Shares fall after move by Obama to rein in US banks
Irish lenders' stock caught up in declines across the globe
President Barack Obama's proposals to limit the size of US banks and stop them trading on their own account sent bank shares tumbling around the globe, with Irish bank shares caught up in the declines.
Analysts said that while Mr Obama's proposals remained very unclear, valuations for virtually all banks would take a hit. AIB dropped by as much as 8.3pc earlier in the trading day, but later recovered, while Bank of Ireland sank by 9pc at one point, although it made up much of this ground later.
The multiples used to value banks may now move downward, say analysts, even though many European banks do not engage in the kind of proprietary trading Mr Obama is seeking to outlaw.
The amount of money banks inject into the market is also likely to reduce due to the proposals, say banking analysts.
"The Obama proposals have the potential to impact on liquidity in the market generally, even for Irish banks,'' said Oliver Gilvarry, head of research at Dolmen Stockbrokers.
"The proposals have caused huge uncertainty, with even Irish banks caught up in the situation,'' he added.
Neither AIB nor Bank of Ireland do the kind of proprietary trading engaged in by major US banks like Goldman Sachs. On Thursday, this led some analysts to speculate that Irish banks could become defensive plays, but falling share prices dented this idea.
While the proposals do not affect the Irish banks directly, there is a danger of tighter regulation generally in 2010, with banks having to put aside higher levels of capital and having some of their riskier activities curbed.
Banks in the western world have generally been able to generate a return (on equity) of about 13.5pc, said Eamon Hughes of Goodbody Stockbrokers. He said the Irish banks were never likely to get any more than 15pc in future due to stricter regulations.
"However, with the inexorable -- for the moment -- move to impose stricter regulations on the financial system globally, this represents our base case, but also the highest likely outcome,'' said Mr Hughes.
Analysts are also concerned that if Mr Obama's proposals restrict the share of the deposit market any bank can hold, institutions will simply be forced to get more wholesale funding to plug the gap. This could leave them with dangerous loan-to-deposit ratios, which are already at elevated levels in Ireland.
It is unclear which banks will be covered by the Obama proposals at this stage, although members of his administration have said any bank that is covered by the federal deposit protection scheme will be subject to the new rules.