Ireland Note to the European Commission

8/14/2019 Ireland Note to the European Commission

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NON-CONFIDENTIAL V ERSION

STANDARD FORM FOR NOTIFICATION OF STATE AIDSPURSUANT TO ARTICLE 88 (3) EC TREATYAND FOR THE PROVISION OFINFORMATION ON UNLAWFUL All

NOTIFICATION

cDATED 8 tn JANUARY,2009

-BY-IRELAND

TO

THE EUROPEAN COMMISSIONPURSUANT TO

COUNCIL REGULATION (EC) No 659/1999 (AS AMENDED)IN RELATION TO

THE PROPOSED CAPITAL INJECTION BY THE STATE OF1.5 BILLION INTOANGLO IRISH BANK CORPORATION PLC

Department of FinanceGovernment BuildingsUpper Merrion StreetDublin 2Ireland


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PART I. GENERAL INFORMATION

STATUS OF THE NOTIFICATION

Does the information transmitted on this form concern:

a notification pursuan t to Article 88 (3) EC Treaty?

[~~| a possible unlawful aid1?If yes, please specify the date of putting into effect of the aid. Please complete thisform, as well as the relevant supplementary form s.

I | a non-aid measure which is notified to the Commission for reasons of legal certainty?

Please indicate below the reasons why the notifying Member State considers that themeasure does not constitute State aid in the meaning of Article 87(1) EC Treaty.Please complete the relevant parts of this form and provide all necessary supportingdocumentation.

A measure will not constitute State aid if one of the conditions laid down in Article87(1) EC Treaty is not fulfilled. Please provide a full assessment of the measure in thelight of the following criteria focusing in particular on the criterion which youconsider not to be met:

According to Article l(f) of Council Regu lation (EC) No 659/1999 of 22 March 1999 laying down detailedrules for the application of Article 93 of the EC Treaty (OJ L 83, 27.3.1999, p. 1) (hereinafter "ProceduralRegulation"), unlawful aid shall mean new aid put into effect in contravention of Article 88(3) of the EC-Treaty.


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No transfer of public resources (For example, if you consider the measure is notimputable to the State or where you consider that regulatory measures withouttransfer of pub lie resources will be put in place)No advantage (For example, where the private market investor principle isrespected}No selectivity/specificity (For example, where the measure is available to allenterprises, in all sectors of the economy and without any territorial limitation andwithout discretion)No distortion of competition / no affectation of intra-community trade (Forexample, where the activity is not of an economic nature or where the economicactivity is purely local)

OVERVIEW

This notification concerns the proposed capital injection by the Irish State of 1.5 billion(the "State investment") into Anglo Irish Bank Corporation pic ("Anglo Irish Bank" orthe "Bank") under the Irish Governm ent's bank recapitalisation programme. The Stateinvestment will be made pursuant to the Credit Institutions (Financial Support) Act2008 (the "Act"). A copy of the Act is contained in Annex 1.

Following on from Government announcements on 28 th November, 2008 and 14thDecember, 2008, on 21st December, 2008, the Irish Government issued an announcementon its bank recapitalisation programme which included details of the State investment inAnglo Irish Bank. Copies of the Government's announcements of 21 st Decem ber, 2008,14 th December, 2008 and 28 th November, 2008 are attached in Annex 2. The Stateinvestment in Anglo Irish Bank will be in the form of 1.5 billion of Core Tier 1 non-cumulative perpetual preference shares in the Bank with a fixed annual dividend of10% (the "Shares"). The Shares will carry 75% of the voting rights in Anglo Irish Bank.An Extraordinary General Meeting ("EGM") of the Bank in relation to the Stateinvestment is scheduled to take place on 16 th Janu ary, 2009 and, subject to shareholderapproval at the EGM, the State investment is anticipated to take place on 20 th January,2009.

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The decision by the Irish Government to make the State investment in Ang lo Irish Bankwas taken in light of the impact of the current global financial crisis on Anglo Irish Bankand recent corporate governance developments at Anglo Irish Bank, which are outlinedin furthe r detail below. In summary, the objectives of the State investment are to ensurethat Anglo Irish Bank is adequately capitalised to preserve financial stability, to ensurethat the Bank's capital ratio levels me et the expectations of international investors andto facilitate lending to the real economy. Further details of the background to andobjectives of the State investment are set out below in the section entitled "Background".Further details of the parties are set out below in the section entitled "Parties". Furtherdetails of the terms an d conditions of the State investment are set out below in thesection entitled "The State investment".

