|Minister for Finance Brian Lenihan (r) in Brussels, Monday, Sept 06, 2010. |
Irish Bank Rescue: The Government
announced this morning a final estimate for the cost of the Anglo Irish Bank
bailout of at least €29.3bn; AIB will require an additional €3bn in funding and
Irish Nationwide will receive an additional €2.7bn .
Ireland’s General Government Debt to GDP (gross
domestic product) will rise to to 98.6% this year.
A total of €22.9bn has already been provided by the State since Anglo was
nationalised early in 2009. This additional capital requirement brings the
projected total gross cost of the restructuring of Anglo Irish Bank to €29.3bn.
The additional €6.4bn in total capital arises from
a 67 per cent haircut on transfers to the toxic property loans agency, NAMA.
The Minister for Finance Brian Lenihan said the
Central Bank has determined that on the basis of severe stress assumptions - -
including a 70% discount on the remainder of Anglo’s NAMA loans - - the stress
case level of losses in Anglo Irish Bank could potentially be €5bn higher than
in the expected case of €29.3bn.
The Minister said in relation to Anglo's bond debt that "the principle of
appropriate burden sharing by holders of subordinated debt, however, is one with
which I agree. As can be seen from the figures...the losses in the bank are
substantial and it is right that the holders of Anglo’s subordinated debt should
share the costs which have arisen.
In keeping with this approach, my Department in conjunction with the
Attorney General is working on resolution and reorganisation legislation, which
will enable the implementation of reorganisation measures specific to Anglo
Irish Bank and INBS which will address the issue of burden-sharing by
subordinated bondholders. The legislation will be consistent with the
requirements for the measures to be recognised as a re-organisation under the
relevant EU Directive in other EU Member States.
I expect the subordinated debt holders to make a significant
contribution towards meeting the costs of Anglo."
The announcement of the additional capital of €3bn at AIB is in addition to
the €7.4bn target that was set in March as AIB’s funding bill is rising due to
higher than expected discounts on €23bn in loans being sold to NAMA.
Minister Lenihan said AIB's managing director and chairman are to step down.
Chairman Dan O'Connor will step down within the coming weeks, while managing
director Colm Doherty is due to quit before the end of the year.
The State will end up with majority control.
To date €2.7bn in capital has been given to the Irish Nationwide Building
Society. Lenihan said today that the debt management agency, the NTMA, has
recommended that the State provide a further €2.7bn representing a prudential
estimate of the capital required to cover expected losses on INBS’s residual
loan book will bring total capital support to €5.4bn.
The full amount of the costs for Anglo and INBS
is added to Ireland’s General Government Debt which raises the ratio to GDP to
98.6% this year.
says failure of Anglo Irish Bank would "bring down" the country
- - see 2 key video clips from 2008 - - including one from
Sept 30 2008.
Minister’s Statement on Banking 30 September 2010
It is an urgent and immediate
priority to reinforce international market confidence in our ability and
commitment to restore our banking system to health and to secure the long-term
sustainability of our fiscal position.
Greater certainty on the final
costs of repairing the banking system in Ireland will provide reassurance to
investors on the capacity of the Irish State to accommodate these costs within
the Government’s overall framework for the restoration of Ireland’s public
finances to long-term sustainability.
As has already been signalled,
this statement confirms that additional capital support will be required by some
of our banks and building societies. The overall level of State support to our
banking system remains manageable and can be accommodated in the Government’s
fiscal plans in the coming years.
It is imperative that we remain
focused on our major challenge which is to ensure that our public finances are
returned to a stable and sustainable path. We must continue the fiscal
consolidation we have embarked upon. This is the only course to follow if we
are to ensure the future economic wellbeing of our society.
There will be a very
substantial spike in Ireland’s General Government Deficit in 2010 as a result of
the capital support that we are providing to our banking system, totalling
almost 20% of GDP. On a purely headline basis our General Government Deficit for
2010 will be around 32% of GDP. Were it not for this once off spike we would
have broadly met our budget target for 2010. I want to stress today to all,
including our European partners, that Ireland remains fully committed to
reducing our deficit below 3% of GDP by 2014 as agreed. It is important that we
have a credible path to show how we propose to meet this commitment.
