THE GOVERNMENT has publicly signalled for the first time that it is willing to participate in a recapitalisation of the banking system, but only to supplement new capital from private investors.
In a move that opens the door for the State to follow the public recapitalisations of banks in Britain and the US, Minister for Finance Brian Lenihan said in a statement issued late last night that he would examine proposals for such investment on a case-by-case basis.
His remarks followed a series of meetings in Government Buildings yesterday with the chiefs of the six institutions covered by the State-guarantee scheme: AIB, Bank of Ireland, Anglo Irish Bank, Irish Life Permanent (ILP), the Educational Building Society (EBS) and Irish Nationwide Building Society (INBS).
Mr Lenihan noted some institutions were already in talks with potential investors and encouraged them to progress these discussions.
"In certain circumstances, it would be appropriate for the State, through the National Pensions Reserve Fund or otherwise, to consider supplementing private investment with State participation, where in doing so the aim of securing the financial system can be better met," the statement said.
"In that regard, the Minister is open to evaluating proposals from potential investors which would add value to the security and stability of the financial system and its ability to contribute in a positive way to economic development."
The State will consider any such involvement in institutions "active in Ireland" on the basis of objective and non-discriminatory criteria, in line with the principles set out in the guarantee scheme. The overarching objective was to preserve financial stability, he said, consistent with EU state aid rules.
There was no formal comment from the financial institutions after they met Mr Lenihan, who was accompanied by Central Bank governor John Hurley; Department of Finance secretary general David Doyle; and solicitor Pádraig Ó Ríordáin, head of law firm Arthur Cox.
Although Mr Lenihan said he had made "no proposals" in relation to consolidation of financial institutions, the banks and INBS are widely said to be resisting suggestions from the Government that they engage in mergers to strengthen the sector.
Bank of Ireland and ILP are understood to have told Mr Lenihan in decisive terms that they are unwilling to merge their businesses, an option favoured in Government circles. The presence of solicitor Paul Carroll, head of law firm AL Goodbody, with ILP chief Denis Casey and chairwoman Gillian Bowler, was seen as a sign that the institution took a robust stance in the talks.
Asked if ILP had threatened legal action against any attempt by the Government to force it into a merger with Bank of Ireland, a spokesman said: "We're not threatening anything, but in a process as serious as this, we would reserve all our rights."
ILP remains interested in a transaction with the EBS, whose engagement with Rabobank is said to have petered out.
Bank of Ireland held discussions this week with four private equity groups: the Mallabraca consortium (comprising JC Flowers, Carlyle Group and two Middle East funds), Texas Pacific Group, Kohlberg Kravis Roberts and another unnamed firm. However, the bank's top management is considered unlikely to favour recapitalisation from such quarters.
Additional concern, at least in banking circles, surrounds the two-year duration of the State guarantee. This is seen as a hindrance to the banks' ability in the scheme's second year to raise funding on international money markets as the risk of loan defaults rises because of the recession. Some banks are seeking an extension to the guarantee to enable the banks rebuild their financial capacity. Mr Lenihan's spokesman declined to comment.
