It is obvious that the Irish banks will need very large amounts of new equity capital in the near future, given their NAMA-related loss crystallisation, along with prospective losses on their retained loan portfolios. This confirms the year-ago forecasts of Brian Lucey, Karl Whelen and others, and contradicts the contemporaneous claims of bank and government spokespersons that there would be no need for additional equity capital. It seems clear that the amount of new equity capital needed is equivalent to majority ownership (Lucey was quoted on Frontline stating that the newly issued equity might constitute 95% of total equity after issuance).
There are three ways to inject new equity capital into the two surviving banks: 1) the government directly purchases more equity shares from the banks, 2) the banks try to raise the equity from existing shareholders using a rights offering, or 3) the banks accept a big block acquisition of equity capital from a large foreign institution probably a foreign bank. The Central Bank and Department of Finance should be pushing hard on the banks to use method 3, since this method is in the best interest of the Irish taxpayer and Irish economy.
It is standard best practice to rescue ailing banks via arranged takeovers by strong banks. For example, in the USA the Federal Deposit Insurance Corporation and Federal Reserve have very well-honed procedures and can arrange these forced-marriages quickly and smoothly. In the current Irish situation there are several big advantages over the other two methods:
1. It brings harsh market discipline to the banks. If using method 1 instead, the banks become majority state-owned, and the political biases in government policy might infect bank strategies even more strongly than at present. This is a serious concern. For example, recent government banking policies (liability guarantee, Anglo Irish non-closure, NAMA business plan, property price information suppression) have been very generous toward Irish property developers, at great expense to Irish taxpayers and the Irish economy. A foreign bank would not have these political biases – perhaps it could even strong-arm the government into releasing a property price register and also force the government to stop working through NAMA to prevent property prices from dropping to a market-clearing equilibrium. Method 2, an attempted rights offering, would leave the banks very weak and essentially wards of the state, and hence many of the same concerns apply.
2. A foreign block acquisition would provide market validation of the equity price for the Irish banks. By opening up its books to a foreign acquirer, and then accepting a fair offer for some or all of the shares of the bank, the bank provides a true picture of the state of the bank, and by extension a valuation guide for other Irish banks and building societies.
3. The implicit cost of the government liability guarantee, for any bank in foreign ownership, would fall to near-zero. The liability guarantee would be buffered by the big foreign bank’s large asset base.
The drawback to a foreign takeover is that domestic shareholders (?) would lose control of either or both of the two main banks. I think that this is a price that the Irish public should accept. The banks gambled recklessly with their legacy and lost the bet. Domestic ownership of the banks matters very little in a very open economy like Ireland’s.
 Anglo Irish (as Fintan O’Toole wittily stated) is “undead” rather than strictly “alive” — here I am focussing only on AIB and Bank of Ireland. I exclude the building societies to simplify the discussion.