Accordingly, a four year budgetary plan, incorporating the annual measures will
be published in early November.
No additional borrowing arises
this year as a result of this capital support to our banks. Our ongoing cash
funding requirements for these measures will be spread over more than ten years.
Funding the banks in such a manner lessens the immediate impact on the
Exchequer. It is important to note that the Exchequer is fully funded through to
the middle of next year. However, in order to fully underline the strength of
our resolve and to ensure the necessary fiscal adjustment we will make an
additional significant consolidation effort in 2011 over and above the already
Projected final NAMA discounts
Following the completion of the
transfer of the first two tranches of loans, a total of €27bn. of loans has
transferred to NAMA. With the granular loan-by-loan data available to NAMA from
these transfers and the comprehensive and detailed information now available to
it on the remaining loans, the Agency has now refined its estimates of the
discounts on the remaining loans to be transferred to a high level of accuracy.
This information has allowed
the Financial Regulator to update his assessments of the capital position of all
of the institutions participating in NAMA following his Prudential Capital
Assessment Review (PCAR) earlier in the year and the EU-wide CEBS Stress Testing
Exercise carried out in July.
In addition to the information
on the capital position of Anglo Irish Bank, I will set out in this Statement
the expected final position in respect of the other institutions participating
in the NAMA Scheme.
A number of important steps
have been agreed and will be taken by Government to provide certainty about the
impact of NAMA transfers and to end the speculation on discounts which has
surrounded the tranche by tranche release of data. The Board of NAMA and the
participating institutions have therefore agreed that all remaining NAMA
transfers should be completed in one single tranche for each of the
In order to support the
accelerated implementation of the plan for restructuring Anglo into an Asset
Recovery Bank and a Funding Bank, the Board have agreed that Anglo’s remaining
eligible bank assets will be transferred to NAMA by the end of October and that
bonds will issue to Anglo in return on the basis of NAMA’s current estimate of
their value. These loans will then be subject to due diligence and valued by
NAMA on a loan by loan basis. If any adjustment to their value is necessary, it
will be made subsequently. The EU has been advised of this revision to the
valuation process for the remaining Anglo loans and I will be making Regulations
to provide for it.
In all cases this expedited
transfer will be undertaken in accordance with the legislative framework for
NAMA set out in the NAMA Act and the European Commission State aid approval for
the NAMA Scheme. This expedited transfer will maintain the principle of a
loan-by-loan valuation of all NAMA transfers and is consistent with the EU State
aid approval for the Scheme.
The Government has decided,
having consulted with the NAMA Board and the European Commission, that where the
total exposure of a debtor is below a €20 million threshold in AIB and Bank of
Ireland, that debtor’s loans will not now be transferred to NAMA. The threshold
had previously been set at €5 million.. This change will ensure that NAMA can
operate to the highest level of efficiency and effectiveness in the management
of its loan portfolio and allow for the completion of all NAMA transfers by
NAMA will continue to focus on
realising maximum value for the taxpayer from the higher-value loans transferred
into it. I have been advised by NAMA that there are 650 debtors with
property-related debts of between €5m and €20m in these two banks. They account
for just €6.6bn of the aggregate €80bn volume of NAMA eligible loans.
Loans of this size can be
efficiently managed by the banks themselves through their network of local
representation and relationships. The Financial Regulator will ensure that the
banks put in place prudent provisioning for these loans.
Anglo Irish Bank
On the 8th of
September last I announced the Government’s decision on the restructuring and
resolution of Anglo Irish Bank, which remains
subject to European Commission approval.
This envisages the splitting of
the bank into two licensed and regulated credit institutions: an Asset Recovery
Bank focussed on recovering maximum value for the State from the loan assets and
business of Anglo not being transferred to NAMA and a Funding Bank to fully
safeguard Anglo’s deposit base.
I said then that the guaranteed
position of depositors in Anglo Irish Bank would be unaffected by the new
structural arrangements for the bank. Both existing and future depositors are a
critical source of funds for the restructured Anglo and protecting these
depositors is a priority.
