The government and the board of Anglo Irish Bank decided to operate the nationalised property lender as a going concern because it would have cost them €60bn to wind the institution down, the bank's own estimates indicate.
Anglo, which reported a record €4.1bn half-year loss on Friday, estimated it could lose up to three-quarters of its €80bn in customer and corporate funding if it ceased operating as normal, forcing the government to make up the deficit, finance director Matt Moran told the Sunday Tribune.
As a result, the government has effectively been forced to sink €4bn in capital into the stricken bank to keep it alive, as the billions in bad debt charges on its property development loans have destroyed its equity.
Often a business in this situation would enter into liquidation, but Anglo Irish – with input from the Department of Finance – concluded that this would be far more expensive than recapitalisation.
Anglo executive chairman Donal O'Connor said in a statement before the bank's interim results last Friday that "any wind-up option would be very costly for the Irish taxpayer".
He later told reporters that an immediate liquidation of the bank would result in a "huge fire sale" of assets at extreme discounts, while a more orderly, long-term wind-down would not be welcomed by depositors or the foreign debt investors Anglo depends on for its funding.
"The experience of other banks shows nobody wants to commit to a relationship with a bank in a wind-down situation," O'Connor said.
Moran told the Sunday Tribune that not only would depositors – both corporate and retail – flee the bank if it shut its doors, but the government would lose access to most of the bank's capital markets funding, which he said is provided by institutions that lend to banks but not governments.
The British government sold the deposit book of nationalised building society Bradford & Bingley and replaced it with £18bn in funding precisely to avoid this problem. But proportionally Anglo's funding base is much larger. Its deposits alone are €64bn – more than twice the government's budgetary borrowing needs for 2009.
Anglo is already depending on €23.5bn in emergency funding lines provided by the European Central Bank and the Central Bank of Ireland to remain liquid.