Summary of relationship with the Irish Government
The Irish Government, as a result of both its investment in AIB’s 2009 Preference shares and AIB’s participation in Government guarantee schemes, became a related party of AIB in 2009. Following the various ordinary/CNV share issues to the NPRFC during 2010 and 2011, AIB is under the control of the Irish Government. AIB enters into normal banking transactions with the Irish Government and many of its controlled bodies on an arm’s length basis. In addition, other transactions include the payment of taxes, pay related social insurance, local authority rates, and the payment of regulatory fees as appropriate. Following the crisis in the Irish banking sector and the stabilisation measures adopted since 2008, the involvement of the Irish Government in AIB and in other Irish banks has been and continues to be considerable. This involvement is outlined below.
Rights and powers of the Irish Government and the Central Bank of Ireland
The Irish Minister for Finance (‘the Minister’) and the Central Bank of Ireland (“the Central Bank”) have significant rights and powers over the operations of AIB (and other financial institutions) arising from the various stabilisation measures. These rights and powers relate to, inter alia:
– The acquisition of shares in other institutions;
– Maintenance of solvency ratios and compliance with any liquidity and capital ratios that the Central Bank, following consultation with the Minister, may direct;
– The appointment of non-executive directors and board changes;
– The appointment of persons to attend meetings of various committees;
– Restructuring of executive management responsibilities, strengthening of management capacity and improvement of governance;
– Declaration and payment of dividends;
– Restrictions on various types of remuneration;
– Buy-backs or redemptions by the Group of its shares;
– The manner in which the Group extends credit to certain customer groups; and
– Conditions regulating the commercial conduct of AIB, having regard to capital ratios, market share and the Group’s balance sheet growth.
In addition, various other initiatives such as strategies/codes of conduct for dealing with mortgage and other consumer/business loan arrears are set out in the Risk section of this report.
The relationship of the Irish Government with AIB is outlined under the following headings:
– Capital investments;
– Guarantee schemes;
– Funding support;
The relationship of the Irish Government with AIB is outlined under the following headings:
- Credit Institutions (Stabilisation) Act 2010:
(i) Direction Order;
(ii) Transfer Order;
(iii) Subordinated Liabilities Order;
- Central Bank and Credit Institutions (Resolution) Act 2011; and
- Relationship framework which was signed in March 2012
There have been no significant changes to the various aspects of this relationship since 31 December 2011.
- Capital investments
At 31 December 2012, the Irish Government, through the NPRFC, held 99.8% of the ordinary share capital in AIB (2011: 99.8%). However, the number of shares held increased by 3.624 billion since 2011 through the non-payment of the dividend of EUR280 million on the preference share capital as noted below. The NPRFC now holds 516.2 billion ordinary shares (31 December 2011: 512.6 billion shares). See note 45 for details of the Government's investment in the ordinary shares of AIB.
2009 Preference Shares
At 31 December 2012, the Irish Government, through the NPRFC, held EUR3.5 billion capital (2011: EUR3.5 billion) in the form of noncumulative preference shares ('2009 Preference Shares'). The annual cash dividend amounting to EUR280 million was not paid in either 2012 or 2011, however, the dividend entitlement was satisfied by way of a Bonus issue of 3.624 billion ordinary shares (2011:1.247 billion). The terms and conditions attaching to the 2009 Preference Shares are outlined in note 45.
Contingent capital notes
On 27 July 2011, AIB issued EUR1.6 billion of contingent capital notes at par to the Minister. Details of this transaction are set out in note 44.
On 28 July 2011, the Minister and the NPRFC made capital contributions totalling EUR6.054 billion to AIB for nil consideration. For further details, see note 51.
- Guarantee schemes
The European Communities (Deposit Guarantee Schemes) Regulations 1995 have been in operation since 1995. These regulations guarantee certain retail deposits up to a maximum of EUR100,000. In addition, since September 2008, the Irish Government has guaranteed relevant deposits and debt securities of AIB through the Credit Institutions (Financial Support) Scheme 2008 ('the CIFS scheme') which expired in September 2010 and the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 ('ELG Scheme') which is outlined below.
The ELG Scheme is a temporary measure which was introduced in response to the financial crisis.
On 21 January 2010, Allied Irish Banks, p.l.c., including its international branches and subsidiaries, AIB Group (UK) p.l.c., AIB Bank (CI) Limited and Allied Irish Banks North America Inc., became participating institutions for the purposes of the ELG Scheme. The Minister stands as guarantor of all guaranteed liabilities of a participating institution. The ELG Scheme is intended to facilitate the ability of participating credit institutions in Ireland to issue certain debt securities and take deposits with a maturity of up to five years for pre-defined periods. To date, the ELG Scheme has been reviewed on a six monthly basis to determine whether the financial support provided by the ELG Scheme continues to be necessary. However, on 26 February 2013, the Minister announced that the ELG Scheme will end for all new liabilities, with effect from midnight on 28 March 2013 (note 69).