BACKGROUND

The decision by the Irish Go vern me nt to mak e the State investment in Anglo Irish Bankwas taken in light of the impact of the current global financial crisis on Anglo Irish Bankand recent corporate governance developments at Anglo Irish Bank, which togetherhave led to a serious deterioration in the financial position of the Bank.

The current global financial crisis has led to a sudden and dramatic increase in themarket's perception of the risks contained in banks' balance sheets. Consequently,international capital market expectations in relation to capital levels for financialinstitutions have risen significantly. In particular, markets and rating agencies haveincreasingly focussed on the adequacy of Tier 1 capital and Core Tier 1 capital.

Market perceptions concerning the inadequacy of Anglo Irish Bank's capital ratio levelshave led to a deterioration in investor sentiment with regard to Anglo Irish Bank. As at31st December, 2008, Anglo Irish Bank's shares traded at 0.171, with a marketcapitalisation of129.95 million. Over the previous 12 months, the Bank traded as highas 10.94, with a market capitalisation of 8,327.74 million. As a result, Anglo IrishBank's shares h ave lost mo re than 98% of their value over the last 12 months.


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reliant on wholesale lending, the availability of which ha s diminished very substantiallyon account of the dislocation of international credit markets. Anglo Irish Bank hasapproximately6 billion [Confidential - business .secret}; [We could not find the in thePreliminary Results 2008 - Department to confirm whether this is in the pubic tomain]of term debt maturing in 2009. Anglo Irish Bank's loan book is approximately72billion and it is heavily exposed to commercial investment property (c. 40 billion[Confidential - business secret] [Wecould not find this in the Preliminary Results 2008 -Department to confirm whether this is in the pubic domain]) and, more crucially,to thedevelopment sector (c. 20 billion {Confidential - business secret] [We could |pt findthis in the Preliminary Results 2008 - Department to confirm whether this is in tie pubicdomain]).

Anglo Irish Bank results were a profit before tax of784 million for 2008, but includedsignificantly increased collective and specific impairment provisions, totaling 724million. Treasury losses account for a further 155 million impairment provision. AngloIrish Bank reported actual impaired loans of957 million (131 basis points) for 2008.[The market views these provisions as too conservative and the market consensusestimate is an average of 200 basis points (1.4 billion pe r annum)] [Departfnent toconsider whether this should be removed oh the ground that it is commercially sensitivefor Anglo. May be difficult to argue this as market viewsrare, by their nature^ in thepublic domain], whereas the maximum Anglo Irish Bank guide to is 120 basis points.However, according to a report on the financial position of the six main domesticinstitutions participating in the Guarantee Scheme (the "PwC Report") carried out byPricewaterhouseCoopers for the Irish Financial Regulator (the "Financial Regulator"),Anglo Irish Bank's current capital position could withstand provisions substantially inexcess of market estimates. Profits before impairments in 2069 are projected by AngloIrish Bank at approximately 1.6 billion.

The Financial Regulator has stated that the key risk currently faced by Anglo IrishBank is liquidity risk, which th e Financial Regulator is closely monitoring on a dailybasis. Since the end of November 2008, Anglo Irish Bank has experienced outflows bothin terms of corporate and retail deposits. Accordingly,the Bank has had to increase itslevel of borrowing from th e interbank market and also from th e ECB to manage thisfunding gap. [Confidential - commercially sensitive for Anglo Irish Bank] [Departmentto confirm] However, in addition to the 1.5 billion Government injection, other

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measures being put in place to enhance th e liquidity position of the bank going forwardinclude the approval of an asset covered securities bank, wh ich will increase its access toECB borrowings, and additional undrawn committed facilities from tw o creditinstitutions.

According to the Financial Regulator, Anglo Irish Bank is currently fully in compliancewith regulatory capital requirements - its current Tier 1 capital amounts to c.7.2billion, which is more than 8% of risk assets - but it has a strong requirement foradditional Core Tier 1 capital in order to reassure the market regarding its capacity tofully provide for anticipated losses on its loan book. Market feedback is that there wouldbe little if any private investment in an ordinary share rights issue or preference shareissue by Anglo Irish Bank. [Confidential - commercially sensitive for Anglo Irish Bank] t[Department to confirm!

