Bank of Ireland will be required to bolster its reserves by €5.2 billion as a result of the Prudential Capital Assessment Reviews (PCAR) carried out by the Central Bank of Ireland.

This could result in the bank falling in majority state ownership although it still hopes to avoid this scenario.

At present, the state owns 36 per cent of Bank of Ireland.

The bank is set to become the biggest financial institution in the state as a result of the restructuring announced today by the government.

The new funds will involve €4.2 billion in incremental equity capital, including a regulatory buffer of €500 million.

In addition, €1 billion in contingent capital is also required.

This will come from a debt instrument - effectively a bond - that could, under certain circumstances, convert into equity capital.

The PCAR involves a deleveraging plan that anticipates a loan to deposit ratio of less than 122.5 per cent for Bank of Ireland by December 31st 2013.

This would result in a reduction in its non-core loan portfolios of about €30 billion between December 2010 and the end of 2013.

Like AIB, Bank of Ireland will be split into core and non-core businesses.

While these entities will have separate management teams, they will continue to operate under the Bank of Ireland umbrella.

The core business will become a “significantly more domestically focused bank” the Minister for Finance Michael Noonan said today.

It will comprise its existing businesses in the Republic, its branch network in Northern Ireland, its Post Office deposit joint venture in the UK, and limited capital markets businesses.

It won’t include New Ireland Assurance, which is still slated for sale.

The non-core business will be wound down or sold over time.

These will include portfolios of UK intermediary-sourced mortgages and selected international niche businesses such as project finance, asset-based lending and certain previously-identified international corporate banking portfolios.

It will also include certain international commercial investment property portfolios, and land and development loans of less than €20 million to be potentially transferred to Nama.

These portfolios are estimated at about €39 billion of customer loans and around €22 billion of credit risk weighted assets at December 31st 2010.

Bank of Ireland said it would be engaging with its advisers to draw up initiatives aimed at raising the €4.2 billion in equity capital that it requires.

This could include raising funds from new and existing investors and could involve a debt-for-equity swap.

Any shortfall in funding will be met by the state.

The case for investment is that the bank will be well capitalised and have a large market share when the Irish economy returns to growth.

But many analysts are sceptical that Bank of Ireland can stave off majority ownership by the state.

Mr Noonan said today that the bank would be given time to raise the additional capital from private sources although no deadline was announced.