Eligible liabilities under the ELG Scheme comprise the following:
- all deposits to the extent not covered by deposit protection schemes in Ireland or in any other jurisdiction;
- senior unsecured certificates of deposit;
- senior unsecured commercial paper;
- other senior unsecured bonds and notes; and
- other forms of senior unsecured debt which may be specified by the Minister consistent with European Union State aid rules and the European Commission's Banking Communication (2008/C 270/02) and subject to prior consultation with the European Commission.
Dated subordinated debt and asset-covered securities issued after a covered institution joined the ELG Scheme are not guaranteed under the ELG Scheme.The total liabilities guaranteed under the ELG Scheme at 31 December 2012 amounted to EUR34 billion (EUR0 billion at 31 December 2011).
– Guarantee schemes
Participating institutions must pay a fee to the Minister in respect of each liability guaranteed under the ELG Scheme. Details of the total charge for 2012 and 2011 are set out in note 3. Participating institutions will also be required to indemnify the Minister for any costs and expenses of the Minister and for any payments made by the Minister under the ELG Scheme which relate to the participating institution’s guarantee under the ELG Scheme.
AIB Group (UK) plc and AIB Offshore commenced withdrawal from the ELG Scheme effective 18 August 2012 and 30 August, 2012, respectively. However, deposits opened before these dates have been guaranteed for the remainder of their maturity.
AIB was designated a participating institution under the NAMA Act in February 2010. Under this Act, AIB transferred financial assets to NAMA for which it received consideration from NAMA in the form of NAMA senior bonds and subordinated NAMA bonds which are detailed in notes 8, 32 and 33. In addition, AIB acquired NAMA senior bonds in 2011 as part of the Anglo transaction (EUR11,854 million fair value at acquisition date) and the EBS transaction (EUR301 million carrying value at acquisition date), details of which are set out in notes 22 and 23. AIB also acquired EUR6 million in subordinated NAMA bonds, as part of the EBS transaction (note 23). The NAMA senior bonds are guaranteed by the Irish Government.
Following on the transfer of financial assets to NAMA, a contingent liability/contingent asset arises in relation to:
– final settlement amounts with NAMA on assets transferred;
– a series of indemnities which AIB has provided to NAMA on transferred assets;
– a possible requirement for AIB to share NAMA losses on dissolution of NAMA.
Details of the contingent liability/asset are set out in note 53.
Investment in National Asset Management Agency Investment Ltd (“NAMAIL”)
In March 2010, a then subsidiary of Allied Irish Banks, p.l.c. made an equity investment in 17 million “B” shares of NAMAIL, a special purpose entity established by NAMA. The total investment amounted to EUR17 million, of which EUR12 million was invested on behalf of the AIB Group pension scheme (fair value at 31 December 2012 of EUR6 million), with the remainder invested on behalf of clients.
– Funding support
AIB received funding from the Central Bank throughout the year through the ECB Monetary Policy Operation Sale and Repurchase Agreements. The total funding amounted to EUR22.2 billion at 31 December 2012 (2011: EUR30.8 billion). These agreements were for maturities of between 7 days and 3 months, apart from the € 11.25 billion (2011: EUR3billion) in the three year LTRO (note 39) which will mature in January and February 2015. The interest rates on these facilities are set by the Central Bank and advised to AIB.
These facilities, together with other assets and liabilities with Irish Government entity counterparties, are set out below.
On 31 March 2011, the Central Bank of Ireland published the ‘Financial Measures Programme Report’ which detailed the outcome of its review of the capital (PCAR) and funding requirements (PLAR) of the domestic Irish banks. The PCAR/PLAR assessments followed the announcement of the EU-IMF Programme for Ireland in November 2010, in which the provision of an overall amount of EUR85 billion in financial support for the sovereign was agreed in principle. Up to EUR35 billion of this support was earmarked for the banking system, EUR10 billion of which was for immediate recapitalisation of the banks with the remaining EUR25 billion to be provided on a contingency basis. Arising from the 2011 PCAR and PLAR assessments, AIB, including EBS, was required to raise EUR14.8 billion in total capital (including EUR1.6 billion in contingent capital), all of which was subsequently raised.
– Credit Institutions(Stabilisation) Act 2010
The Credit Institutions (Stabilisation) Act 2010 was passed into Irish law on 21 December 2010. The Act provides the legislative basis for the reorganisation and restructuring of the Irish banking system agreed in the joint EU/IMF Programme for Ireland (‘the Programme’). This 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.
