State aid: Commission temporarily approves rescue aid for merged entity Educational Building Society/Allied Irish Banks

European Commission - Press release

State aid: Commission temporarily approves rescue aid for merged entity Educational Building Society/Allied Irish Banks

Brussels, 15 July 2011 - The European Commission has granted temporary approval, under EU state aid rules, to a recapitalisation worth up to €13.1 billion of AIB/EBS, an entity resulting from the merger of Allied Irish banks plc and Educational Building Society, by the Irish authorities. In particular, the Commission found the measure to be necessary to increase the bank's solvency ratios, to enable it to resist stress situations, and to preserve stability on the Irish financial markets. The Commission will take a final decision on aid to AIB/EBS based on the new restructuring plan that Ireland committed to submit in due course to take account of this additional state support.

The Commission acknowledges that the measures are necessary to increase the bank's solvency ratios and maintain confidence in the Irish financial markets. Therefore, it has temporarily authorised the measure as emergency aid subject to the submission of a revised restructuring plan, which is expected by the end of July. The final approval of the measures is conditional on the plan ensuring (i) a return to long term viability of the bank, (ii) an adequate participation in the restructuring costs by shareholders and subordinated debt holders and (iii) proper measures to limit the distortion of competition created by the state support.

The November 2010, EU-IMF support programme for Ireland included a prudential capital assessment review of all banks subject to the programme. The review carried out by the Irish central bank identified capital needs of €13.3 billion for AIB (broken down as €11.9 billion in Core Tier 1 capital and €1.4 billion in contingent capital) and €1.5 billion for EBS (broken down as €1.3 billion in Core Tier 1 capital and € 0.2 billion in contingent capital). For the combined entity, the recapitalisation needs are €13.2 billion in Core Tier 1 and €1.6 billion in contingent capital. The Irish State will purchase ordinary shares in AIB/EBS for €5.0 billion and contingent capital notes for €1.6 billion. It will also inject a capital contribution in the bank's reserves of up to €6.5 billion. The merger of AIB and EBS was announced at the same time as the review's results and was completed on 1 July 2011.

Before turning to the State, AIB and EBS both first undertook liability management exercises, consisting of debt for cash offers and mandatory changes of the terms of certain subordinated notes to allow for their early redemption.

Irish Support Programme

The Support Programme for Ireland requires Bank of Ireland, Allied Irish Bank, EBS and Irish Life and Permanent to increase their capital to meet new regulatory requirements during the period 2011 to 2013. The base case and the stress case capital targets used by the Irish Central Bank were respectively 10.5% and 6%, assuming further deleveraging of the banks in order to meet the 122.5% loan-to-deposit ratio by the end of 2013. On 15 July 2010, the Commission approved a first restructuring plan for Bank of Ireland (see IP/10/954). The Commission will assess the capital injections and restructuring plans for the newly merged AIB/EBS entity and Irish Life and Permanent when the Irish authorities will have submitted them. The €85 billion EU-IMF Support Programme comprises €35 billion to meet the recapitalisation needs of the financial sector and to act as a contingency fund. Half of this sum is provided by Ireland itself.

Background on Temporary State aid framework for banks

In December, the Commission prolonged until the end of 2011, albeit in a stricter form, the crisis-related state aid rules for banks and for other companies with problems accessing finance (see IP/10/1636).

The rules are outlined in a Communication on the recapitalisation of financial institutions (see IP/08/1901) enabling Member States to inject emergency support into banks in order to safeguard financial stability.

Under the Communication the Commission temporarily authorises emergency support and requests a restructuring plan that ensures the bank's viability and compensation for the distortion of competition.

The July 2009 Communication on restructuring aid to banks (see IP/09/1180) outlines the terms under which Member States can give aid to banks for periods exceeding six months provided that:

• aided banks implement a restructuring plan that ensures that they are viable in the long term without further support from taxpayers;

• aided banks and their owners must carry a fair burden of the restructuring costs and

• measures must be taken to limit distortions of competition in the Single Market.

For an overview of state aid decisions related to the crisis as well as pending investigations see Memo/11/122.

The non-confidential version of the present decision will be made available under case number SA.33296 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.