In addition to difficulties caused by the global financial crisis, the deterioration in thefinancial position of the Bank has been accelerated by recent corporate governancedevelopments at the Bank. On 18th Decem ber, 2008, the chairman of the bank (Mr. S.FitzPatrick) tendered his resignation as chairman with immediate effect. At the sametime, a non-executive director (Mr. L. Bradshaw) also tendered his resignation. Thefollowing day, the chief executive of Anglo Irish Bank (Mr. D. Drumm) tendered hisresignation. On 7 th January, 2009, the finance director and chief risk officer of AngloIrish Bank (Mr. W. McAteer) tendered his resignation. The chairman's decision toresign is based on the fact that, over a period of eight years to 2007, he temporarilytransferred loans he had with Anglo Irish Bank to another bank prior to Anglo IrishBank's year end. The statement from the board of directors of Anglo Irish Bank on 18lDecember, 2008 stated that this transfer of loans did not breach banking or legalregulations. It was, however, considered as inappropriate from a transparency point ofview. M r. B radsh aw's decision to resign was based o n the fact that a loan, which he heldjointly with the chairman, was temporarily transferred to another bank prior to yearend. The Financial Regulator has launched an inquiry into the events surrounding thecorporate governance developments at Anglo Irish Ban k and has instigated a review ofthe treatment of directors' loans in the financial institutions covered by the GuaranteeScheme.


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In these circumstances, the Irish Gov ernm ent, in consultation with the G overnor of theCentral Bank of Ireland (the "Governor") and the Financial Reg ulator, decided that itwas necessary for the State to take measures in relation to Anglo Irish Bank in order toavoid further deterioration in the market investor sentiment in relation to the Bank,which, in turn, would represent a threat to the stability of both the financial system inthe State and the wider econom y. In particular, a loss of confide nce in Anglo Irish Bankcould undermine confidence in the Irish financial sector as a whole, which is verydependant upon international funding through wholesale money markets. Thisconstitutes a serious risk of a systemic crisis in the Irish financial system, which, in turn,would have significant negative spill-over effects into the w ider economy . For thesereasons, on 21st December, 2008, the Irish Governm ent announ ced the decision to maketh e State investment. The objectives of the State investment are to ensure that AngloIrish Bank is adequately capitalised to preserve financial stability and to ensure that theBank's capital ratio levels meet the expectations of international investors.

A further objective of the State investment in Anglo Irish Bank is to facilitate lend ing tthe real economy. The State investment is part of a wider Government recapitalisationprogram me, the ob ject of which is to ensure that the financial system in Ireland iscapitalised to meet the everyday financial needs of individuals, businesses and theoverall economy. In the Government announcement on 21st December, 2008, theMinister for Finance (the "Minister") stated:

"The provision of credit to the economy is the most immediate and pressing issue forbusiness and for the Governm ent. The future health of our econom y is inextricablylinked with the supply of credit and a situation where banks are unwilling or areperceived to be unwilling to lend is damaging not only for the econom y but also forthe banks themselves. Banks have an important part to play in addressing this issueand a key objective of the Government's recapitalisation initiative is to ensure thecontinued flow of funds through the banks to individuals and businesses in the realeconomy.In response to my earlier meetings with the banks many had already announcedspecific programmes to boost lending to small and medium enterprises. AIB andBank of Ireland have announced new business support and start up funds and haveprovided commitments to support first time buyers and consumers. While these

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announcements are welcome the Government believes that it is appropriate as partof the agreed recapitalisation programm e that the banks should further build on thecommitments given in the banks guarantee scheme through specific credit policiestargeted at small medium enterprises, first time buyers an d consumers generally.

The recapitalisation announced today will provide the banks with the stabilityrequired to continue to lend to meet the needs of the Irish economy. The banks willbe expected to contribute to the economy in a verifiable manner in relation to creditand in relation to the maintenance of a payments system, which is socially inclusive.They will be expected to adopt an approach to customer relationships in a waywhich recognises that customers need support through difficult as well as goodtimes."

In furtherance of these objectives, the banks have agreed to a credit package, whosedetails are set out in the section below entitled "B ehavioural Conditions".

THE PARTIESIt is anticipated that the Shares will be acquired by the Minister acting through theNational Treasury Management Agency ("NTMA"), which would act un der delegationfrom, and on behalf of, the Minister in acquiring the Shares. The NTMA is the asset andliability management arm of the Irish Government. Its fundamenta l role is that ofborrowing for the Government and m anaging the National Debt. The NTM A wasestablished in 1990 under the National Treasury Ma nagem ent Agency Act, 1990 (the"NTMA Act"). Under the NTMA Act, the Government may by order delegate to theNTM A certain func tion s of the Minister, including those relating to the m anagem ent ofthe national debt or the borrowing of moneys for the Exchequer, subject to the controland general superintendence of the Minister, and to be performed subject to suchdirections or guidelines as the Minister may give. A function of the Minister delegatedby the order shall be vested concurrently in the Minister and the NTMA so as to becapable of being perfo rm ed by either the Minister or the NTM A. Any obligation orliability un dertaken by the NTMA consequent upo n the performan ce by the NTMA of afunction to which the delegation or declaration relates shall be of the same force an deffect as if the obligation or liability had been undertaken by the Minister.

