Yes. The Minister has set specific lending targets for AIB and Bank of Ireland. They will make available for targeted lending not less than €3 billion each for new or increased credit facilities to SMEs in both 2010 and 2011. In particular, it must include funds for working capital for businesses. This represents a considerable increase on lending last year. To ensure the proper management of these funds, the two banks will be required to submit SME lending plans by both geography and sector for 2010 and 2011. Mr. John Trethowan, as the Government's new credit reviewer, will be reviewing bank lending policies as part of his remit.
The first loans have now transferred to NAMA and the agency's painstaking approach to the valuation of the loans will result in the maximum level of protection for the taxpayer. The first tranche represents roughly one fifth of the total amount to be transferred and comes from the ten largest borrowers. The bottom-up valuation means the banks will incur heavy losses on the loans which NAMA will acquire from them, which in some cases will amount to more than 50%. The banks must deal with the resultant losses now as any delay would only lead to stagnation. The losses on these loans, together with the capital requirements outlined by the Financial Regulator, have made clear the likely requirements of the banks and building societies. In this regard, I now wish to address the impacts on each of the institutions.
The Financial Regulator has determined that Bank of Ireland must raise additional equity capital of €2.7 billion by the end of the year to meet the new capital standards. Bank of Ireland already has taken action to address its capital needs through private sources and the Government has committed to supporting the bank in its efforts through the conversion of preference shares. The State intends to achieve full value for its investment while remaining a minority shareholder in the bank. Recapitalising Bank of Ireland will maintain its strong presence in the international capital markets and provide loan finance to individuals and businesses, while supporting Ireland's economic recovery.
The regulator has determined that Allied Irish Banks must raise additional equity capital of at least €7.4 billion by the end of the year to meet the new base case capital standards. In view of the extent of capital to be raised, Allied Irish Banks will be required by the regulator to produce a detailed capital plan by the end of April this year. However, the sale of its assets in the United States, Poland and Great Britain will assist the bank in meeting its capital requirements. The State is willing to convert some or all of its preference shares to provide additional capital in the form of ordinary equity if capital cannot be accessed privately. If private capital proves unavailable, the State will have a majority shareholding in Allied Irish Banks as a listed entity. This is preferable to the prospect of an under-capitalised or barely adequately capitalised bank stagnating in the economy.
Clearly it has proved extremely difficult to find a solution for Anglo Irish Bank, given the poor quality of its very sizeable balance sheet. The Minister for Finance reiterated yesterday that winding up the bank is assuredly not a viable option as the cost would be too great. Such a measure also would cause such disruption to the financial system that it could generate enormous and long-lasting economic instability for the State. As the Minister informed the Dáil, Anglo Irish Bank was much larger relative to the Irish economy than was Lehman Brothers relative to the United States economy. Given that the failure of Lehman Brothers brought the global financial system to the brink, it is clear that the disorderly failure of Anglo Irish Bank just two weeks later would have had a similar effect on the entire Irish financial system. The Government is providing €8.3 billion to support the capital position of the bank to take account of the bank's losses to date. There is no alternative to this capital injection that would meet the bank's unavoidable obligations at a lower cost. The Minister's actions are the logical step towards stability in our banking system. The new management team in Anglo Irish Bank is not part of the old guard and is demonstrably committed to implementing a strong risk management system and to reducing the bank's cost base. Its actions and policies are designed to lead ultimately to the creation of a smaller and stronger bank, leaving the remainder in the form of an asset management and recovery company. The Government's overriding objective is to maximise the potential return for the taxpayer in recognition of the very significant State support that has been afforded this institution.
As this House will be aware, Irish Nationwide Building Society, INBS, was heavily exposed to property speculation and as a result will transfer approximately 80% of its assets to NAMA. It requires a significant injection of capital. The Financial Regulator has determined that INBS will need an injection of €2.6 billion to remain compliant with its current regulatory capital requirements. Again, the provision of this capital is the least costly option available to the Government as without this capital injection, the taxpayer would be obliged to shoulder the significant and immediate costs in meeting the deposits, bondholders and the liabilities due to the ECB. The State will have extensive powers, as well as economic ownership of INBS, following the issuing of €100 million in special investment shares in the institution. The remaining capital required by INBS will be injected by way of a promissory note. This will have the effect of spreading over time the cost to the Exchequer. The Government favours a swift sale of INBS or its integration with another entity.
