Michael McGrath (Cork South Central, Fianna Fail)
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Question 192: To ask the Minister for Finance the position regarding the payment of the 8% coupon rate to the Government by banks (details supplied) further to the recapitalisation of both institutions in 2009. [6474/10]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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As a condition of State Aid approval, in relation to the recapitalisation by the Irish Government of both AIB and Bank of Ireland, the EU Commission required that the two banks each prepare and present restructuring plans to the Commission. The plan for Bank of Ireland was submitted on 30 September 2009 and the plan for AIB was submitted on 13 November 2009. The restructuring plans must comply with EU guidelines in this regard and have regard to EU State aid rules.

The commitment to burden sharing by the institution is a key consideration of the EU requirements for restructuring plans. Drawing on this, the EU issued guidelines in October 2009 aimed at clarifying their position on burden sharing, in particular in relation to the non-payment of discretionary coupons for hybrid capital instrument holders. The basis to the Commission's policy is to ensure that the amount of State aid should not exceed the minimum necessary and to achieve appropriate burden sharing with bond holders. Commission practice in this area is guided by the principle that transactions such as coupon payments reduce the total regulatory capital of an institution and this is incompatible with a situation where those same institutions are still reliant on State aid to fulfil regulatory capital requirements.

In response to the Commission's policy in this area, AIB and Bank of Ireland have both had to announce to the market that they cannot make discretionary coupon payments on Tier 1 and upper Tier 2 capital instruments. Non-payments of these coupons gives rise to a so-called "dividend stopper" which prevents payments on a range of other hybrid capital instruments held by the two institutions including the cash coupon on the State's Preference Shares. This would result in the activation of an alternative payment mechanism which would give rise to issuance of ordinary shares related to the cash amount of the dividend that would otherwise have been payable.

I am determined, in the context of ongoing discussions with the European Commission to secure agreement on the banks' restructuring plans, to resolve this issue to ensure that the State receives appropriate remuneration for the State's recapitalisation of these banks. Importantly, the European Commission is also open to finding a solution particularly since payment of a cash dividend on the State's Preference Shares was an important element of the Commission's approval for the State aid provided to the banks. I will keep the Deputy updated on progress in this matter.