The wholesale money markets are starting to discriminate between AIB and Bank of Ireland when it comes to funding, which may force AIB to increase mortgage rates before its main Irish rival.
Bank of Ireland last week raised €2.5bn in a five-year bond issue, which cost the bank 145 basis points above the market average. AIB will shortly have to price its own issue and it is likely to be higher than Bank of Ireland's, brokers have speculated.
Brokers said any elevated funding costs for AIB would put pressure on the bank to re-price its mortgage products, even though this was likely to be unpopular with the Government.
"Political reaction to such moves will be closely gauged," said NCB banking analyst Ciaran Callaghan yesterday.
The gap between Bank of Ireland and AIB is most apparent in the credit default swap market, which is a form of bond insurance.
At the end of last week, Bank of Ireland's five-year cost of insurance was 192 basis points, but AIB's was 222 basis points. These figures are used as a guide when wholesale funding rates are set in the market.
The market was demanding a premium from AIB because of its loan book and current capital levels, said Oliver Gilvarry, head of research at Dolmen.
Both Irish banks were suffering from elevated funding costs, putting pressure on them to charge more for lending, said NCB.
While AIB's funding costs are well ahead of Bank of Ireland's at present, AIB has less funding to roll over this year. It also has overseas assets in Poland and the US to bring in extra capital, if required.
While funding costs are high, Bank of Ireland's offer last week was over-subscribed and among those subscribing for the bond were investors from as far away as Singapore.