While EBS is less exposed to the property development sector, it none the less requires the injection of capital by the State. The regulator has determined that the society will need an injection of €875 million to meet the target sufficient to ensure 8% core tier 1 capital. Again, this will be done through the issuing of €100 million in special investment shares in EBS. The State will consequently control EBS. The State has committed to providing the remaining capital required by EBS by way of a promissory note which will spread over time the cost to the Exchequer if the society cannot access the requisite private capital.
There is no doubt that recapitalisation requires substantial investment by the State in the banks, although payments will be structured in a way that eases the burden on the taxpayer. These actions are being taken for a good reason, namely, that the banking system may return to its rightful role as provider of credit to the real economy. No other course of action would result in a swift return by the banking sector to its function as a provider of finance. By forcing the banks to recognise their losses upfront, the Government can rid the system of these speculative loans and end the mismanagement of the banking system.
The suggestion remains that the nationalisation option would have been less costly. The argument seems to be that if only the Government had nationalised AIB and Bank of Ireland, it would have eliminated the valuation risk pertaining to NAMA and as a result there would have been no need for the concept of long-term economic value. As the Minister announced last night, had the Government opted to do this, the losses crystallised at the two main banks still would have had to be fully recognised and real capital still would have been required. As the full owner of these institutions, the State would have been obliged to cover the totality of this enlarged capital requirement with no prospect of new private sector funds contributing. All in all, there is strength in the view that the option chosen by the Government is the least costly to the taxpayer.
The detailed Central Bank legislation outlined in the Dáil yesterday ensures greater protection for our economy from the irresponsible actions of financial institutions in recent times. A combined regulator and Central Bank will ensure enhanced scrutiny of our banks. It will have stronger powers and will be in a position to exercise them more frequently and more stringently. The Central Bank will itself be subject to increased Oireachtas scrutiny and we must never again be in a position where the banks treat the taxpayer with disdain. The new Governor of the Central Bank and the new head of the Financial Regulator are committed to this.
Being in this House, I cannot help but remember the debates on the Financial Regulator six or seven years ago, as do, I am sure, the Leas-Chathaoirleach and Senators Norris and MacSharry. The tendency in the argument was to try to push the Central Bank and the regulator as far apart as possible. The drawbacks of this argument are now evident, as is the importance of their working together.
There is no question but that there are large costs to resolving Ireland's banking crisis. Nevertheless, there are also significant benefits for the State and its taxpayers from these initiatives. As the Taoiseach and the Minister for Finance have explained, the economy should grow faster because the Government has set the banking system on the correct path again, it is likely that NAMA will deliver a net gain for the taxpayer, particularly as the agency has pursued such a robust valuation process, the NPRF will have a valuable shareholding in the two main banks that have the potential to realise gains, the taxpayer has a proven gain of €1 billion, which will accrue in six months time from the bank guarantee schemes, and reinventing Anglo Irish Bank as a much reduced but sound credit institution that can be sold to private investors at a later date will go some way towards recouping the taxpayers' assistance to it.
Ireland now enjoys the confidence of the international markets because of the determined and successful steps the Government has taken to place our public finances on a more sustainable footing. It is clear that facing up to the problems presented by the severe downturn in our fiscal position has paid off. The actions announced yesterday will have the same effect on our financial sector by compelling the banks to face up to their difficulties.
With reference to past debates on social partnership, I am glad that an agreement has been reached. It is subject to ratification by the social partners, but I hope it will bring the current action to an end and help to underpin stability and confidence in the new course that we have been required to adopt.
The banks have been forced to recognise their losses and the Government, on behalf of the taxpayer, has committed the capital that will ensure we have a banking system to serve this economy as it recovers. The certainty provided will further boost international confidence in this nation, its people and its economy. It will, therefore, smooth Ireland's path to economic recovery.
