The current share prices of AIB and Bank of Ireland “are not indicative” of the true health of these banks, the governor of the Central Bank John Hurley told the Oireachtas Joint Committee on Finance and the Public Service today.
He said both banks had faced “a great deal of pressure in recent times” but said they are “very strong institutions” and are “vital for the Irish economy.”
“So far as Allied Irish Banks and Bank of Ireland are concerned, the government has reiterated that it sees these banks as central to the Irish financial system and essential to the proper functioning of the economy. It has also indicated its intention that both banks remain as independent banks in private ownership and has stated that it is proceeding with the planned re-capitalizations of both banks.”
With regard to liquidity he said “there isn’t really a difficult there. They have some modest drawings from the ECB (European Central Bank) but it’s not significant.” He also said the bank recapitalisation should be allowed to run its course.
Shares in the two largest Irish banks had come under renewed pressure this morning before rebounding strongly in the afternoon.
At 3.10pm shares in AIB were over 24 per cent higher at 56 cent having been almost 11 per cent lower this morning. Bank of Ireland of shares were flat at 40 cent after recovering from a 20 per cent fall earlier.
Shares in Irish Life and Permanent, which is not included in the Government’s recapitalisation plan, were 24 per cent higher at €1.49.
Mr Hurley said “uncertainty as to the speed with which the global financial market crisis can be overcome” made any assessment of the domestic economic outlook very difficult.
“What is certain is that we are in a significant downturn and two courses of action are essential. It is imperative that we move to correct the sizeable deficit in the public finances over a reasonable timeframe. It is also vital that we improve our competitiveness, which has weakened steadily in recent years.”
He said the decision to nationalise Anglo was made in “response to a weakened funding position and the reputational damage to the bank arising from unacceptable practices that took place within it at a time when overall market sentiment was already negative towards the institution.”
Earlier today the Committee heard that the financial regulator may ask for new legislation covering loans made to company directors at financial institutions.
Jim Farrell said the Irish Financial Services Regulatory Authority (IFSRA) is committed to fully investigating all aspects surrounding the issues around directors' loans at Anglo Irish Bank.
The Minister for Finance again ruled out nationalising the two largest banks in the State; AIB and Bank of Ireland.
Speaking in Dublin this morning Brian Lenihan said: “Government policy on banking is to secure the banking sector. As you know at all stages since last autumn we have sought to ensure that our banks are solvent and working well, lending to the real economy.”
“We will take whatever steps are necessary to ensure that but there are no proposals before me to nationalise either institution this morning”, he said.
Mr Lenihan’s comments were welcomed by finance union the IBOA.
“The Minister’s statement has brought clarity to what was becoming an increasingly volatile situation as a result of intense speculation over the Government’s intentions for AIB and Bank of Ireland in the wake of developments at Anglo Irish Bank,” said IBOA general secretary, Larry Broderick.
One Dublin broker said this morning the “fundamental soundness” of AIB and Bank of Ireland was being undermined by the problems emanating from Anglo Irish and negative investor sentiment towards Ireland.
“This is simply a confidence issue. These two banks are sound but the international investment community doesn’t want to know because of the negative coverage,” he said.
The Irish Timesreported this morning that the Government has opened contact with Allied Irish Banks (AIB) and Bank of Ireland with a view to providing an additional €1 billion in public money to each institution under the State recapitalisation plan.
The Government is providing €2 billion to each bank in the form of preference shares. The banks must seek an additional €1 billion each from private investors although the State has agreed to provide the funds should the banks be unable to raise all or part of the capital.
In a note to investors this morning Rossa White, chief economist with Davy Stockbrokers, said the commitment of the Government to keeping the two main banks in private ownership may indicate a willingness for “further preference capital issuance in due course”.
Mr White added that the fact Anglo Irish Bank was now a commercial semi-state company was crucial from an EU/Maastricht perspective as it means the bank is not on the Irish government's balance sheet.
