Brian Lenihan Jnr (Dublin West, Fianna Fail)

As the Deputy will be aware, the Government has agreed the recapitalisation terms to be offered to Allied Irish Banks and Bank of Ireland, and these terms will be put before shareholders of the two banks in the coming weeks; indeed, in the case of Bank of Ireland, I understand they will be put before a general meeting of the bank tomorrow. The recapitalisation package will provide €3.5 billion in core tier 1 capital for each bank. The State will receive preference shares with an annual coupon of 8%, as well as warrants for the purchase of shares in five years' time at predetermined prices. The terms of the recapitalisation include a bank customer package which includes additional capacity for mortgage and small and medium-sized enterprise lending. The Government is in discussions with the other covered institutions concerning their respective capital positions.

With regard to impaired loans, the Government is conscious that in current market circumstances there is a need to bring greater certainty and transparency to the operations of systemically important financial institutions, in particular in regard to specific asset classes currently perceived as carrying a higher than average risk. Irish financial institutions have very little exposure to the sort of complex financial instruments which are weighing on the balance sheets of many banks internationally. However, Irish institutions have engaged in lending for land and property development, and construction, which has exposed them to a specific risk at a time of falling property prices and difficult economic conditions. The Government, therefore, announced on 11 February, along with its recapitalisation programme, that it would examine options for risk mitigation in this area. This work is currently under way.

In this context, I have asked Dr. Peter Bacon and the National Treasury Management Agency to report to me on the management and reduction of risks of bank balance sheets. I have seen the initial report prepared by Dr. Bacon for the NTMA. The proposals, with ongoing work at EU and European Central Bank level, will inform the considerations and any decisions the Government may take in this area. I will bring forward proposals in this area as a matter of priority.

As with all of the actions taken by the Government to address the issues faced by the banking sector, a key objective in the consideration on impaired assets will be to ensure that any State involvement will protect the interests of the taxpayer.

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