BRINGING FORWARD the €6 billion recapitalisation of AIB and Bank of Ireland would be an attempt to provide a level of certainty to the market that neither institution will be nationalised in the wake of the decision to take Anglo Irish Bank into public ownership.

Shares in both banks have been on the floor since their dramatic collapse last Monday, suggesting they have virtually no prospect of raising the €1 billion each in new equity required under the original recapitalisation plan. It now seems increasingly certain that the Government itself will have to make good on its commitment to provide an extra €1 billion to both banks, in addition to the €2 billion in preference shares that each will receive.

If the Government is to keep to its policy of avoiding the nationalisation of AIB and Bank of Ireland, it will have to invest the additional cash as preference shares. This is because €1 billion in new ordinary shares would wipe out existing investors in both institutions and hand a controlling stake to the Government, something it does not want. Precisely when this recapitalisation will take place is unclear as of yet. However, the rapid pace of events since the Anglo nationalisation means the Government has to move well before the previous deadline of the end of March.

Minister for Finance Brian Lenihan was to have the right to appoint new directors to each bank, giving the State 25 per cent voting rights on their boards.

Whether Mr Lenihan would seek the appointment of an additional director on foot of the extra €1 billion is unclear.

To maintain some distance between the State and the two banks – with rampant fear of nationalisation spooking markets – it may be that he will choose not to seek additional representation.

Also unclear is the dividend that would be payable to the State on any additional preference shares. The first €2 billion going into each bank will yield 8 per cent. If the State is not getting any additional board representation there may well be an argument for increasing the coupon on the third billion. However, Mr Lenihan would have to strike a balance between protecting the taxpayer and keeping enough money available to the banks to provide credit into the market.

All of that is in line with Mr Lenihan’s existing bank policy. Now on the table, however, is an big extension of the policy to allow AIB and Bank of Ireland to transfer their most toxic loans into Anglo on a commercial basis.

In this context, AIB and Bank of Ireland would have to pay Anglo for the service.

This mechanism would provide protection to the Government investment in preference shares as rising bad debts in both banks would deplete the State capital, increasing the likelihood in a worst-case scenario that the institutions might have to seek more public money.

The loans would be housed in Anglo, which as a State-owned entity would not come under the same market pressure that would erode confidence in the listed banks in the event of a big rise in their bad debts.

Anglo’s advantage here is that it would have significantly more time in the bosom of the State than the listed banks to wait for the repayment of loans.

However, the danger is that big debtors would see the State-owned Anglo as a soft touch and simply choose to repay the loans that remain in the privately owned banks with whom they would do business in the future.

Accordingly, the plan would have to include specific protection for the interest of taxpayers in the toxic loans the State is taking on.

The Government never wanted to go down this road, but it may be the price of avoiding a nationalisation of the entire banking system.