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Anglo Irish Bank is a focused business bank with a private banking arm. Tfe Bankprovides business banking, treasury and wealth/managementservices. It is not auniversal bank and its stated strategy ikniche rather than broad marketSEach of itsWstomers deals directly with a dedicated relationship m anager and a product specialist,sThe Bank's main strateg y is to lend on a senior first s ecured basis to clients againstinvestments an d development property assets in each of its three core markets: Ireland,the UK and the US. Lending comprises approximately 73 billion of the Bank's totalassets of approximately 100 billion. These lendin g assets are split geograph ically asfollows: 57% in Ireland, 29% in the UK and 13% in the US.

Anglo Irish Bank's shares are quoted on the Dublin and London stock exchanges. TheIrish Financial Regulator is the lead regulator. According to its preliminary results fo rthe year ended 30 th September, 2008, the Bank had a balance sheet total of 101,321million. Anglo Irish Bank ha s locations in Ireland, the UK, the United States, Jersey an dthe Isle of Man. Further details on Anglo Irish Bank can be found atwww.angloirishbank.com.

THE STATE INVESTMENT

The main terms and conditio ns of the State investment, which are unchanged from thosethat were comm unicated to the Commission on 21st December, 2008, are as follows:-

Form of Security: Core Tier 1 non-cumulative preference shares with votingrightsSize: EUR 1.5 billion

Transferability: Non-transferable Dividend:

Fixed dividend of 10% payable, at the discretion of the bank, annually on16 January

Dividends payable in cash. If not able to pay in cash then paid in the formof ordinary shares. Calculated on the basis of unpaid dividend divided bythe share value. Share value is calculated based on the average daily10


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closing price over the 30 trading days preceding the dividend declarationdate

Payment of dividends made in priority to dividends on ordinary sharesTerm: Perpetual, no step-upRedemption: Redemption at the Bank's option Anglo Irish Bank can repurchase at par for 5 years and thereafter at

125% of par, subject to replacement of capital and Irish FinancialRegulator approval

Replacement capital needs to be Core Tier 1Ranking: Pari passu to ordinary share capital on liquidation and with otherpreference shares/securities fo r dividendsDividend Stopper. Yes, if cash preference share dividend is unpaidVoting rights: Full voting rights as long as preference shares outstanding Voting rights to represent 75% of total voting rights

Other Items: Management and board change Board will have Government representation Submission of restructuring plan after six months in line with European

Commission Recapitalisation CommunicationProposed Timetable: Sunday, 21st December, 2008: Government announcement of capital

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Tuesday, 23rd December, 2008: Anglo Irish Bank published ashareholders' circular

Friday, 16th January, 2009: Anglo Irish Bank EGM to be held to approvethe capital increase

Tuesday, 20th January, 2009: the Shares to be issued to the Minister (orthe NTMA on behalf of the Minister)

The Financial Regulator has confirmed that the Shares will be treated as Core Tier 1Capital fo r regulatory capital purposes. The State investment will boost Anglo IrishBank's Core Tier 1 capital ratio from 5.9%3 to 7.7%4. The remuneration level and theredemption terms are designed to encourage Anglo Irish Bank to redeem the Minister'sinvestment as soon as market circumstances permit.

A copy of an Anglo Irish Bank circular to shareholders that was issued by Anglo IrishBank on 23rd December, 2008 in relation to the State investment is attached in Annex 3.An agreement will be entered into by the Minister (or the NTMA acting on behalf of theMinister) and Anglo Irish Bank in relation to the State investment.

3 Source: Merrill Lynch. Basis:Current CT1:5,068m (incl.371m prefs)Current RWA:85,798m==> Current CT1 ratio of 5.9%4 Source: Merrill Lynch. Basis:After1.5bn additional CT1Pro forma CT1: 66,568m==> Pro forma CT 1 ratio of 7.7%

