EC temporarily approves rescue aid for Bank of Ireland

The European Commission has granted temporary approval, under European Union state aid rules, to the recapitalisation of the Bank of Ireland by the Irish authorities of up to €5.35 billion.

This follows from the calculations of the Irish central bank, in March this year, of the capital needed to deleverage and meet higher than normal loan to deposit ratios to be able to resist stress situations.

The prudential capital assessment review carried out by the Central bank was required under the Programme for Support for Ireland agreed in November 2010 between the Irish authorities, on the one hand, and the EU, European Central Bank and the International Monetary Fund, on the other hand. The Irish State will underwrite the issue of new rights by the Bank of Ireland for up to €4.35 billion. Another €1 billion will be provided as contingent capital.

The Commission's final approval of the new recapitalisation measures is conditional upon the submission of a new restructuring plan, which is expected by the end of July.

The Commission agrees that the measures are necessary to increase the bank's solvency ratios and maintain confidence in the Irish financial markets, it said in a statement. Therefore, it temporarily authorised the measure as emergency aid subject to the submission of a revised restructuring plan.
 
The final approval of the measures is conditional on the plans ensuring a return to long term viability of the bank, an adequate participation in the restructuring costs by shareholders and subordinated debt holders and proper measures to limit the distortion of competition created by the state support.

On 15 July 2010, the Commission approved a first restructuring plan for the bank after it received a €3.5 billion state recapitalisation and other state support. The November 2010 EU/IMF support programme for Ireland included a prudential capital assessment review of all banks subject to the programme. The review carried out by the Irish Central Bank identified capital needs of €5.35 billion for the Bank of Ireland, of which €4.35 billion should be Core Tier 1 capital and €1 billion contingent capital.

Before turning to the State, the Bank of Ireland first undertook a liability management exercise consisting of debt for equity offers, the compulsory acquisition of certain eligible debt securities and potentially further burden-sharing with subordinated bondholders.

The Support Programme for Ireland requires the Bank of Ireland, Allied Irish Bank, EBS and Irish Life and Permanent to increase their capital to meet new regulatory requirements during the period 2011 to 2013. The base case and the stress case capital targets used by the Irish Central Bank were respectively 10.5% and 6% assuming further deleveraging of the banks in order to meet the 122% loan to deposit ratio by the end of 2013.

The Commission will assess the capital injections and restructuring plans for the other three institutions when submitted by the Irish authorities. The €85 billion EU/IMF Support Programme comprises €35 billion to meet the recapitalisation needs of the financial sector and to act as a contingency fund. Half of this is provided by Ireland itself.