IL&P rejected merger plan weeks after €440bn guarantee
FINANCE Minister Brian Lenihan was given a stark rebuff when he tried to radically restructure the banking system at the height of the financial crisis by merging two of the country's three largest banks.
The Department of Finance wanted to bring about a merger or buyout of Irish Life & Permanent (IL&P) by Bank of Ireland, according to a letter obtained by the Irish Independent.
But the letter from IL&P to Mr Lenihan -- sent just weeks after the Government staked billions of taxpayers' money to guarantee bank deposits -- shows the country's third largest bank refused to be guided by the Finance Minister.
IL&P said Mr Lenihan's proposal would cause the "destruction" of thousands of jobs and Bank of Ireland was too weak anyway to take on another institution.
The ramifications of the decision will escape scrutiny by the Government banking inquiry, which will only examine events up until the bank guarantee on the night of September 29, 2008.
The letter raises concerns about Mr Lenihan's ability to compel the banks to do the Government's bidding, despite the €440bn guarantee.
More than a year later, IL&P is still grappling with the problem of having too few deposits compared to the loans it has given out.
The company said in November it still needed the European Central Bank to help fund its operations, with the ECB supplying €7bn during 2009.
The letter of November 28, 2008, sent personally to Mr Lenihan, outlined a range of concerns about Bank of Ireland itself -- the country's second biggest bank. It underlined how competitive the banks were against each other, even at the height of the financial crisis.
IL&P said: "The market perceives that Bank of Ireland has a weak capital position and has a requirement for additional capital." It then compared that position with its own. "In contrast IL&P has an exceptionally strong and flexible capital position."
The most serious warning from the company was that it could lose 30pc of its entire deposit base, about €3bn, because IL&P and Bank of Ireland shared many of the same customers.
The deposits would be lost because some customers would not want their funds tied up in one large combined company.
The letter also shows that IL&P took advise from legal firm A&L Goodbody and also investment bank Goldman Sachs before responding negatively to Mr Lenihan's proposals.
It warned of dire consequences if an alliance with Bank of Ireland was attempted.
"Bank of Ireland's capital ratio would deteriorate, existing funding lines would be lost and Bank of Ireland's loan-to-deposit ratio would increase. As a consequence, Bank of Ireland's debt rating could come under pressure," the letter warned the minister.
IL&P also poured cold water on Bank of Ireland's prospects in the period between 2008 and 2010. "Market forecasts of Bank of Ireland's earnings indicate that the bank will see significant falls in profitability, with some estimates pointing to losses over the next 18 to 24 months."
But the core of its argument, which appears to have been accepted by Mr Lenihan and his advisers, is that merging such large entities would have resulted in large-scale job losses.
A spokesman for IL&P, when asked about the contents of the letter, replied: "The letter we sent summed up our view on one particular proposal -- but right now we're more focused on looking ahead than looking back over our shoulders."
The Department of Finance refused to comment on whether it has the powers to 'force' banks into mergers. And it declined to say whether other mergers, like AIB and Bank of Ireland, have been proposed by the minister during the financial crisis.