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BEHAVIOURAL CONDITIONSManagement and Board changesThe terms and conditions of the State investment envisage management and boardchanges at Anglo Irish Bank and Governm ent representation on the Board of Directorsof the Bank.In addition, it will be a condition for the State investment in Anglo Irish Ban k that theBank will not use the fact that it has received the capital injection for advertisementorpromotion purposes. J ^\l[^ (ZP^U^Lending to the real economyAs stated above, as part of the Government's recapitalisation programme, Anglo IrishBank, together with other banks that may be recapitalised und er the Gov ernm ent'srecapitalisation programme (together the "Recapitalised Banks"), will be expected tocontribute to the economy in a verifiable ma nne r in relation to credit and in relation tothe maintenance of a payments system which is socially inclusive.In furtherance of these objectives, the Recapitalised Banks have assured theGovernment that they will continue to grow lending to small and medium sizedenterprises ("SMEs")5 and have agreed to a credit package, details of which are set outin Annex 6. In summary, the undertakings in the credit package include increasedcapacity for lending to SMEs and first time buyers, a new code of practice for businesslending and increased assistance for householders in arrears on mortgage repayments,including a commitment not to seek enfo rcemen t action or repossession for at least sixmonths.On account of Anglo Irish Bank's specific business model, which is specialised incommercial property lending and property development finance, not all of the elementsof the agreed credit package will directly impact on Anglo Irish Bank, at least initially.However, given the requirement to prepare a restructuring plan within a six monthperiod as part of the recapitalisation initiative, future changes in the business model andstrategic direction of Anglo Irish Bank are likely to bring about a closer alignmentbetween the lending activities of th e Bank and the credit needs of the real economy. As a5 SMEs are to be defined in accordance with the requiremen ts under EU State aid R egulations.

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r-it is aDticipa-ted that in-time farther elements of th e gydit package will become /applicableteAngloIrishBankaccordingly. [Confidential - business^- secret]![Department to confirm]. Moreover, notwithstanding that the Bank will be operated onan arms-length basis from the State, it is expected that the public policy objectivesunderlying the Government's decision to recapitalise systemically important banks inIreland will guide an d inform the lending activities of Anglo Irish Bank, subject, ofcourse, to the requirement to safeguard its financial position and long-term commercialsustainability.

Behavioural conditions under the Guarantee SchemeAs noted above, Anglo Irish Bank is a participant in the Guarantee Scheme. A copy ofthe Guarantee Scheme is attached in Annex 4. Therefore, in addition to the behaviouralconditions referred to above, Anglo Irish Bank continues to be subject to thebehavioural conditions and transparency and reporting conditions that may be imposedunder paragraphs 24 to 50 of the Guarantee Scheme6, including in relation to thefollowing:

balance sheet growth constraints (paragraph 36 of the Guarantee Scheme); compliance with directions given by the Governor and the Financial Regulator

on consultation with the Minister concerning: (i) the management of its balancesheet; (ii) structures to improve long-term stability of funding; (iii) executivemanagement and corporate governance; (iv) liquidity, solvency an d capitalratios; and (v) minimising any risk of recourse to the guarantee (paragraph 37 ofthe Guarantee Scheme);

controls over acquisition of shares in other financial institutions, establishingsubsidiaries and/or entering into new business (paragraph 38 of the GuaranteeScheme);

compliance with targets on assets and liabilities set by the Financial Regulator onconsultation with th e Minister, including in relation to loan/deposit ratio,

6 The Credit Institutions (Financial Support) Scheme 2008, S.I. No 41 1 of 2008, which wa s brought into forcepursuant to the Act.14


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wholesale funding/total liabilities ratio, deposit growth and maximum loan-to-value on new loans (paragraph 39 o f the Guarantee Scheme);

compliance with liquidity, solvency and capital ratios set by the FinancialRegulator on consultation with th e Minister (paragraph 41 of the GuaranteeScheme);

limitations on dividends (paragraph 42 of the Guarantee Scheme); controls on executive remuneration (paragraphs 46-49 of the Guarantee

Scheme); reporting and compliance obligations (paragraphs 24-27 and 29 of the Guarantee

Scheme); controls on board representation and executive management (paragraphs 32-34

of the Guarantee Scheme); and,obligation to draw up a restructuring plan in certain circumstances (paragraph

s m^~~--^4e^i/^^te/:\Jc> oQThere has been very close engagement and liaison between the Department of Finance(the "Department") and Anglo Irish Bank on an ongoing basis since it executed the legalinstruments required to join the Guarantee Scheme in order to ensure that Anglo IrishBank conforms fully to the objectives of the Guarantee Scheme and all relevant elements

ic Guarantee Scheme are appropriately implemented by the Bank on a timely basis.Anglo Irish Bank, in common with all the covered institutions, has been required toprepare and submit a strategic report to the Department setting out how it proposes toalign the future direction of the Bank to meet th e objectives of the Guarantee Scheme.In the report the bank describes the measures already taken and those planned for thefuture in relation to the following:- Promotion of sustainable lending practices; Controlling asset growth; Securing long-term funding;

