IL&P's management estimated that as much up to 900m in bank capital may become available after the Basel II accords go into effect in January 2008, while between 100m and 500m should arise in its life business as a result of changes under the EU's proposed Solvency 2 standards, due to take effect in 2009 or 2010.

Although analysts who cover the bank have said it is difficult to estimate at this stage exactly how much capital will ultimately be released to shareholders, they agree that IL&P is wellpositioned among Irish banks to benefit from the new frameworks, which are expected to reduce capital requirements for lending and insurance underwriting.

The Basel II accords are an attempt by the banking industry to take account of improved risk measurement and credit analysis into regulatory standards by re-allocating (lowering) risk weightings for loans. A risk weighting is the percentage of a loan that must be backed, at the standard 8%, by capital on the balance sheet. So a 200,000 mortgage at 50% risk weighting requires 8,000. However, at 20% . . . the likely adjustment . . . the same loan only needs 3,200 to back it up.

These changes were expected to benefit larger banks most, but neither AIB nor Bank of Ireland are anticipating major changes to their capitalisation.

IL&P, though smaller, believes its low risk profile as a mortgage-heavy institution with less corporate and commercial lending than its competitors puts it in a position to reap the rewards built into the Basel framework . . . a view shared by Davy in a recent report on Basel II and Irish banking.

But it's not all good news, either.

Because each country's central bank has the final say on any changes to risk weighting and capital adequacy, IL&P could find itself at a competitive disadvantage to a foreign retail bank with operations in Ireland . . . such as Danske, owners of National Irish bank. If the Danish central bank relaxes the rules more than the Irish central bank, Danske could be handed an arbitrage opportunity in the Irish market, according to banking analyst David Odlum of NCB Stockbrokers.

IL&P will be making its Basel II submission to the regulator this month and a decision is expected later in the second half of the year.

The central bank will be looking at the bank's stress-testing plans which, as per its London presentation, make provision for securing an extra 430m of capital in the event of zero economic growth, a 30% collapse in house prices and 12% unemployment over two years.

The size of IL&P's capital buffer will help determine the amount finally returned to shareholders.