Capital Assessment – Anglo Irish Bank
Mr Matthew Elderfield and his
staff in the Central Bank have worked intensively liaising very closely with the
CEO and senior management team in Anglo, NAMA and the other relevant authorities
to establish as definitively as possible the level of capital required by the
This assessment has now been
completed. The result has been communicated to the bank and a statement has been
issued by the Central Bank. The statement provides an explanation of the
approach and methodology adopted to determine the bank’s capital requirements.
The Central Bank has,
therefore, determined and advised the Bank that in the central - or expected
loss case - an additional €6.4bn in total capital will be needed for the
Recovery Bank and Funding Bank structure to continue to meet the minimum capital
requirements in the coming years consistent with Basel rules.
A total of €22.9bn has already
been provided by the State since the bank was nationalised early in 2009. This
additional capital requirement brings the projected total gross cost of the
restructuring of Anglo Irish Bank to €29.3bn.
This additional capital will be
provided by increasing the Promissory Note issued by the State and by
appropriate burden-sharing exclusively by holders of Anglo subordinated debt
instruments as outlined below.
The Central Bank has carried
out a detailed analysis of potential losses in the bank in the coming years.
The examination has drawn on comprehensive information and analysis of Anglo’s
non-NAMA loan book carried out both by the Bank and its advisers and independent
consultants in preparing the Bank’s Restructuring Plan for the European
Commission. Information has also been made available by NAMA from a review of
assets securing the loans in Anglo’s remaining NAMA tranches. This review has
enabled NAMA to determine and advise the Central Bank of the expected discount
of 67% on the remaining €19bn. of the bank’s loans that are due to be
Stress scenario - Anglo Irish Bank
The Central Bank has also
undertaken a stress test on Anglo building on the PCAR analysis carried out for
the other banks earlier in the year. The Central Bank has determined that on
the basis of severe stress assumptions - including a 70% discount on the
remainder of Anglo’s NAMA loans– the stress case level of losses in Anglo Irish
Bank could potentially be €5bn. higher than in the expected case of €29.3bn.
The stress case indicates the
upper boundary of the level of losses. It does not represent the Central Bank’s
expectation of the likely outcome.
The Government will therefore
capitalise the new structure to the expected case requirement of €29.3 billion.
It will also be a priority for
authorities to press ahead with the restructuring of the bank with a view to
achieving the split of the bank early in 2011. I will continue close
consultation with the European Commission and in particular with Commissioner
Almunia with the aim of providing in the next month all elements necessary to
bring the Commission’s assessment of the restructuring plan to a positive
conclusion. This should allow the matter to be settled through a formal
Commission decision on a timely basis.
Burden sharing by holders of subordinated debt in Anglo Irish Bank
Much has been said about senior
debt obligations in Anglo Irish Bank. The position is that senior debt
obligations rank equally with deposits and other creditors under Irish law. I
have no plans to change this position. There is, therefore, no question of
seeking to impose losses on holders of such senior debt in Anglo or indeed in
any other credit institution in the State through any legislative measures. Any
alternative strategy as advocated by some creates a significant risk of
jeopardising the banking system’s and indeed the State’s access to international
debt markets and cannot be countenanced on that basis.
The principle of appropriate
burden sharing by holders of subordinated debt, however, is one with which I
agree. As can be seen from the figures outlined above, the losses in the bank
are substantial and it is right that the holders of Anglo’s subordinated debt
should share the costs which have arisen.
In keeping with this approach,
my Department in conjunction with the Attorney General is working on resolution
and reorganisation legislation, which will enable the implementation of
reorganisation measures specific to Anglo Irish Bank and INBS which will address
the issue of burden-sharing by subordinated bondholders. The legislation will
be consistent with the requirements for the measures to be recognised as a re-organisation
under the relevant EU Directive in other EU Member States.
I expect the subordinated debt
holders to make a significant contribution towards meeting the costs of Anglo.
Irish Nationwide Building Society
On the 30th March I
announced that INBS did not have a future as an independent stand-alone entity.
