THE GOVERNMENT will demand management and governance changes in the big financial institutions in return for State participation in a recapitalisation of the banking system.
Indications that Minister for Finance Brian Lenihan wants changes in the management of the banks emerged last night as his department prepared legislative changes that will allow the Government to use money held in the €18 billion National Pension Reserve Fund (NPRF) to inject fresh capital into the banks.
Mr Lenihan's stance will intensify pressure on Eugene Sheehy, Brian Goggin and the Denis Casey - the respective chief executives of Allied Irish Banks, Bank of Ireland and Irish Life Permanent - as they seek to defend the independence of their institutions while looking for State support in talks on recapitalisation.
A collapse this week in the share price of Anglo Irish Bank, which has tried to forge an independent path by seeking new capital, has considerably weakened the hand of its chief executive David Drumm and chairman Seán FitzPatrick.
"If there's taxpayers' money going in, we would expect changes," said a senior source with direct knowledge of the Government position in talks on recapitalisation.
The Government wants banks and building societies to merge to strengthen the banking system and minimise potential for any future threat to its stability, but the banks have resisted such pressure.
Sources involved in official discussions said forthcoming changes to legislation to facilitate the use of money in the NPRF indicate that the Government is laying groundwork for an injection of capital into the system.
Discussions were held yesterday afternoon between the Irish-led Mallabraca consortium of private investors and Merrill Lynch, which is advising the Government.
A Department of Finance spokesman said that legislative changes would be required if funds held by NPRF were to be used in the banks, and that officials had already been working on changes to the fund. "If there was a requirement for taking money from the fund, it could be done very quickly," he said.
A fortnight ago, Mr Lenihan suggested that the State may use the pension reserve fund for a co-investment in the banks with private investors.
If the State is to use the NPRF to invest in the banks, the Government would need to alter legislation which compels the fund to secure the "optimal" return on its investments, provided the level of risk to the money held or invested is acceptable to the commission running the fund.
In a separate development, the department held briefings with the 12 individuals who have been appointed to the boards of the six guaranteed lenders during the week to discuss their future roles.
Among the issues that the new State representatives will have to oversee is the level of lending to small- and medium-sized businesses in an effort to ensure a flow of credit into the economy.