in government – insist upon lecturing us about free markets when the benefits run their way. I’m sure I’ll come up with something more nuanced eventually. It’ll probably include a sense of wonder that we’ve just sunk our pension fund into an industry on the grounds that it is failing. Great stewardship.

    If your gripe is that the banks must have been fiddling their balance sheets, I’m not sure you’re necessarily right. I can imagine three ways in which this wouldn’t be true: first the crisis hit so fast that balance sheets went screwy between quarterly or annual financial returns. Second, the balance sheets aren’t bad right now, but the gov’t and banks (and ex-shareholders) can see where things are headed. Third, there isn’t a crisis on this scale but the banks have so captured government that they got the loot on the justification that everyone else in Europe is getting something. In any of these senses, you can have the solution without the fiddle.

  4. Gavin Sheridan says:

    On the first point I agree… the ties between politicians and bankers in this country is entirely too close. And none of those bankers are willing to lose their jobs by being sacked by their new Government bosses, or by resignation.

    On the second point. We just has a massive asset bubble. The banks lent money and got themselves into a massive hole. Some banks were more careless than others (Anglo comes to mind)… whatever about balance sheets being ok right now, it is clear that they won’t be… thanks to the bubble deflating. Along with SOME of the views of Schiff et al, i think Anglo should fail.

    I think there is a serious crisis, and the banks seem to be in denial that they could have gotten it seriously wrong, or that they the value of the assets they lent money for developers to buy is going to be worth less than 50% of what they paid.

  5. “I think there is a serious crisis, and the banks seem to be in denial that they could have gotten it seriously wrong, or that they the value of the assets they lent money for developers to buy is going to be worth less than 50% of what they paid.”
    If one writes down assets by 50% will somebody with a head for figures tell us where that leaves the banks?
    This exercise may not be possible until the banks come clean;their books are opened ;and the loans are balanced against the original valuations.
    50% may be an accurate estimate given the current global downward economic spiral.
    Will 10 or 20 billion be enough?

  6. Gavin Sheridan says:

    If you take 2005/2006 prices in particular, we should be looking at 50% off or more… I don’t have a head for figures, but I believe it leaves some banks up shit creek without a paddle.

  7. v2020 says:

    We need to know that this money is going to be lent to companies who have a chance to survive, who will grow, who will retain and increase employment, who will pay more taxes, companies that will keep Ireland afloat.