Anglo Irish Bank Capital Costs and Review of Capital Requirements for Irish Banks

The Central Bank statement is below, while the detailed statement on Anglo-Irish is here and the detailed statement on capital requirements for Irish banks is here.

The Central Bank today (Thursday 30 September) published its assessment of the capital requirements resulting from the recently announced restructuring of Anglo Irish Bank.

In addition, the Central Bank has published the outcome of its review of the capital requirements of those Irish banks subject to the Prudential Capital Assessment Review (PCAR) exercise, in light of the estimated remaining haircuts to be applied by NAMA.

Anglo Irish Bank Restructuring

The Central Bank has assessed the injection of capital needed to meet minimum regulatory requirements under both a base, or central, scenario, taking account of expected losses, and under a severe hypothetical stress scenario.

This assessment has been applied to both the proposed Funding Bank and the Asset Recovery Bank that will be created. The total capital required for both institutions under the base, or expected loss, scenario is €29.3billion.

Under the stress scenario, in the event that unexpected additional losses are incurred, the Central Bank estimates that an additional €5 billion of capital could potentially be required.

A detailed description of the capital requirements and the methodology used are set out in the attached statement.

Implementation of PCAR Requirements for Irish Banks

The Central Bank has advised the Irish banks subject to the Prudential Capital Assessment Review (PCAR) that the year-end deadline for meeting the standards remains in place. The Central Bank has reviewed the requirements based on the higher NAMA haircuts announced today and which were not available when the original calculations were conducted on 30 March.

The outcome of the review is as follows:


In light of the higher NAMA haircuts, the Central Bank has advised AIB that it will be required to raise an additional €3 billion by 31 December.

Bank of Ireland

Bank of Ireland already has sufficient capital to meet the PCAR standard in the light of the higher NAMA haircuts.


NAMA has not indicated haircut estimates for EBS at this point. Given the small size of the portfolio of loans, the impact of higher haircuts is unlikely to be significant. However, the Central Bank has informed EBS that it will need to take account of higher haircut levels of up to 60% in its capital planning and it should advise acquirers accordingly.


IL&P does not have loans in NAMA and its PCAR is unaffected.


A PCAR exercise has not yet been conducted for INBS in light of the continuing discussion on its restructuring plans.

A more detailed description of the PCAR review is in the attached statement.

Speaking today, Central Bank Governor, Patrick Honohan, said: “Taking account of NAMA’s estimates of future haircuts has implications for required capital injections which need to be acted on now.  The new calculations give clarity and as much certainty as can reasonably be expected to the budgetary cost of the bank restructuring.  The additional budgetary costs – and in particular the higher debt-to-GDP ratio that is implied – confirm the need for a reprogramming of the budgetary profile, though it is important to recognise that the bulk of this reprogramming need arises from other sources.  Today’s announcements take the Irish banking system closer to a final resolution of its restructuring, which is a prerequisite for sustained economic recovery.”

The Head of Financial Regulation at the Central Bank, Matthew Elderfield, said: “The assessment we have published today of the costs of Anglo’s restructuring reflect careful analysis of information from a range of sources.  It also includes a projection based on a prudent hypothetical stress scenario which gives guidance as to the likely upper bound of those costs.  At the same time, we have today confirmed that we are pressing ahead with our plans to require the Irish banks to meet more rigorous capital requirements which are closely aligned with the new international standards set by the Basel Committee and to do so by the year end.  As part of this process, we have advised the banks that they need to take account of developments in the NAMA haircuts which have occurred during the course of the year.  This ensures that the banks’ year end capital position fully meets the objectives of our Prudential Capital Assessment Review process.”

32 replies on “Anglo Irish Bank Capital Costs and Review of Capital Requirements for Irish Banks”

This is the stress test applied by the CB

“The micro stress scenario assumed a peak-to-trough fall of 70% in Irish commercial property prices, with prices only recovering to 57% of their peak level out to 2020.

The macro stress scenario assumed that Irish commercial property prices fall to 65% off their peak values and do not recover out to 2020.

The stress loss estimate uses the more conservative of the micro and macro calculations. “

The EU stress test in July for Irish commercial property was

Base scenario (and assuming prices stop falling at the end of 2011) – peak to trough – 64%

Adverse (again assuming prices stop falling at the end of 2011) – peak to trough – 65%

(There is little difference between the base and adverse because property has already fallen so much from peak that % changes to present price levels have little effect on the peak – trough).

So on the face of it the Governor was being more prudent that the EU.

BTW to get to 65% peak to trough from where we were in November 2009 (NAMA’s valuation date) you would have to have a drop of 25% which tells me that NAMA is overpaying through the nose for commercial property-based loans.

In today’s Irish Times: There is a commentary on clearing the residential property market…

“According to one new homes agent, it may not be enough to offer discounts in line with the reduced values set by Nama in December, 2009. Even before the sell-off gets under way, the agent contends that Nama “bought in too dear as new home prices have slipped by a further 15 per cent since then”.”

