Bankers right across Europe are keeping an eye on events at AIB and assessing whether its problems present a takeover or merger opportunity. Royal Bank of Scotland is the bank which is currently being linked with Ireland's biggest bank but others may step into the fray if and when they see value.

AIB's share price has been improving in recent days with the help of upbeat briefings to the markets by AIB's brokers in Ireland and the UK with bid speculation giving it a further boost.

The shares are still below the €13.62 level at which they were trading before the Allfirst fraud was revealed and are trading at a substantial discount to other European banks. The shares closed last night at €13 in Dublin.

AIB shares have moved higher in the past on the back of takeover speculation which linked the bank with Deutsche Bank last spring. Those rumours proved unfounded but today AIB will be feeling less confident about how long it can maintain its independence given that the calibre of its senior management is under intense scrutiny. Royal Bank of Scotland owns Ulster Bank which operates in the Republic and North of Ireland. It acquired these businesses in February 2000, after a bitter fight with its arch enemy, Bank of Scotland, to buy the National Westminster Bank.

Apart from its Irish business, Royal Bank also owns Citizens Bank which is the second-biggest bank in the New England area . Royal Bank has won much praise for its ability to quickly merge NatWest with its own operations and has delivered much of its stated targets in this regard ahead of time.

There is a view, particularly in London, that the bank's appetite for another acquisition could now be whetted once again and could be weighing up AIB. Mr James Eden, analyst at Commerzbank, says a deal with AIB could be good for Royal Bank but he doesn't believe it is preparing to make an imminent move on the Irish bank.

"AIB would be a good deal for Royal Bank and it could make it work but there is no reason why it couldn't wait around for even a year if it wanted to make a move," he said yesterday.

Another issue for Royal Bank would be that it would have to finance any deal with AIB either through shares or by a share placing which is something that might not be well received by the markets at the moment. Mr Eden doesn't believe any of the other main UK banks are likely suitors for AIB.

Other names that have been mentioned by some analysts include Lloyds TSB and National Australia Bank, which owns National Irish Bank and Northern Bank.

National Australia Bank is not being considered as a serious contender even though it is actively looking for acquisitions in this part of the world. It has failed to keep pace with the wave of consolidation in the UK market and has missed some opportunities but does not seem to be disposed towards expanding further in the Irish market.

Nearer to home, some commentators suggest a merger between AIB and Bank of Ireland, although others believe this will never happen mainly because of concerns about competition. There have been some moves in recent years to have competitive issues viewed in an EU context which would make such a link-up more likely.

Royal Bank is certainly the bank most often suggested as the likely acquirer of AIB. "The prospect of a deal with AIB may appear a lot more attractive to Royal Bank than a union with a mainland European Bank," according to Davy analyst, Mr Scott Rankin.

Almost all analysts believe that if a takeover bid is being hatched it will only be mooted with the backing of AIB's board and executives. Financial institutions don't tend to launch hostile swoops and would be keen to make progress with the co-operation of AIB's key personnel.

Anyone eyeing up the bank will closely examine Mr Eugene Ludwig's report into how the massive fraud at Allfirst happened and, more importantly, who should take ultimate responsibility for it.

There is a view among institutional investors that senior people within AIB, both in the US and in the Republic, will have to accept some of the responsibility.

If Mr Ludwig points that finger at AIB chief executive, Mr Michael Buckley, this would only heighten any takeover activity.

Siobhán Creaton