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It is understood that Mallabraca, which includes a number of private equity funds, wants to take a 40pc stake or more in Bank of Ireland

It is understood that Mallabraca, which includes a number of private equity funds, wants to take a 40pc stake or more in Bank of Ireland

It is understood that Mallabraca, which includes a number of private equity funds, wants to take a 40pc stake or more in Bank of Ireland

The controversial private equity scheme to invest in Irish banks may not need an EU green light, the Irish Independent has learned.

However, State refinancing of the banks, which many analysts prefer, would have to go to Brussels for approval.

The European Commission's revised approach to bank refinancing, including concessions for private/state co-investment in light of the recent deterioration in economic conditions, is provided in a new document which outlines the body's stance on state aid for the refinancing of the banking sector.

The document, seen by the Irish Independent, provides for an automatic clearing of private investment deals where the private investors take more than 30pc of an institution, and any State investment is on the same terms. The arrangement must also not significantly alter the incentives for the private stakeholder.

The new commission communication comes as talks continue between the so-called Mallabraca consortium and Bank of Ireland. While there is no guarantee that a deal will be reached, it is understood that Mallabraca, which includes a number of private equity funds including Carlyle and JC Flowers, wants to take a 40pc stake or more in Bank of Ireland. And although the structure of the agreement is not set in stone, it may take the form of a state/private equity co-investment.

The rival interest in the Irish banks, led by AIB Investment Managers, Irish Life Investment Managers and Bank of Ireland Asset Management, who want to ensure that existing shareholders are not diluted in any recapitalisation, may also get automatic clearance, depending on the structure of its offer, if accepted.

And as merger talks continue between Irish Life & Permanent and EBS, the document states that mergers and acquisitions should be organised on the basis of a competitive tendering process.

It adds that it will allow government to accept a return less than current market levels of about 15pc per annum, as they are not considered to reflect normal market conditions.

Repay

It will use an ECB formula, where the State could charge 7-9pc per annum on its investment plus a premium, to ensure than banks will be anxious to repay the State investment as quickly as possible.

However, the commission document added that a blanket approach to the banking crisis would not be acceptable and that banks with a higher risk profile should pay more to be covered by State aid. This is similar to the condition included in the Irish €440bn bank guarantee scheme.

"The commission will place considerable weight on the distinction between fundamentally sound and other banks," the document states. It adds that recapitalisation measures should take into account the underestimation of risk in the pre-crisis period, by charging more to the bank.

While many Irish banks have already cancelled dividend payments, the commission states that if recapitalisation schemes are structured correctly, restrictions on payments may not be necessary, although it will consider such policies to ensure the temporary nature of state intervention.

The commission is sticking to its earlier October guidance that state support should not result in recipient institutions having competitive advantages to those that do not receive aid. But market watchers said the document reflects an easing of state-aid rules as the credit crunch seeps into the real economy. (See related story, Page 3)

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