Simon Carswellexplains the technical details behind the Government's plan

What are preference shares?

These are shares in a company that pay a fixed annual rate of interest, a coupon, rather than a variable dividend, which is paid to the holders of ordinary shares.

Preference shares confer a degree of ownership of the company. They can come with voting rights on how a company is run.

Under the recapitalisation plan, the Government will take preference shares in Anglo Irish Bank in return for a €1.5 billion investment, giving the State 75 per cent of the voting rights in the bank. This will give the Government control over the bank, though the deal must be approved by existing ordinary shareholders, who may have the opportunity to invest later.

The State will provide €2 billion each to AIB and Bank of Ireland, in return for preference shares and 25 per cent of the voting rights in the bank. This will give the Government a say in the running of the two banks and the power to appoint two directors to the board of each bank, in addition to the two directors that the State has appointed under the guarantee.

The Government will be paid a 10 per cent annual dividend by Anglo and 8 per cent each by AIB and Bank of Ireland.

This is in line with new EU state aid rules, which outline an indicative charge of 7 to 9.3 per cent by the Governments of member states in banks to ensure competition is not distorted and there are no concerns about state subsidies. This is less than the 12 per cent charge to the UK banks by the British government.

Under EU rules, higher-risk banks pay more. This explains why Anglo is paying a higher cost.

The Government has said that its preference share investments in the banks will be counted as core tier one capital ratio - the key measure the stock market is watching - by the Financial Regulator. This is a barometer of a bank's ability to absorb higher loan losses expected over the coming years.

What's the difference between core and core tier one capital?

Core capital is a term defined by regulators to gauge the minimum amount of wealth a bank must have to operate. It is mainly the value of the banks' shareholders' equity, which acts as protection against losses on loans.

The core tier one ratio at the UK banks rose to more than 8 per cent after the British government's recapitalisation plan. The Government said the ratio for Bank of Ireland would rise to almost 9 per cent, while AIB would move to between 8 and 8.5 per cent. Anglo's ratio will move to 7.7 per cent.

Regulators have started allowing other instruments, such as preference shares, to count for core tier one capital, so even though the Government's €4 billion injection of capital into AIB and Bank of Ireland is in return for preference shares and they are not convertible to ordinary shares, this will still count for core tier one.

What are ordinary shares?

Ordinary shares, also known as equity shares, are the most commonly held. Ordinary shareholders are the company's ultimate owners and have a right to a share of a company's profits, paid as a dividend every year.

Under the State recapitalisation deal for AIB, Bank of Ireland and Anglo, the Government will not initially buy ordinary shares.

This means that the interests of existing shareholders will not be affected in the first instance.

However, the Government has pledged to underwrite the issuing of new ordinary shares in AIB and Bank of Ireland in rights issues where existing shareholders are being given the opportunity to invest in capital-raising at a discount. This means they can protect their existing interests and share in any potential upside from the shares rising in future.

What is a rights issue?

Publicly listed companies can raise new capital through a rights issue, which involves the issuing of new ordinary shares to existing shareholders, who must be offered the new shares in proportion to their existing shareholdings.

In addition to investing €2 billion in AIB and Bank of Ireland in return for preference shares, the Government will underwrite a right issue in both banks, up to €1 billion for each.

AIB believes it can raise additional capital on its own, such as through the sale of its 25 per cent stake in US bank MT, and it's not clear whether it will to resort to a rights issue.

However, Bank of Ireland has indicated that it will use the State-backed rights issue in a bid to raise up to €1 billion in extra capital with the help of the State.

The bank's share price closed at 67.5 cent on Friday. Let's say, the bank issues new shares at 50 cent a share to existing shareholders. (Companies issue new shares at a discount to the existing price to encourage shareholders to invest.)

At 50 cent a share, to raise €1 billion, the bank would need to issue two billion new shares. The bank already has one billion shares in issue.

Concerns persist that €3 billion for each of the two main banks (comprising €2 billion from the Government and possibly €1 billion in a State-backed rights issue) will not be enough to cover rising loan losses as many believe the banks have not realistic enough about how bad the recession will be.

These fears could deter investors as they will not wish to participate in a right issue if further capital has to be raised at a later date, diluting their interests further.

If investors do not buy into the rights issue, the State could be left carrying two billion shares in Bank of Ireland, which would mean the State owns two-thirds of the bank (two billion of the three billion shares in issue).

This could effectively mean the nationalisation of Bank of Ireland.