The Act provides broad powers to the Minister (in consultation with the Governor of the Central Bank) to act on financial stability grounds to effect the restructuring actions and recapitalisation measures envisaged in the Programme. The Act applies to banks which have received financial support from the State, building societies and credit unions. Given the exceptional nature of the powers contained in the Act, the powers are time-limited and were scheduled to expire on 31 December 2012. However, in January 2013, the Minister extended the period of effectiveness of the Act for a further period of two years until 31 December 2014.
– Credit Institutions (Stabilisation) Act 2010
The powers provided in the Act allow the Minister to implement key aspects of the agreed Programme for bank restructuring and include the issue of direction orders, special management orders, subordinated liabilities orders and transfer of assets and liabilities orders. In addition, the Act gives the Minister broad powers in relation to directors and officers and their appointment/removal/duties. Various other terms are also imposed on relevant financial institutions as a condition for financial support.
Since the enactment of this legislation, the Minister has invoked certain of his powers under the Act in relation to AIB as follows:
(i) Direction Order
On 23 December 2010, the Irish High Court, on application from the Minister, directed AIB, inter alia, to increase its authorised share capital; to issue ordinary and CNV shares to the NPRFC; to cancel its listing on the Main Securities Market and to apply for listing on the Enterprise Securities Market (“ESM”) of the Irish Stock Exchange; and to complete the sale of its Polish interests to Banco Santander (note 18). Arising from this Order, on 23 December 2010, AIB issued ordinary and CNV shares to the NPRFC for net proceeds of EUR3.7 billion.
(ii) Transfer Order
On 24 February 2011, following an application by the Minister, the Irish High Court issued a transfer order for the immediate transfer of certain deposits and corresponding assets from Anglo Irish Bank Corporation to AIB (note 22).
(iii) Subordinated Liabilities Order
On 14 April 2011, following an application by the Minister under section 29 of the Credit Institutions (Stabilisation) Act 2010, the Irish High Court issued a Subordinated Liabilities Order (the “SLO”) in relation to all outstanding subordinated liabilities and other capital instruments (including certain tier 1 capital instruments), with the consent of AIB. The Irish High Court declared the SLO effective as of 22 April 2011. The effect of the SLO was to amend the terms of certain subordinated liabilities and other capital instruments. Details of the SLO are set out in note 44.
Acquisition of EBS Limited (“EBS”) On 31 March 2011, the Minister proposed the combination of AIB and EBS (formerly EBS Building Society) to form one of the two Pillar banks. On 26 May 2011, AIB entered into an agreement with EBS, the Minister and the NTMA to cquire EBS for a consideration of EUR1 (one euro). The acquisition was effective from 1 July 2011. Details of this transaction are set out in note 23.
– Central Bank and Credit Institutions (Resolution) Act 2011
The Central Bank and Credit Institutions (Resolution) Act 2011 was signed into law on 20 October 2011 and became effective on 28 October 2011. This legislation provides the Central Bank with additional powers to achieve an effective and efficient resolution regime for credit institutions that are failing or likely to fail and that is effective in protecting the Exchequer and the stability of the financial system and the economy.
The Act gives the Central Bank power to take control of banks, appoint managers to run them and remove directors, staff and consultants, and to move their deposits and loans to other banks. It provides for the establishment of a Credit Institution Resolution Fund which would provide a source of funding for the resolution of financial instability or in the event of an imminent serious threat to the financial stability of an authorised credit institution. Authorised credit institutions will be obliged to contribute to the resolution fund.
The Act provides for the establishment of “Bridge-Banks” for the purpose of holding assets or liabilities which have been transferred under a transfer order. Bridge-Banks are only intended to hold such assets or liabilities on a temporary basis pending onward transfer as soon as possible.
The Central Bank is empowered to make special management orders in relation to an authorised credit institution, or in relation to a subsidiary or holding company of the authorised credit institution in certain circumstances. The Act also provides powers to the Central Bank regarding the liquidation of authorised credit institutions. Authorised credit institutions may also be directed to prepare a recovery plan setting out actions that could be taken to facilitate the continuation or secure the business or part of the business of that institution.
The legislation which provides for a permanent statutory regime under which the Central Bank may exercise intervention powers when a relevant credit institution is in difficulty is expected, in due course, to replace the temporary emergency provisions of the Credit Institutions (Stabilisation) Act 2010 outlined above.
– Relationship framework
In order to comply with contractual commitments imposed on AIB in connection with its recapitalisation by the Irish State and with the requirements of EU state aid applicable in respect of that recapitalisation, a relationship framework was entered into between the Minister and AIB in March 2012. This provides the framework under which the relationship between the Minister and AIB is governed. Under the relationship framework, the authority and responsibility for strategy and commercial policies (including business plans and budgets) and conducting AIB's day-to-day operations rest with the Board of AIB and its management team. However, the Board is required to obtain the prior written consent of the Minister, or to consult with the Minister, in respect of certain material matters, such as material disposals.