Watchdog due to set crucial capital ratios for the banks
Matthew Elderfield (right), the new head of the financial watchdog, will tell the banks by the end of this month what level of capital they must hold in reserve, according to informed sources.
This will set the benchmark for what level of equity Bank of Ireland and Allied Irish Banks will need to raise over the coming months -- through share sales, asset disposals, debt restructuring, and an expected conversion of some of the Government's investment in each into ordinary stock.
It comes as international investors are increasingly indicating they want both banks to raise enough this year to have equity capital ratios of close to 8pc at the bottom of the economic cycle.
Analysts say this implies BoI would need to raise about €2.5bn and AIB well in excess of €4bn. However, the banks would prefer a more gradual process of initially reaching about 6pc, and adding to this over the course of three or four years as they return to profitability.
They fear that being forced to raise too much in one fell swoop could turn off investors, forcing the Government to take a larger stake in the banks.
But one of a number of Dublin stockbrokers currently gauging market appetite for potential rights issues said: "The feedback we're getting from abroad is clear: 'Make sure your banks raise enough so that they're not coming back to us a second time.'"
An Irish fund manager said that investors wanted the banks to outline a clear "path to dividends", rather than a situation where they were hoarding all their earnings to add to their capital base for years to come.
The concern, too, among some observers is that banks will remain risk averse and continue to crimp lending if their capital ratios are initially set at a high level.
It is often argued that banks holding too much capital are less competitive and deliver much lower returns on equity, which annoys investors.
But Max Watson, a former deputy director of the International Monetary Fund, and co-author of an upcoming preliminary report into the Irish banking crisis, told a key Oireachtas committee last week that his previous work had found otherwise.
"They were able to fund themselves very cheaply and are even more profitable," he said.
Mr Elderfield's office remains responsible for setting capital targets pending legislation that will absorb the Financial Regulator back under the Central Bank. But sources say he has been liaising closely with the new Central Bank governor, Patrick Honohan, on the issue.
The regulator declined to comment other than to say: "We continue to engage with credit institutions on their capital positions and requirements."