Bank of Ireland chief executive Richie Boucher must have been looking forward to a relaxing Christmas break after a hectic year that has seen the 227-year-old institution emerge as the only major Irish bank not yet in government control. Instead, he finds himself in a race against time to prevent it from sliding into majority state ownership.

As part of the Central Bank's revised capital assessment tests, Bank of Ireland needs to find almost €2.2bn by early next year to hit the required target of a core tier one capital ratio of 12.5%. Having completed a complicated €2.7bn capital-raising last May, the bank now faces the prospect of going back to shareholders in the next few months looking for more cash.

One banking source told the Sunday Tribune last week: "It's going to be a tall order to avoid majority government ownership but you'd have to assume that government will want at least one bank in private hands."

Achieving that is going to be difficult. The amount it needs to raise and the short time to do it are big obstacles to overcome. The bank said in November that it would look to generate as much of the additional capital as it could through "a combination of internal capital management initiatives, support from existing shareholders and other capital markets sources" before it needs to go to the government and NTMA again. With the state already in control of 36% of the bank's shares, it wouldn't take a large cash call on taxpayers to push the government's stake above 50%.

The first part of capital-raising got underway last week with an offer to holders of subordinated, or junior, debt to exchange their bonds for new securities. By buying back the debt at discounts to their face value of between 46% and 58%, Bank of Ireland may be able to net about €700-€750m, according to NCB Stockbrokers analyst Ciaran O'Callaghan.

Although that would go some way to meeting a big chunk of the capital required, the ultimate gain from the move depends on how willing the bondholders are to exchange their existing securities for a new bond Bank of Ireland will issue.

And while junior debt investors have been willing to sell or exchange their debt in the past at large discounts, O'Callaghan pointed out in a note last week that as "this is a voluntary tender [by Bank of Ireland] some owners may prefer to sit tight knowing that they are legally entitled to receive a stream of coupon payments until redemption of their existing instruments". And, he added, there is still a large capital cushion in the bank to absorb losses before these investors have to take a hit.

The harder part for the bank will be to convince investors to stump up again in a rights issue. In May it was very successful in tapping institutional investors to come on board with the fundraising. The shares in May were issued at 55 cents but have sunk below that in recent weeks, meaning the institutions are already sitting on hefty losses. One fund management source said the investors may be wary of committing funds again because of the losses.

"They had a lot of institutions who were involved in the [share] placing but they have got hurt and I'd imagine they would want a compelling investment case to follow their money. It will be linked to what the bank's role in Ireland is and where Ireland's economy is going," said the source. "When people look at the business case, and they are likely to be new investors, they will see [the bank] is in better order. When this is all over there will be a banking system left in Ireland and Bank of Ireland will be the main player."

In the bank's favour is that it is seen as "fronting up" to the scale of its problems and has taken measures to deal with them, he added. The haircut on its Nama-bound loans is the smallest and it has already started cutting costs by announcing a voluntary redundancy scheme.

"They have played ball and have been more open. They have done everything properly since they had to call for help [from the government] and there is a lot less uncertainty about what is in Bank of Ireland. Some people don't believe AIB have got to the bottom of their exposure," said another investment source, who said BOI may also be able to generate capital through securitising some of its loan portfolios.

Another source of cash for the bank is the sale of non-core business. Bank of Ireland has already put most of its remaining non-core assets up for sale as part of the agreement with the EU in return for the state aid it has already received. Its fund management unit BIAM has been sold to State Street for nearly €60m while its ICS Building Society division and insurance arm New Ireland are also on the block. The other businesses it has that aren't up for sale are its Burdale asset-based lending arm and its joint venture with the UK Post Office. Given the short timeframe it has, it is unlikely that selling any of these will generate much money.

Despite the gaffe over his pension earlier in the year (see panel, right), Boucher has so far managed to prevent the bank from losing its independence and position it as the strongest lender still standing.