Patrick Honohan: phased approach likely on recap

CENTRAL bank governor Patrick Honohan is working on a timetable that will see the regulator tell banks by May how many billions of euro in capital lenders will need to keep in reserve to satisfy the markets, senior bankers have told the Sunday Tribune.

The key decision has been described as the final piece of the jigsaw in the recapitalisation of the Irish banks.

The central bank will hope to adopt a phased approach by setting an initial low level of capital to be held by the Dublin banks because otherwise a high ratio would trigger a huge demand on the Irish taxpayer to make good the big accounting holes all in one go, senior bankers believe.

Analysts, who believe that Honohan will have to follow a phased approach in setting initially low minimum capital requirements, say he will have to juggle the demands of the markets, the requirements of the European Commission and the stretched resources of the Irish government to fund the banks.

The timetable would see the start of the transfer of loans this spring into the National Asset Management Agency (Nama) and the completion of the injection of additional billions of euro into the banks following the governor's decision.

Senior bankers say that the European Union cannot give Ireland an advantage by allowing the Irish central bank to set a low level of reserves for its banks.

The Central Bank declined to comment.

Analysts at JP Morgan said AIB and Bank of Ireland will need to raise substantial amounts of equity to meet new capital requirements proposed by the Basel Committee on Banking Supervision.

JP Morgan said AIB would have a €4.5 billion capital deficit while Bank of Ireland's would be €2.7bn. The Basel III proposals require banks to exclude pension fund liabilities and deferred tax assets to improve the quality of their capital.

"We believe a substantial recapitalisation is needed for Irish banks in the medium term, as we consider it unrealistic for these banks to be able to operate below industry capital levels," the analysts said. It urged investors to "avoid" Irish bank shares.

AIB would need to retain its earnings for at least eight years to avoid going to the market for new equity in order to meet the Basel standard. Bank of Ireland would to retain earnings for almost five years.

The JP Morgan analysts said the deficits equate to about 390% of AIB's market value and 207% of Bank of Ireland's.

Rumours that Anglo Irish Bank will need €11bn in recapitalisation from the State were played down last week by informed sources.