The institution is now under public control and arrangements for its sale or
integration into another institution are being advanced in discussions between
the State, the European Commission and the Society.
To date I have provided €2.7
billion in capital to cover the losses on lending by the Society. The NTMA has
recommended that I provide a further €2.7bn representing a prudential estimate
of the capital required to cover expected losses on INBS’s residual loan book
and bringing the total capital support to €5.4bn. I have accepted the NTMA’s
recommendation in order to establish a ceiling on the level of support provided
to the Society consistent with the objective of providing final clarity on the
public support required by the Irish banking system. I propose to inject this
capital, subject to European Commission approval, through an increase of the
Promissory Note so as to spread the cash requirements over the coming years.
I have asked the NTMA and my
other advisors to explore options for the society and to bring finality to the
position. Management in INBS was replaced in 2009.This further capital
investment by the State will reassure depositors in the institution that all
deposits remain secure.
The same approach will be
adopted for subordinated bondholders in INBS as in Anglo.
Estimate of final NAMA discount for Bank of Ireland and AIB Bank
Detailed and extensive work has
been carried out by NAMA in close consultation with Bank of Ireland and AIB on
the remaining loans to be transferred from both banks. This draws on the
detailed analysis of the valuations and transfer values from the approximately
€10bn. of loans already transferred from these two banks in the previous
tranches. It is now possible for NAMA to forecast with confidence the final
overall discount to be applied to the remaining tranches of loans from these
banks. Both banks have had discussions with NAMA on this matter. This
information on the projected final discounts has been conveyed by NAMA to the
Central Bank to inform its assessment of the capital position of both banks.
Bank of Ireland
Bank of Ireland has already met
the Financial Regulator’s 2010 capital requirement.
To date the Bank has
transferred €3.75bn of loan assets to NAMA at an aggregate discount of 36%.
While the final tranche of NAMA loans may have a higher discount of up to 42%,
the Central Bank has confirmed that the bank has sufficient capital to meet the
PCAR standard to accommodate this increase.
The Financial Regulator
determined last March that AIB must raise €7.4bn by the end of 2010 to meet its
capital requirements. AIB has already announced the sale of its Polish
subsidiary BZWBK, expected to generate capital of €2.5bn.
To date AIB has transferred
just over €6bn. of loan assets to NAMA at an aggregate discount of 45%. NAMA
has reviewed the quality of loans still to transfer from AIB and has estimated
discount to be applied to the remaining €13.5bn. of loans at 60%.
A major factor in this
increased discount for AIB has been the predominance of land bank loans, many of
which were speculative investments that now have little value.
In view of the increased NAMA
discount the Central Bank has concluded that an additional amount of €3bn will
be required. This brings the new total capital requirement for AIB, after
deducting the capital generated on the sale of its Polish subsidiary, to €7.9bn.
The Central Bank Governor, the
Financial Regulator and the NTMA have now advised me, and AIB has acknowledged,
that in the current stressed market conditions, the bank is unlikely to be able
to conduct a traditional privately underwritten transaction.
In order to afford every
opportunity to AIB to raise as much as possible of the required capital from the
markets and to minimise further Government support, it has been decided that
this capital requirement will be met through a placing and open offer to
shareholders of AIB shares to the value of €5.4bn. This transaction will be
fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a
fixed price of €0.50 per share and is expected to be completed in 2010 subject
to shareholder and regulatory approval. If necessary, the NPRFC’s underwriting
commitment will be satisfied by the conversion of up to €1.7bn. of its existing
preference shares in the bank into ordinary shares along with a new cash
investment for the balance of €3.7bn in ordinary shares. This transaction
structure assumes the sale of AIB’s stake in M&T Bank and disposal of other
assets in due course.
In the event that the bank’s
residual capital requirement is not met through asset sales by 31 March 2011,
any shortfall will be met by the conversion of a proportion of the remaining
€1.8bn. of preference shares. The company will issue a prospectus in relation
to the open offer in due course giving details of the transaction, underwriting
structure and timing. In the first instance, existing shareholders will be given
the option of subscribing for the whole or part of their entitlement to new
shares under the offer pro rata to their existing holdings. New institutional
shareholders may also be permitted to subscribe for new shares.
