Anglo Irish Bank will be split into an asset recovery bank and a funding or deposit bank, the Department of Finance said today, without providing details of the final cost.
Minister for Finance Brian Lenihan said this option had been taken because the alternative - closing the bank immediately - exposed the State to a debt of €72 billion.
“If we closed Anglo tomorrow, €72 billion would be owed to be paid out tomorrow and the taxpayer can’t afford that,” Mr Lenihan said.
He said the bulk of this was owed to depositors. “If we let those deposits go, we let Ireland go with it; we cause chaos in our banking system and we cannot continue to borrow to fund ourselves as a State.
“And we also will do fierce damage to our economy. We cannot contemplate that. We have to work out the problems in this bank over time.”
Under the Government’s plan the recovery bank will try to get the maximum value from assets not transferred to Nama. It will include performing and non-performing loans. This unit will eventually be sold or will run down the assets over a period of time.
Mr Lenihan said the asset recovery bank will lend to existing borrowers to help them complete projects. It is "not fully decided" whether it would have a lending limit, he added.
The funding bank will be owned directly by the Minister for Finance. It will not lend but will continue to accept and manage deposits and will continue as a regulated bank. It will also provide funding to the asset recovery bank.
The guarantee on depositors is unaffected by the announcement.
The proposal is a variation of that put forward by Anglo's board. The bank had wanted to split into an asset management unit, to manage the bank's "lower quality" assets, and a 'good bank' that would manage performing loans, retain the bank’s deposit funding and engage in new lending.
Mr Lenihan said the decision would provide certainty over the future of Anglo, although neither the timescale or overall cost was revealed today. The Government said it will announce the final cost for the restructuring and resolution of the bank by October. The Central Bank will determine the levels of capital needed in both institutions.
“[The] resolution of this, our most distressed institution, is essential to the promotion of confidence and stability in our financial system”.
"Anglo Irish Bank has not expanded its loan book since it was nationalised in early 2009 and this will remain the case," he added.
"It is intended that in due course the recovery bank will be sold in whole or in part or that its assets will be run off over a period of time," the department said.
Mr Lenihan stressed the State would not default on Anglo's senior bondholders. "I do not see default on that type of bond as a realistic option for the Irish state," he told reporters at a briefing to outline the decision in Dublin this afternoon. That would be "very dangerous for the country".
“Some of the bond holders are guaranteed, some of the bond holders are not guaranteed. Those who are not guaranteed will have their position guaranteed in due course.”
No exact timeframe for the workout of Anglo's loans was provided, although Taoiseach Brian Cowen said it should take no more than 15 years.
Anglo’s management team welcomed the announcement, saying it provides certainty. In a statement the bank said it would work with the Government to submit an alternative proposal to the European Commission.
European Competition Commissioner Joaquin Almunia said he viewed the new plan "positively," though a "number of important aspects still need to be clarified."
The announcement follows a Cabinet meeting where the future of Anglo was top of the agenda.
Analysts were disappointed by the lack of detail in the plan. "We're still none the wiser really. Okay it tells you the route they're going, but I don't think it gives you any clarity on the amount of money it's going to cost the Exchequer which is what the market is worried about," said Alan McQuaid, chief economist at Bloxham Stockbrokers.
"I don't think the market gives a hoot one way or the other if it's a 'good bank/bad bank' or if it's wound up, the issue is how much it's going to cost."
Yesterday the premium demanded by investors to lend to the Government reached a new high, fuelled by renewed fears about the state of the Irish public finances and concerns about the cost of bailing out the bank, which is set to exceed €25 billion.
The Government yesterday renewed the Irish bank guarantee after a scheduled meeting of euro zone finance ministers.
Additional reporting: Bloomberg/Reuters