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Sunday, 14th July 2024
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Banks are well placed to raise Tier One capital Back  
Irish banks are in a strong position to take advantage of the pent-up demand for institutional investments, with funding through Tier One capital, which is normally the core or permanent capital, becoming an increasingly attractive option. In December of 2004, AIB became the latest in a growing line of Irish banks to execute a successful funding through Tier One capital issuance, raising €1 billion.
This was AIB’s largest perpetual capital issue and was significantly oversubscribed even when the bank extended the target funding from €500 million to €1 billion. In September, Anglo Irish took advantage of the Irish Financial Services Regulatory Authority’s (IFSRA) newly codified rules on capital funding to raise €600 million via Tier One issuance.

Under IFSRA’s new rules, issued in a notice in early September, an institution proposing to issue a Tier One alternative capital investment (ACI) vehicle must assess its behaviour under a series of stress events, with particular importance attached to the ability to absorb losses on a permanent basis. A number of additional concepts and considerations based on the Basel Committee paper ‘Instruments eligible for inclusion in Tier One capital’ have also been included.

Although the clarity brought by IFSRA’s new rules has been welcomed by all banks, the level playing field with European financial institutions the regulations are credited with creating is not seen as a significant boost to the attractiveness of raising Tier One capital.

One of the main benefits, according to Brian Kealy, head of capital management with Bank of Ireland, is that it is a cheaper form of funding to equities. ‘It enables you to get Tier One funding that isn’t equity which is obviously beneficial to shareholders in terms of returns.’ And, according to Declan McSweeny, chief financial officer with AIB Group, while IFSRA standardised the process of raising Tier One capital, the success of a bank in raising funds still ultimately depends on the investors’ interest in an institution’s paper.

‘The investors have to be interested; they have to feel it’s a good investment; they have to like the company they’re investing in. That’s the more critical part. The good news is that the Irish banks are in good standing and don’t have any problems raising this kind of capital.’

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