New structure primes lenders for 'bail-ins'
Bank of Ireland and Allied Irish Banks (AIB) are set to redesign their corporate structures so that savers would be better protected in any future financial crisis, following recommendations from regulators.
Under the plan, each of the banks will create a new holding company to issue bonds and shares that will be at a remove from the deposits of ordinary savers.
In theory it would make it easier to "burn bondholders" at holding company level in the event of any future crisis, without any risk that savers in the banks' operating companies would suffer losses.
In the early period of the Irish crash the Government insisted that under the law any losses that fell on bond investors would have to be imposed on savers too.
The holders of around €15bn of so-called junior Irish bank bonds were, eventually, burned after the crash - meaning losses were allowed to fall on the investors, but only after a long and fraught political battle between the State here and the ECB.
Bond market analyst Ryan McGrath at Cantor Fitzgerald said the latest news "finally gave clarity on the future structure of Irish banks".
"The new structure means that equity holders, senior and junior bondholders can be 'bailed-in' as the first line of defence to absorb any potential capital losses before tax without depositors being hit," he said.
The new rules will be phased in between 2017 and 2020, he said.
That is likely to involve new bond deals being issued by the new 'HoldCos' of the banks to replace debt that would otherwise remain at the holding company level.
Bank of Ireland said in a statement on Friday that the European Single Resolution Board (SRB), along with the Bank of England, had indicated a preference for "a single point of entry bail-in strategy" that would be through a group holding company.
The bank operates in both Ireland and the UK. Bank of Ireland said it expects to establish a holding company that will be the parent company of the group, a move that will require shareholder approval.
The SRB made the same recommendation for AIB, the bank said. Permanent TSB already has such a holding company structure.
The news had no clear impact on shares. Shares in AIB fell 5.7692pc to €4.90 each yesterday. Bank of Ireland shares were up 2.41pc to 25.40 cent each.
Neither bank has indicated how long it will take to set up a holdco, but Bank of Ireland said it would require shareholder approval.
Analysts at Davy expect the new structures to be set up during the second half of 2017.
"We would be hopeful that given the time required to set up the holdcos that Irish banks may receive additional time - as with the UK banks - in order to issue the required amount of new debt to satisfy their MREL requirement, the amount of which is also yet to be confirmed," Davy's Stephen Lyons wrote in a note.
Goodbody's Eamonn Hughes said the announcements were in line with market expectations.
The HoldCo option was always the most likely of three potential resolution routes for Irish banks, he said.