Minister for Finance Brian Lenihan said today director borrowings at Anglo Irish Bank were "unacceptable behaviour" and expressed surprise the financial regulator knew about the matter at some level.
Anglo's chairman Sean FitzPatrick and chief executive David Drumm resigned within hours of each other last week after Mr FitzPatrick said he had transferred loans of around €87 million that he had received from Anglo to Irish Nationwide before each year-end over a period of eight years.
Mr FitzPatrick said in a statement last week while the transfer of the loans did not breach banking or legal regulations, it was "inappropriate".
"In relation to Mr FitzPatrick's loans, I think this is unacceptable behaviour," Mr Lenihan said in an interview on RTÉ radio this morning.
"The position taken by Mr FitzPatrick is that there was nothing illegal involved, but if there was nothing illegal involved it was grossly unethical because it involved the concealment of essential information from the shareholders of the company and from the auditors," Mr Lenihan said.
The financial regulator said on Saturday it would investigate directors' loans at all banks and building societies covered by a €400 billion Government guarantee programme.
The Irish Financial Services Regulatory Authority became aware of the loans at Anglo Irish in January but its board said over the weekend it was only notified about them on Wednesday.
"I was very surprised to learn ... that at some level within the organisation there was already an awareness of the loan to Mr FitzPatrick and that had not been communicated to the board, to the department or to the minister," Mr Lenihan said. "That is a very very serious matter."
Shares in the two of the State's largest banks - Allied Irish Banks and Bank of Ireland – rose in early trading today following the Government's decision to inject up to €7.5 billion to recapitalise them.
However, shares in the third bank covered by the scheme - Anglo Irish Bank - have continued their plunge. Its stock was down close to 27 per cent at one point, but ended the day 14.3 per cent down at 30 cent.
Dealers said investors just "don't want to know about Anglo".
Bank of Ireland put in the strongest peroformance, closing 32 per cent up at 89 cent.
Irish Life and Permanent, which is not included in the capitalisation plan and has less exposure to commercial property loans than the others, was up 12.5 per cent at €1.63. AIB finshed the day up 1.2 per cent at €1.67.
The Government is effectively taking over Anglo Irish with an investment of €1.5 billion for a 75 per cent control of the bank and is investing €2 billion each in AIB and Bank of Ireland (BoI). The capital will come from the €18.7 billion National Pension Reserve Fund.
Mr Lenihan said he hoped the move would restore confidence in the Irish banking system. He said other countries had made mistakes with regard to their own recapitalisation plans he hoped to learn from those.
Mr Lenihan said it was vital that the banking sector was secured and that was why the plan concentrated on the three largest banks.
He said there was an onus on the boards in those banks to show they retain market confidence and are able to raise the necessary monies through the rights issues.
Should they fail, Mr Lenihan said the State would take up the shares although "clearly the State doesn't want to take up these shares if it can be avoided".
Any decisions on the future of the senior management of the three banks were a matter for their boards, not the Government, he added.
Asked about the possibility of consolidation, Mr Lenihan said there was "some appetite for consolidation but it is not very developed".
In a statement this morning Donal O'Connor, Anglo Irish Bank Chairman said the recapitalisation would ensure the Bank will continue" to be a sound and viable institution".
Brian Goggin, BoI chief executive told investors on a conference call this morning the deal "brings certainty at a time of great volatility and aids our ability to continue to support our customers and provide a meaningful return to our stockholders in the medium term".
Mr Goggin said the raising of an extra €1 billion could come from issuance of new shares and/or preference shares, but only if it can be done on acceptable terms for existing investors.
Kevin McConnel, head of research at Bloxham Stockbrokers in Dublin said the plan was substantially better terms than similar moves in the UK saying the Government has learned from the mistakes there.
"Whether it's enough or not just depends on your viewpoint of the bad debt cycle."
The State's investment could rise to €7.5 billion, as the Government will underwrite the issue of further shares, and both AIB and BoI have "indicated an interest" in the State underwriting up to €1 billion worth of new shares at each bank.
This means the Government will acquire any new shares issued that are not taken by private investors.
Asked last night if up to €7.5 billion would be enough to cover higher loan losses at the banks, Mr Lenihan said: "The investment reflects our assessment of what is required to meet the challenges they face."
The Government said that the core tier one capital ratios - the key measure of a bank's ability to absorb unforeseen losses on loans - would rise "over time" to between 8 and 8.5 per cent for AIB, close to 9 per cent for Bank of Ireland and 7.7 per cent for Anglo Irish Bank.
Mr Lenihan said core tier one ratios are the "gold standard" and "the ultimate cash deposit that the markets look at."
Prior to recapitalisation, the banks' ratios stood at around 6 per cent, below the 8 per cent level set by state capital injections in the UK, so the State recapitalisation plan will bring the capital ratios up to the higher benchmark levels set by the UK.
The Government expects to make around €470 million per year, or €2.3 billion over the five-year term of the plan. If the banks do not repay the money injected within that time span they face interest payments of 125 per cent.
The former minister Joe Walsh and the former Secretary General of the Department of Finance, Tom Considine have been officially appointed as non-executive directors to serve on the board of Bank of Ireland, representing the taxpayer under the State bank guarantee scheme.
The appointments will take effect from January 1st .
Mr Considine retired two years ago from the Department of Finance two years ago. He also served on the board of the Central Bank and Financial Services Authority of Ireland and was a member of the National Treasury Management Agency Advisory Committee and on the Council of the Economic & Social Research Institute.
Mr. Walsh served as Minister for Agriculture from 1992-2004 having previously served as Minister for Food from 1987. He retired from the Cabinet in 2004. He is currently Chairman of the Irish Horse Board, Horse Sport Ireland, Cork Racecourse Mallow and the Irish Hunger Task Force.
Additional reporting by agencies