Top Irish bankers' pay will be cut by a third under the Government's €7 billion recapitalisation of Allied Irish Banks and Bank of Ireland announced this evening. Under the plan, €3.5bn will be invested in Core Tier 1 capital in each of the banks, in return for an 8 per cent annual dividend payable in cash, or ordinary shares.
The Minister for Finance, Brian Lenihan, speaking at a Government Buildings press conference, defended the decision to limit the number of State directors to a quarter of each board.
The State did not want more because financial markets would otherwise not believe that the banks were still commercial enterprises and would therefore be unable to borrow.
"The State doesn't intend to take control of these banks," he said, adding that the Government's ability to buy up to quarter of the banks' shares at a discount of today's prices offers taxpayers "a considerable upswing".
The banks will be able to cut the State's possible stake-holding to 15 per cent if they can find €1.5bn worth of private capital by next September, the Minister said.
Explaining the need for pay cuts in the banks, he said the Government believed that pay restraint is important given the taxpayers' help that has been offered.
A top-level officials' group will report shortly on executives' pay, but, "as a step in this direction, both AIB and Bank of Ireland accept that the pay of senior executives will be curtailed.
"Total remuneration for all senior executives will be reduced by at least 33
per cent. No performance bonuses will be paid for these senior executives and no salary increases will be made in relation to 2008 and 2009.
"The two banks have also accepted that, for non-executive directors, fees will be reduced by at least 25%," he said, adding that all of the directors of both banks are up for re-election this year.
The €7 billion recapitalisation will guarantee the banks' future stability, he said, adding that he rejected some of the doomsday predictions about future property bad debts.
"As far as the Government is concerned this is the recapitalisation of the two main financial institutions which are of such systemic importance for Ireland," said Mr Lenihan.
"We have avoided the danger of nationalising these institutions because it would have led to serious difficulty in international perceptions about Ireland," he said.
He said "exhaustive inquiries" have been made by the State into the operations of the two main banks over the last few months and nothing suggests that criminal behaviour has taken place.
"Everyone knows that we are facing a battle for financial stability," said Mr Lenihan, "This isn't a question of baling out the banks. The State is getting a good deal."
The bad debts discovered in the banks, he told a Government Buildings press conference, are in line with an estimate given already by Pricewaterhousecoopers.
However, "a short, sharp due diligence" will be undertaken in both banks before any of the State's money is invested in either of them.
The Government, he acknowledged, had been "slow to capitalise" Irish banks "but it has been worthwhile in that it has given us the advantage of being able to do due diligence".
All directors of both AIB and Bank of Ireland will stand down before their annual general meetings will take place, but he rejected calls to impose a State-ordered cull of executives.
"Were the Government to issue a directive like that it would be seen as a signal that the banks do not have any proper corporate governance," said Mr Lenihan.
The Bank of Ireland's chief executive, Brian Goggins has already said that he is to retire in the summer, and the bank is already preparing to replace him.
The bank's chairman, Dermot Gleeson has said that he would "consult" with the Government before an appointment is made, the Minister told journalists during a lengthy press conference.
However, top bankers' pay will have to be cut by at least a third, while bonuses and pay increases that may have due this year and last will have to be scrapped, he said.
The recapitalisation was structured to ensure that the taxpayer would benefit from an increase in bank valuations, while the banks themselves would be encouraged to get private investment.
"We want to incentivise the banks to get private capital. The fact that they are unable to do so now doesn't mean that they will be unable to do so in future," he said.
The possible property loan losses facing Allied Irish Bank and Bank of Ireland cannot be gauged by National Irish Banks to write-down hundreds of millions from its books last week.
The majority of property loans were given on a 75 per cent loan-to-value ratio, and, therefore, the first losses will have been sustained by the property developer.
Davys Stockbrokers' estimate that the two big banks will each to cope with €5bn worth of bad debts in each of the next three years, is "more realistic" than many others, Mr Lenihan said.
The State will use €4 billion of savings currently held by the National Pension Reserve Fund, while the rest will be borrowed on international markets to invest in the banks.