So, we paid more for junk than it is worth. Anglo went from costing nothing to costing up to €34 billion. More worryingly, the State is going to take ownership of AIB. One fears what non-property related debts are lurking on its balance sheet.

Did the government not rubbish S&P not even a month ago for putting the Anglo bill at 35bn?

Has Lenihan even a shred of credibility left?

NTMA steering clear of auctions? Precursor to Stabilization intervention.

Deficit down to 3% of GDP by 2014? I suppose if all pubic expenditure is halted between now and then (except of course expenditure on the tribunal lawyers, government advisers and junkets to ‘attract’ jobs) it’s possible. On the other hand, growth might roar back at 4% yoy.

I’m about to reread all those drug addled authors from the sixties that I fondly remember for inspiration and escapism.

@David Meredith:
“So, we paid more for junk than it is worth.”

Good lord. Well I never.


I’m a tad confused. If we are putting €3bn into AIB, wouldn’t it be cheaper to at least wipe out the shareholders first and get 100% ownership.

How is their holding worth anything if they can’t trade without our €3bn?

@ Din Taylor

“Did the government not rubbish S&P not even a month ago for putting the Anglo bill at 35bn?”

Not only the Government but the State braodcaster RTÉ donned the green jersey.

Emmet Oliver of the Indo wrote on Aug 26: “Not only did the NTMA disagree with the results of the downgrade from AA to AA-, it also described the assumptions behind it as ‘extreme.’ The leading credit analyst with S&P was then subjected to an extremely hostile interview on RTE, even though the analyst, Trevor Cullinan, was making the simple point that the bonds issued by NAMA are a form of government borrowing, albeit backed up by property assets.”

@ Rory O’Farrell
Me too. The total market value is less than .5b today. so we spend 3.5 and another 3b and we may get 90%. crazy maths.

Apparently we only get 75% of the votes for that money.

Lenihan says “ have 75% voting stake in AIB” according to Bloomberg

@John Mul
I think I get it. Issue tons of paper to institutions at 20c per pop and let current holders participate at 35c.

@ John Mul

Yep, I heard that too. I don’t see where that comes from in the statement.

From the statements

“This brings the new total capital requirement for AIB, after deducting the capital generated on the sale of its Polish subsidiary, to €7.9bn.”

“In order to afford every opportunity to AIB to raise as much as possible of the required capital from the markets and to minimise further Government support, it has been decided that this capital requirement will be met through a placing and open offer to shareholders of AIB shares to the value of €5.4bn.”

So one estimate would be 5.4 / 7.9 = 0.68.

Anyone got a better figure than that?

Well, if it is 5.4 bn they want to raise, the closing price as of yesterday valued AIB at about 600 mn.

So a new issue of 5.4 bn would value the equit at 6 bn

If the state puts in 3 bn, that is 50% of the new equity value. The existing 18% stake becomes 1.8% so 51.8%

The warrants amount to 25% of any new bank whether recapitalised or not, so that becomes 71.8% (25% of something gives you a 20% stake (as you dilute yourself)???)

Guesswork really.

If it is just 3bn in extra equity with no private placing, then the state ends up with about 86.5% excluding warrants…

But no doubt, as I’ve said before, it will be structured so we dilute ourselves three times, have to stand on our heads and end up with 48% of the bank, no warrants and reduced preference shares.


I cannot visualise the logic in kicking AIB uncertainty into 2011 – and can only suspect that a deeply frozen infection from the ideological virus that largely caused the global financial crisis remains in the policy process ….. and on the board of said bank ……… I had hoped for a strong statement on Nationalisation NOW and that this fudging, finessing, spinning etc was over ……….. ditto with BOI.

@ Hoggie

most of the broker/bank reports this morning reckon it’ll be more like 90% or so, assuming 1.7bn of the prefs get converted.

In addition to a new 3bn from the NPRF?


I note that AIB now needs to raise 7.9 bn post the Polish disposal. Even assuming M&T raises 2.2 bn and 3.2 bn for the UK banking operation, how much is required to be raised in a market placing?

@ David O’Donnell

Is this a sign of a general election early in the new year? You can get that can pretty far down the road if you kick it hard enough…..

@ Hoggie

In terms of capital 2.5bn for Polski, 1.2bn for Yankee, 1bn for Ingerland is probably about the extent of it, and possible another 600mm for smaller assets (AIB Inv Mgt for example). So tops they are generating 5.3bn in total. hence the reason why they are having to do the 5.4bn in equity raising to get to 10.4bn (7.4+3).

Of that 5.4bn equity, which will be fully underwritten by NPRF, 3.7bn is expected to come from shareholders, and 1.7bn will come from pref shares being converted to ordinary. Of the 3.7bn coming from shareholders, obviously the vast bulk of this is expected to come from the government, hence how they’ll end up with 80-90%.

Thanks for that.

Wanna bet the three-card monte is pulled again with different rounds of recap resulting in a much lower state stake?