Any additional capital required
will be provided by the NPRFC.
Ireland is committed to
ensuring that all additional aid to AIB will be granted in line with State aid
rules. To this end, it will notify the new measures to seek State aid approval
before they are implemented.
As a consequence of these
actions it is likely that the State will hold a majority shareholding in AIB.
The high level of State support
being provided to AIB, as an institution, is absolutely necessary given the
central role that AIB plays in the Irish economy and in the Irish financial
system. In the coming weeks I will be working closely with the Board of the
Bank on behalf of the Government to ensure that AIB successfully overcomes its
current challenges and develops a renewed strategic focus on the Irish market
following the divestiture of its overseas operations. In conjunction with the
recapitalisation, I expect there will be progressive management and board change
in AIB. The bank’s board has agreed with Mr Dan O’Connor that he will step down
as executive chairman within the coming weeks. The bank’s board has also agreed
with the Group Managing Director, Mr Colm Doherty, the termination of his
contract on existing terms. Mr Doherty will depart AIB before the end of 2010. I
appreciate the commitment of Mr O’Connor and Mr Doherty in this most challenging
environment as well as the support they have shown to me.
Educational Building Society
The projected final NAMA
discount for EBS is in the region of 60%. The Central Bank has advised that this
final discount will have no material implications for the overall capital
requirements of the banking system.. The Society is in discussion with a number
of parties about its future and any adjustment in its capital need that arises
will be accommodated in the outcome of those discussions in due course. The EBS
sales process is ongoing.
Repair of the Irish banking system
The overriding benefit of the
NAMA process is the recognition of losses upfront by the participating
institutions and the cleansing of the balance sheets of our banks of their most
toxic loans. Otherwise this lending would remain on the banks’ books
representing a major source of risk and instability in the years ahead which
would prevent the banking system from playing its essential role in providing
the finance required to underpin our economic recovery and fiscal
The transparency and clarity
achieved through the operation of NAMA has been recognised internationally as a
significant strength of the government’s strategy for the repair and the
restoration of the banking system.
Fiscal impact of bank restructuring costs in Ireland
As I indicated at the outset of
this statement, this Government is committed to restoring sustainability to our
public finances. In so doing, we will achieve a General Government Deficit of
below 3% by 2014. The inclusion in this year’s deficit of the banking support
measures does not alter this commitment in any way.
This target can be achieved in
a manner which is consistent with maintaining a sustainable trajectory for
Ireland’s General Government Debt and the capacity of the National Treasury
Management Agency to fund the Exchequer’s borrowing requirement.
Work is underway on a revised
four year plan that will set out the annual measures required to restore order
to the public finances and bring our deficit below 3% of GDP by 2014. The four
year budgetary plan will be published in early November taking account of the
latest economic and fiscal data.
The full amount of the costs
for Anglo and INBS is added to Ireland’s General Government Debt which raises
the ratio to 98.6% this year. The objective is to stabilise the debt to GDP
ratio in 2012/13 period. As has been stressed by the NTMA over recent months,
this figure is a gross debt figure and does not reflect the very substantial
assets held in the National Pension Reserve Fund, or the substantial cash
balances held by the NTMA. On a net debt basis our Debt ratio would be 70.4% of
GDP this year.
announcement brings full clarity to the costs and methods of recapitalising the
banks. These costs are fully manageable in the context of the programme of
fiscal restraint to which the Government is committed. In addition the cliff in
the banks’ refinancing requirements during the month of September, which had
been a source of concern to the markets, has passed and the amount of term bank
debt maturing over the remainder of this year and next year is quite limited.
I am advised
by the NTMA as the Exchequer is fully funded until late June 2011 the Agency has
decided not to proceed with the bond auctions scheduled for October and
November. The NTMA will return to the bond markets in the normal way in early
2011. In the meantime investors will have had the benefit of the affirmation in
the budget that Ireland continues on its planned path of multiannual fiscal
consolidation up until 2014