It has been suggested that the creation of a ‘bad bank' is the best option available to the Irish government to avoid the nationalisation of its major banks, and could save taxpayers and shareholders significantly.
The proposal is aimed at speeding up the recovery of lending by Irish banks and would involve the government buying some of the banks' riskiest loans in return for government bonds. The riskiest loans would then be put into a state-run bad bank, thus cleansing AIB and Bank of Ireland of their toxic debt.
JP Morgan explained that the proposal would require shareholders to inject new capital into the bank but that it would be a ‘clean’ bank, and therefore recover more quickly.
JP Morgan has stated that the bad bank scheme is more favourable than the government’s proposed recapitalisation programme in which the government would be required to guarantee losses above a certain level from bad debts using a scheme similar to that already in place in the UK. JP Morgan believes that the government would have to shore up the two banks' capital with injections of EUR5bn in order for the plan to succeed.
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