Top executives at Allied Irish Banks and Bank of Ireland are understood to be keener on the Government pursuing an insurance scheme rather than a 'bad bank' solution in the belief they can still manage their spiralling impaired loans through the downturn.
Talks with the Department of Finance over the recapitalisation of both stepped up a gear in recent days. Some observers have suggested there could be agreement later this week -- ahead of the Government's self-imposed deadline of next Tuesday -- to finalise details on €2bn of public spending cuts.
There has been speculation that negotiations with the banks had been progressing at different paces over the past week, but the Government is keen to unveil a comprehensive plan for both at the same time.
AIB and BoI had each been expected to raise €1bn in the open market over the coming months to top up a €2bn preference share investment from the State.
But plans to tap shareholders for the additional funds unravelled last week as their share prices collapsed to record lows -- the result of the emergency nationalisation of Anglo Irish Bank and very weak sentiment across the global financial sector.
It is believed the department now plans to buy at least €3bn of preference shares in both groups, despite a 270pc rally by AIB shares to €1.66 and the more than doubling of BoI's stock from last week's lows having opened up their fundraising options.
The Government is also known to be mulling over setting up a bad bank to absorb toxic loans, as well as the possibility of launching an insurance scheme to tackle bad loans.
While the Obama administration in the US appears poised to set up a bad bank to stabilise the country's troubled banks, the British and Dutch governments have unveiled toxic assets insurance plans in recent weeks.
Top brass at AIB and BoI are largely believed to be of the view that an insurance scheme would be easier to execute and would not encounter the potential political quagmire of a bad bank.
"The realpolitik of the situation is that many people might see a bad bank as a way of giving troubled developers a digout -- even if that's not the case," said one source.
Goodbody Stockbrokers analyst Eamonn Hughes said yesterday that while the bad bank option "has its merits, we have to admit we are more enthused with the insurance option that the UK and Dutch governments are pursuing".
While the Dutch plan has focused on risky mortgages -- called Alt-A mortgages -- in ING, an Irish scheme would centre around development property loans, he said.
The analyst expects Irish lenders to write off 17pc of their residential development portfolio and 12pc of their commercial development loans over the coming years.
Mr Hughes added: "Putting additional preference shares into the banks is not going to ease the biggest fear the market has about banks around Europe -- the extent of losses to be incurred.
"Both a bad bank and insurance scheme address those fears, though our preference is with the latter."