Yesterday, Ireland’s Minister for Finance announced investments in Ireland’s three largest banks on terms that are consistent with Ireland’s recapitalization program announced last week. The government will invest €1.5 billion in Anglo Irish Bank and €2 billion in each of Bank of Ireland and Allied Irish Banks plc. The Minister for Finance also said the government is “prepared to underwrite further issuance of core tier 1 capital and both Allied Irish Banks plc and Bank of Ireland have indicated an interest in such an underwriting in an amount of up to €1 billion each.” The investment in Anglo Irish follows the resignation last Thursday of its chairman and the resignation on Friday of its chief executive officer following revelations that the former chairman had “temporarily transferred loans with Anglo Irish Bank to another bank prior to the Group’s year end,” moves that the bank stated “did not breach banking or legal regulations” but were “inappropriate from a transparency point of view.”
Each investment will take the form of perpetual preference shares that will qualify as core tier 1 capital. The preference shares issued by Bank of Ireland and Allied Irish Bank will bear a fixed annual dividend of 8% and the preference shares issued by Anglo Irish Bank will bear a 10% dividend. In each case dividends are to be paid in cash or, if not able to paid in cash, in the form of ordinary shares, but no dividends may be paid on ordinary shares if the preference dividends are not paid in cash. The preference shares issued by Anglo Irish Bank will carry 75% of the voting rights, while the preference shares issued by Bank of Ireland and Allied Irish Bank will have “voting rights in respect of change of control and any changes in the capital structure” and will “confer 25% of the voting rights in respect of appointments of directors and 25% of the directors on the board, currently including any directors to be appointed in connection with the Government’s Guarantee Scheme.” The three participating institutions may redeem the preference shares within 5 years at par or after 5 years at 125% of par, but in each case only with the replacement capital that also qualifies as Core Tier 1 capital. Anglo Irish Bank is also required to submit a restructuring plan within six months of the investment “in line with EU Commission guidance.”
Each investment is subject to approval of the European Commission under EU state aid requirements and approval of the shareholders of each bank. It is expected that the investments will be funded in early 2009.
Commenting on the investments, the Minister for Finance stated that the “future health of our economy is inextricably linked with the supply of credit and a situation where banks are unwilling or are perceived to be unwilling to lend is damaging not only for the economy but also for the banks themselves” and “it is appropriate as part of the agreed recapitalisation programme that the banks should further build on the commitments given in the banks guarantee scheme through specific credit policies targeted at small medium enterprises, first time buyers and consumers generally.” Accordingly, the participating banks have agreed to the following credit package:
- Small and Medium Enterprises: The recapitalized banks will provide at least an additional 10% capacity for lending to small to medium enterprises (SMEs) in 2009, although actual lending will be “subject to demand from viable enterprises.” (SMEs are to be defined in accordance with the requirements under EU State aid regulations.)
- Code of practice for business lending: The recapitalized banks adopt a new code of practice for business lending to be developed by the Financial Regulator (or Financial Services Regulatory Authority), in consultation with the participating banks and the Irish Banking Federation.
- Mortgages/First time buyers: The recapitalized banks will provide an additional 30% capacity for lending to first-time home buyers in 2009. Actual lending will be subject to demand, but the banks have “committed to actively promote mortgage lending at competitive rates with increased transparency on the criteria to be met.”
- Mortgage Arrears: In addition to continuing to comply with the IBF Code of Practice on Mortgage Arrears and referring customers to the Money, Advice and Budgeting Service where appropriate, the recapitalized banks will take action to assist homeowners who are in arrears, including working “with mortgage holders to ensure that repossession is truly an option of last resort” and waiting “at least six months from the time arrears first arise before the enforcement of any legal action on repossession of a customer’s primary residence.”
- Basic bank account: The recapitalized banks have committed to “broaden the provision of basic or introductory bank accounts and will promote these accounts to socio-economic groups where the holding of bank accounts is less prevalent and to those who find that a current account does not suit their basic banking needs.” Although the account details will vary among the banks, all accounts will “provide cash card facilities” in exchange for which commitment “the Government will arrange that stamp duty will not apply to cash cards for basic bank accounts.”
- Environmental Improvements: Each recapitalized bank will create a €100 million fund to “support environment friendly investments with a view to reducing energy usage, facilitating switching to renewable energies with a view to reducing Ireland’s carbon footprint.”
- Financial education: The recapitalized banks will provide funding and other resources, in cooperation with the Financial Regulator, to “support and develop financial education for consumers and potential consumers.”
- Customer Communications: The recapitalized banks will continue to improve the transparency of the terms and conditions of their products, charges, and marketing and sales processes and procedures.