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Improving capital ratios; Updating the valuation of assets; Ensuring that the cost of the guarantee will not be passed on to customers; Controlling exposures to customers or asset classes; and The strengthening of management capacity and corporate governance.Anglo Irish Bank is required to provide regular reports to the Department that describeprogress made in complying with th e principles and objectives of the GuaranteeScheme, and any specific directions issued by the Minister in connection with theGuarantee Scheme.Specific progress in relation to the main elements under the Guarantee Scheme is asfollows:-Board of Directors: Anglo Irish Bank ha s appointed tw o directors representative of thepublic interest nominated by the Minister to its board.Remuneration Arrangements: Anglo Irish Bank has provided a plan fo r review by theCovered Institutions Remuneration Oversight Committee (CIROC) under theGuarantee Scheme on the proposed structure of the remuneration packages of thedirectors and executives of the bank so as to take into account the objectives of the Actand in order to comply with the requirements of the Guarantee Scheme.Dividends; Anglo Irish Bank has been informed that it cannot declare or pay dividendsuntil further notice.Buy-Backs: Anglo Irish Bank has been advised that it should not buy-back any of thesecurities (either debt or equity), which form part of its capital without the priorapproval of the Financial Regulator after consultation with the Minister.Funding: Anglo Irish Bank has been notified that it cannot undertake any fundingprogramme, publish a prospectus, or instruct corporate finance advisors or otherfinancial advisers in connection with a fundraising without prior consultation with theDepartment and the Financial Regulator. Anglo Irish Bank has also been notified that it

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must comply with th e terms of any guidance issued by the Financial Regulator inrelation to prospectuses and offer documents.Public Disclosure: Anglo Irish Bank has been directed that it must consult with theDepartment and the Financial Regulator in advance of any public disclosure as regardsits assets, (including valuations, write-downs or write-offs) and/or liabilities other thanthose required in the ordinary course of business.Advertising; Without prejudice to disclosures made in prospectuses an d other offeringdocuments, Anglo Irish Bank has been prohibited from explicitly promoting itself on thebasis of the Guarantee Scheme.Corporate Social Responsibility (CSR): Anglo Irish Bank has been instructed to initiatearrangements with the Irish Banking Federation ("IBF") for the submission of the b i-annual report on progress in relation to CSR objectives under th e Guarantee Scheme.Interbank deposits: Anglo Irish Bank has been told that its recourse to interbankdeposits with a maturity up to three months must be balanced and proportionate withoverall funding needs so as to ensure consistency with the management of liquidity bythe Eurosystem and compatibility with the operational framework of the Eurosystem.Compliance Certificate: Anglo Irish Bank must provide quarterly certificates to theFinancial Regulator from (i) its auditors an d (ii) its chairman an d chief executive jointly,confirming compliance with all of the terms an d objectives of the Guarantee Scheme.Risk management of the Guarantee: Anglo Irish Bank has been asked to review andmonitor the risk management arrangements in place to guard against a technical defaultevent ever occurring.EXISTENCE OF STATE AID

The Government accepts that, in the current market circumstances, the Stateinvestment may contain elements of State aid. However, for the reasons set out inSection 10 below, the Government is of the view that the State investment is compatiblewith the Common Market on the basis of Article 87(3)(b) of the EC Treaty as it isnecessary in order to remedy a serious disturbance in the Irish economy. Please refer toSection 10 below for further details.

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1. IDENTIFICATION OF THE AID GRANTOR

1.1. Member State concernedIreland.

1.2. Region(s) concerned (if applicable)Not applicable.

1.3.Responsible contact person:

Name : Mr William Beausang

Address : Banking, Finance and International DivisionDepartment of FinanceGovernment BuildingsMerrion StreetDublin 2Ireland

Telephone : +353 1 604 55 61

Fax : +353 1678 5272

E-mail : wiliiam.beausang(Sfinance.gov.ie

1.4. Responsible contact person at the Permanent Representation18


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Name :Mr Fred Cooper

Telephone : + 32 2 230 8580

Fax : +32 2 2310504E-mail ;iFrecl.caoper(ld:fa.ie

1.5. If you wish that a copy of the official correspondence sent by the Commission to theMember State should be forwarded to other national authorities, please indicate here theirname and address:

Name : Not applicableAddress :

1.6. Indicate Mem ber State reference you wish to be included in the correspondence from theCommission

F9/2/09

1.7. Please indicate the name and the address of the granting authority:

The Minister, acting on behalf of the Government, in accordance with the Act.