As far as I can tell there are no news on a bank resolution legislation. Are there any news on updated personal bankrupcy laws?

If AIB ends up being majority controlled by the Irish government and there probably are more personal borrowers from AIB than from Anglo that might have difficulty meeting their obligations then there will be a tricky situation:

At the moment it is difficult to tell if NAMA pursues the borrowers who cannot meet their obligations. There might be some complications due to complicated corporate structures, guarantees etc. However, those complications generally do not exist for personal mortgage holders.

The perception that all are equal to the law must be upheld. Can it be upheld if AIB is majority controlled by the Irish government and nobody (supposedly close to the government) whose loans were transferred into NAMA is forced to abandon their lifestyle while other borrowers are forced into the current strict personal bankrupcy?

One simple question : Who are the Anglo bond holders and why have we gone to the pin of our collars to absorb their losses?

Sp if AIB was worth €600m based on recent share prices…it is now worth €3.1 because of the €2.5bn raised by the sale of the Polish assets?

And worth more again when (if) it sells the other assets, so that when the shares issue comes about the Gov can ostensibly put in €5.4bn without, say, owning the bank many times over?

Also, Is not converting all the €3.5bn preference shares in the first instance merely the Gov saying they feel more confident of raising the (not yet committed) €3.7bn this year than they would in say, March?

Does this all imply the rights issue can’t take place until AIB has sold all its assets?

“Sp if AIB was worth €600m based on recent share prices…it is now worth €3.1 because of the €2.5bn raised by the sale of the Polish assets?”
No. The worth of AIB is calculated by multiplying the current share price by the number of shares currently outstanding.

The sale of the Polish bank has simply put money into the big negative hole in the balance sheet.

“Does this all imply the rights issue can’t take place until AIB has sold all its assets?”
No, both things have to happen before the end of the year.

Thanks Hogan.

So after the Government converts its €1.7bn (lets leave it at that for now) and buys €3.7bn in more oridnary shares), what would the ostensible value of the company be then?

I am struggling to get my head around how exactly the Government can pump in multiples of the company’s value and still only end up with a worst case scenario ownership of 92-93% (as the papers are reporting)?

Is it merely dependent on how many shares the AIB creat at the rights issue / placement?

@Rob S
“Is it merely dependent on how many shares the AIB creat at the rights issue / placement?”
Yep, I think so. It’s a function of the number of existing shares plus the number of new shares issued.

By the way, this is just the market price. There are other ways to value companies (net asset value, for example). Some/many of these would value the Irish banks at a negative amount. Another method would be shareholder equity which is bank assets-bank liabilities (by balance sheet). So, roughly speaking, when it is said that the bank need a tier 1 equity ratio of 6%, that means that the difference between assets and liabilities must be at least 6% of assets.

It is also sort of dependent on how many rounds of recapitalisation there are. In the BoI recapitalisation there were three rounds of recap. The state diluted itself twice…

If the state decided to ‘buy’ AIB, the price of existing shares would rise. It wouldn’t be able to buy it just for the existing market value. It also would still have an insolvent bank, even if it could get it for chips and would have to put in money to fix the balance sheet anyway. By keeping some element of stock-market listing, there is an easier escape mechanism (sell equity back to the market in bits), the IPO costs are avoided and an arms length mechanism is retained.

This is what should have been done initially with the preference shares. The madness of keeping BoI and AIB as ‘independent’ entities wasted two years of resolution process. If the state was in the position of being the hugely majority shareholder of both of them, it could easily merge them and dismember them (split them into units).

“This is what should have been done initially with the preference shares. ”
Oops, what I mean is that common equity should have been bought then, not preference shares.


So €6.6bn in Nama loans (mainly from AIB and BOI) will no longer go to Nama. Is this the main reason for AIB’s extra recap need?

@Rob S
“So €6.6bn in Nama loans (mainly from AIB and BOI) will no longer go to Nama. Is this the main reason for AIB’s extra recap need?”
Unfortunately, no. If AIB were to take a NAMA sized discount on the loans themselves, they would need a bigger capital injectin (another 3 bn). I believe the loans are not going to NAMA because AIB can’t afford that they do (and possibly BoI would require another capital injection).

So keeping those loans on the balance sheet allows the zombie banks to write them down at a slower pace.

There is an argument that NAMA has been a terrible mistake (for other than Anglo and INBS). It has forced the banks to take losses way beyond their ability to raise capital and at a much greater speed. Meanwhile, by enforcing these losses, it has drained liquidity from the banks (contrary to the stated aims of NAMA). What it has done (at the EU’s prompting) is provide clarity to the scale of bad debts, by a granular analysis of the loan book – no cherry-picking allowed.

While it may have been planned as a clever scheme to hide the problem, it has not only back-fired on that, but it has also marked the card for observers looking at the non-NAMA portion of the banks’ loans. The readover from NAMA is that the sub-5 million loans are of as poor quality as the larger ones (at least). Hence part of the need for extra capital – NAMA has exposed the banks’ provisions as ridiculously small.

Comments are closed.