New bank law to give Ireland sweeping powers

IRELAND'S government has passed a new law giving it wide-ranging powers to shrink and overhaul its banks.

The bill, which applies to banks that have received state support, building societies and credit unions, will enable the government to force losses on junior bondholders on a case-by-case basis in the High Court.

Ireland has agreed to radically overhaul its banks as part of an €85bn (£71bn) EU and IMF bailout package.

“This bill will allow the minister to take the actions required to bring about a domestic retail banking system that is proportionate to and focused on the Irish economy,” Finance Minister Brian Lenihan said in a statement.

“The banking system must play its role in providing the credit to the real economy to support our recovery.”

The new law will allow the finance minister to transfer banks’ assets and liabilities and “take or prevent any actions in order to support the government's banking strategy”.

It will also enable the government to inject part of the near €10bn capital required by Allied Irish Banks before the end of the year, and will facilitate the planned restructuring of nationalised lenders Anglo Irish Bank and Irish Nationwide Building Society.

The powers contained in the law will expire at the end of 2012 in recognition of their exceptional nature.

The bill will be debated by parliament on Wednesday, and it is expected to come into effect at the end of the week.

Lenders to Irish banks are already leaning on junior bondholders to shoulder part of the cost voluntarily.

Bank of Ireland, which needs to raise €2.2bn under the bailout plan, is offering holders of its subordinated debt a swap into government-guaranteed paper at around 50 per cent of face value.

Nationalised lender Anglo Irish Bank has already offered to exchange some €1.6bn of subordinated debt at a discount of 20 cents per share.

Subordinated debt in Allied Irish Banks is trading at a discount of more than 70 per cent, reflecting investors’ view that it too will seek a contribution for the near €10bn in additional capital it needs to raise by the end of February.