Department of FinanceGovernm ent BuildingsUpper Merrion StreetDublin 2Ireland

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2. iDEiNTIFICATION OF THE AID

2.1. Title of the aid (or name of company beneficiary in case of individual aid)As stated above, this notification concerns the proposed capital injection by the IrishState of 1.5 billion into Anglo Irish Bank under the Irish Government's bankrecapitalisation programme.

The beneficiary is Anglo Irish Bank.The Government accepts that, in the current market circumstances, the Stateinvestment may contain elements of State aid. However, for the reasons set out inSection 10 below, the Government is of the view that the State investment is compatiblewith the Common Market on the basis of Article 87(3)(b) of the EC Treaty as it isnecessary in order to remedy a serious disturbance in the Irish economy. Please refer toSection 10 below for further details.

2.2. Brief description of the objective of the aid.

For the reasons set out above, the State investment is required in order to preservefinancial stability, to safeguard the Irish financial system and to remedy a seriousdisturbance in the Irish economy caused by the impact of the ongoing global financialcrisis an d recent corporate governance issues on the financial position of Anglo IrishBank. In particular, the objectives of the State investment are to ensure that Anglo IrishBank is adequately capitalised to preserve financial stability, to ensure that the Bank'scapital ratio levels meet the expectations of international investors and to facilitatelending to the realeconomy.

Please indicate primary objective and, if applicable, secondary objective(s) :

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Primary objective(please tick one only)

Secondary objective7

S Regional developmentS Research and development | |S Innovationv' Environmental protection [~1S Energy saving | |S Rescuing firms in difficulty QS Restructuring firms in difficulty Q/ Closure aid | |S SMEs DS Employment [ |S Training Q^ Risk capital [~]^ Promotion of export and I I

internationalisation/ Services of general economic | |

interestS Sectoral development8 Qv^ Social support to individual I I

consumersv' Compensation of damage caused Q

by natural disasters or exceptionaloccurrences

S Execution of an important project I Iof common Eu ropean interest

S Remedy for a serious disturbance [X]in the econom y

D

nn

nn

n

nn

nn

7 A secondary objective is one for which, in addition to the primary objective, the aid will be exclusivelyearmarked. For example, a scheme for which the primary objective is research and development may have as asecondary objective small and mediu m-sized enterprises (SMEs) if the aid is earmarked exclusively for SMEs.The secondary objective may also be sectoral, in the case for example of a research and development scheme inthe steel sector.8 Please specify sector in point 4.2.

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S Heritage conservation Q | [v' Culture O D

2.3. Scheme - Individual aid9

2.3.1. Does the notification relate to an aid scheme?D yes [X] no

^ If yes, does the scheme amend an existing aid scheme?I I y e s I 1 n o

> If yes, are the conditions laid down for the simplified notification procedurepursuant to Article 4(2) of the Implementation Regulation (EC) N (...) of (...)fulfilled?

CH yes [H no

> If yes, please use and complete the information requested by the simplifiednotification form (see Annex II).

> If no, please continue with this form and specify whether the originalscheme which is being amended was notified to the Commission.

D yes D no> If yes, please specify:

Aid number:

Date of Commission approval (reference of the letter of theCommission (SG(..)D/.. .):

9 According to Article l(e) of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailedrules for the a pplication of Article 93 of the EC Treaty (OJ L 83, 27.3.1999, p. 1), individual aid shall meanaid that is not awarded on the basis of an aid scheme and notifiable award of aid on the basis of a scheme.22


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Duration of the original scheme:

Please specify which conditions are being amended in relation tothe original scheme and why:

2.3.2 Does the notification relate to individual aid?

[X] yes [~~| no

> If yes, please tick the following appropriate box

I | aid based on a scheme which should be individually notifiedReference of the authorised scheme:

Title :Aid number :Letter of Commission approval:[XI individual aid not based on a scheme

2.3.3. Does the notification relate to an individual aid or scheme notified pursuant to anexemption regulation? If yes, please tick the following appropriate box:

Not applicable.

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Commission Regulation (EC) No 70/2001 on the application of Articles 87 and88 EC Treaty to State aid to small and medium-sized enterprises10. Please usethe supplementary inform ation sheet under part III, 1Commission Regulation No 68/2001 on the application of Articles 87 and 88EC Treaty to training aid 11. Please use the supplementary information sheetunder part III, 2Commission Regulation (EC) No 2204/2002 on the application of Articles 87and 88 EC Treaty to State aid for employment12. Please use the supplementaryinformation sheet under part III, 3Commission Regulation (EC) No 1628/2006 on the application of Articles 87and 88 of the Treaty to national regional investment aid13.Commission Regulation (EC) No 1857/2006 on the application of Articles 87and 88 of the Treaty to State aid to small and medium-sized enterprises activein the production of agricultural products and am ending Regulation (EC) No70/200114

