The Minister for Finance Brian Lenihan said today that the nationalised Anglo Irish Bank is to be spilt into a Funding Bank for deposits and an Asset Recovery Bank to recover loans.

Lenihan said today he briefed his Government colleagues on the strategic options for the future of Anglo Irish Bank. The Minister conveyed to the Government the views of the board of Anglo Irish Bank, the Central Bank, the National Treasury Management Agency, the Department of Finance, the EU Commission and his own assessment of the position.

The minimum cost of State support so far for the former builders' bank is €25bn. 

State-owned Anglo on Aug 31st, announced a stunning loss of €8.2bn loss in H1 2010. This compares with red ink of €4.1bn in the same period last year and the bank has set the ignominious record for an Irish corporate loss in a six-month period. Last March, the former builders' bank announced a loss of €12.7bn for the 15-month period to the end of 2009 after writing off €15.1bn on loans and investments. It had previously announced a loss of €4.1bn for the six months to the end of March 2009.

The Government decided that Anglo Irish Bank will be split into a Funding Bank and an Asset Recovery Bank. Anglo Irish Bank has not expanded its loan book since it was nationalised in early 2009 and this will remain the case. It is intended that in due course the Recovery Bank will be sold in whole or in part or that its assets will be run off over a period of time.

The guaranteed position of depositors will be unchanged by the new arrangements and no action is required of them as a result of today’s announcement. The depositors will become customers of the Funding Bank which will be fully capitalized and continue as a regulated bank.

Lenihan said in order to restore the reputation of the Irish Financial System it is essential to bring finality to the problem of Anglo Irish Bank - - "our most distressed institution".

The Minister said the Government’s primary objective in dealing with Anglo Irish Bank has been to minimise the cost of this distressed bank to the Irish taxpayer.  The board of Anglo Irish Bank submitted its preferred option to the Minister and to the European Commission at the end of May for consideration under State Aid rules. The board’s plan envisaged splitting the bank into an asset management company and a new good bank. 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 share of the loan book, retained the bank’s deposit funding and sought new lending opportunities to grow the bank.

The Minister said he acknowledges the good faith and hard work of the board in producing a credible proposal for the future of the bank. However, the Government has concluded that this 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.

Resolution Proposal

In these circumstances, the Government has decided to opt for a variation of the board’s restructuring proposal. The Government’s decision does not affect existing guarantee arrangements.

Under the restructuring plan, the Funding Bank will be a Government-backed/guaranteed specialist deposit bank which will contain the bank’s deposit book. It will be a stand-alone, regulated bank, completely separated from Anglo’s loan assets and it will be owned directly by the Minister for Finance. This bank will not engage in any lending, but will provide a secure home for Anglo’s depositors and any new customers who wish to deposit their funds with it. Depositors with the Funding Bank will be completely insulated from the future performance of the rest of the current Anglo Irish Bank loan book.

The Asset Recovery Bank will also be a licensed regulated bank. Its dedicated focus will be on the work-out over a period of time of the assets not being transferred to NAMA in a manner which maximises the return to the taxpayer.

Anglo Irish Bank closed at 22 euro cent on the Irish Stock Exchange, on its last day of trading before becoming a State-owned bank. On February 21, 2007, the ISEQ index rose to an-all time high of 10,041 and the Financial sub-index rose to 18,098. Bank of Ireland closed at €18.65; Anglo Irish closed at €16.64 and AIB closed unchanged at €23.95. A year later, on February 21, 2008, AIB closed at €13.80, Anglo Irish Bank finished at €8.84, while Irish Life & Permanent closed at €10.20 and Bank of Ireland traded at €9.50. Seven issues dominate the Irish market and in recent years, overseas residents, dominated by institutions, have owned more than 60% of Irish bank shares. Ireland's biggest company CRH, accounts for about a third of Irish market capitalisation and in December 2007, foreign holders held 84% of the issued shares.

Costs

Lenihan said the Government believes that it is essential to identify, with as much certainty as possible, the final cost for the restructuring and resolution of the bank. This will underpin international financial confidence in Ireland. Accordingly, the Central Bank will determine the appropriate levels of capital needed in both institutions. Its decision will be announced by October.

"We operate to the highest ethical and governance standards as we aspire to be a model corporate citizen. For this reason we invest heavily in the development and training of our staff, as well as maintaining the highest levels of integrity in our relationships with our stakeholders." - - Anglo Irish Bank Annual Report 2007 Anglo Irish Bank was founded in 1964 as Dublin City Bank and became a publicly quoted company in 1971. It had 1,900 employees in December 2007. In 1986 Seán FitzPatrick, a chartered accountant, became Chief Executive; Dublin City Bank merged with Anglo Irish Bank Ltd and assumed the latter's name. December 2008/January 2009 - - Chairman Seán FitzPatrick, Chief Executive David Drumm and a number of board members resigned after it emerged that FitzPatrick had taken measures over an eight-year period, to conceal details from shareholders, of an €87 million loan he took from the bank. In June 2007, Fitzpatrick said in a speech at a business lunch, that Ireland’s then economic success was almost entirely due to the country’s entrepreneurs and had little to do with politicians. However, he warned that politicians and regulation were about to stifle growth once more. "Having developed this marvellous entrepreneurial culture which is delivering so many benefits in terms of employment and wealth to the country we must ask ourselves if there is now a danger that our regulatory environment has gone too far?", he asked. "Are we starting to shackle instead of encourage the entrepreneurs who in turn generate more wealth not just for themselves, but for the country as a whole." Stating that we may have reached a situation where the weight of compliance with the various financial reporting standards and other corporate regulations had become so heavy that entrepreneurs were no longer willing to bear it, Fitzpatrick said: "Among the more insidious and I believe iniquitous aspects of the current regulatory environment is its apparent presumption of guilt on the part of entrepreneurs and businesspeople generally. The whole structure seems to be geared towards an annual proof of innocence statement. This is corporate McCarthyism and we shouldn’t tolerate it." He said that we should have been proud of our successful business people and not pillory them. "It is time to shout stop. The tide of regulation has gone far enough. We should be proud of our success, not suspicious of it. Our wealth creators should be rewarded and admired not subjected to levels of scrutiny which convicted criminals would rightly find intrusive."

EU Commission

Lenihan said the Department of Finance has conducted intensive discussions with the EU Commission in recent weeks about the future of Anglo Irish Bank. The Minister for Finance met Commissioner Almunia last Monday to discuss the issue. A formal detailed plan is being prepared for submission to the Commission for approval.

The Minister said: “Today’s decision by the Government will provide certainty about the future of Anglo Irish Bank. Resolution of this, our most distressed institution, is essential to the promotion of confidence and stability in our financial system.”