The government is considering giving Bank of Ireland a loan of more than €1bn to meet a February deadline to increase its reserves. The move would buy the institution time this spring to raise fresh equity from investors, according to sources.
The bank and the Department of Finance are understood to have discussed issuing a financial instrument – possibly a promissory note – which would satisfy the Central Bank's requirements for core capital, but would not increase the government's stake beyond the current level of 36%.
The note would allow Bank of Ireland chief executive Richie Boucher a chance to drum up support among shareholders for a rights issue or share placement over the coming months to replace the government's capital and keep the bank largely in private hands.
The bank needs to raise another €1.5bn by 28 February to meet the new minimum core capital level of 12% imposed by the Central Bank as a condition of the EU/IMF bailout. Bank of Ireland has already raised €700m from a debt exchange exercise to bring the figure down from €2.2bn. Analysts estimate the bank could get €200m from another round of debt buybacks, leaving a €1.3bn shortfall.
The government had been expected to convert part of its remaining €1.8bn in preference shares in Bank of Ireland to ordinary equity in a move that would effectively nationalise the institution, which has long been regarded as the "best of a bad bunch" of Irish banks. Market sources said the Department of Finance would not exercise this option right away, giving the bank a chance to source fresh funds, possibly from a foreign investor.
Banking and investor sources have expressed concern in recent weeks that the February deadline for recapitalising Bank of Ireland is unnecessarily tight. One senior fund source told the Sunday Tribune there was a consensus that the bank had a chance of raising the money given more time.
Central Bank stress tests for capital and liquidity planned for March have also complicated the picture. The two deadlines put the bank in a "quandary", said a source.
"Nobody is going to invest in a bank in February if they don't know what it's going to look like in June," said a senior bank analyst at a Dublin securities firm.
The NTMA, Department of Finance and Bank of Ireland declined to comment.