10 Commission Regulation (EC) No 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of theEC Treaty to State aid to small and medium sized enterprises, OJ L 10, 13.1.2001, p. 33, as amended byComm ission Regulation (EC) 364/2004, OJ L 63, 28.2.2004, p. 22, Commission Regulation (EC) No1857/2006 OJ L 358, 16.12.2006, p. 3. and Commission Regulation EC No 1976/2006, OJ L 368,23.12.2006, p. 85.11 Commission Regulation (EC) No 68/2001 of 12 January 2001 on the application of Articles 87 and 88 of the

EC Treaty to State aid to training aid, OJ L 10, 13.1.2001, p. 20, as amended by Commission Regulation(EC) 363/2004, OJ L 63, 28.2.2004, p. 20 and Commission Regulation EC No 1976/2006, OJ L 368,23.12.2006, p. 85.12 Commission Regulation (EC) No 2204/2002 of 12 December 2002 on the application of Articles 87 and 88 ofthe EC Treaty to State aid for employment, OJ L 337, 13.12.2002, p. 3 and O J L 349, 24.12.2002, p. 126 asamended by Comm ission R egulation EC No 1976/2006, OJ L 368, 23.12.2006, p. 85.13 Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 ofthe Treaty to national regional investment aid, OJ L 302 of 01.11.2006, p. 29.14 Commission Regulation (EC) No 1857/2006 of 15 December 2006 on the application of Articles 87 and 88 ofthe Treaty to State aid to small and medium -sized enterprises active in the production of agricultural productsand amending R egulation (EC) No 70/2001, OJ L 358, 16.12.2006, p. 3.24


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3. NATIONAL LEGAL BASIS

3.1. Please list the national legal basis including the implementing provisions and theirrespective sources of references:Title: The Credit Institutions (Financial Support) Act 2008Reference (where applicable): Number 18 of 2008

3.2.Please indicate the document(s) enclosed with this notification:P


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Please provide the internet address:confirm that the scheme will not be applied before the inform ation is published on theinternet.D yes

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4. BENEFICIARIES

4.1. Location of the beneficiary(ies)[~~l in (an) unassisted region(s):|~~] in (a) region(s) eligible for assistance under Article 87(3)(c) EC Treaty(specify at

NUTS-level3 or lower):

I | in (a) region(s) eligible for assistance under Article 87(3)(a) EC Treaty (specify atNUTS-level 2 or lower):

[X] mixed: specifyAnglo Irish Bank has locations in Ireland, the UK, the United States, Jersey andthe Isle of Man. Its head office is located in Dublin, Ireland.

4.2. Sector(s) of the beneficiary(ies):I I Not sector specific

[X] Sector specific, please specify according to NACE rev. 2classification15:Section K Financial an d insurance activities, Division 64(Financial service activities, except insurance and pension funding).

4.3. In case of an individual aid:Name of the beneficiary :Anglo Irish Bank Corporation pic

Type of beneficiary :

NACE is the Statistical Classification of Economic Activities in the European Community. See Regulation(EC) No 1893/2006 of 20 December 2006 establishing the statistical classification of economic activities NACERevision 2, OJL393 of 30.12.2006, p. 1. NACE Revision2 comes into force on 1 January2008.

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D SME

Number of employeesAnnual turnoverAnnual balance-sheetIndependence

(please attach a solemn declaration in line with the Commission Recommendation onSME16 or provide any other evidence to demonstrate the above criteria):

[X] large enterprise

I I firm in difficulties17

4.4. In case of an aid scheme: Not applicable.Type of beneficiaries:

I I all firms (large firms and small and medium-sized enterprises)f~| only large enterprisesI | small and medium-sized enterprises18

16 Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sizedenterprises, OJ L 124, 20.5.2003, p. 36 and Commission Regulation (EC) No 364/2004 amendingRegulation (EC) No 70/2001 as regards the extension of its scope to include aid for research anddevelopment, OJ L 63, 28.2.2004, p. 22; or any subsequent legislation replacing it.As defined in Community guidelines on State aid for rescuing and restructuring firms in difficultyOJ C 244, 01.10.2004, pages 2.

18 As defined by Commission Recommendation of 6 May 2003 concerning the definition of micro, small andmedium-sized enterprises, OJ L 124, 20.5.2003, p. 36 and Commission Regulation (EC) No 364/.2004amending Regulation (EC) No 70/2001 as regards the extension of its scope to include aid for research anddev elop me nt,, OJ L 63, 28.2.2004, p. 22; or any subseq uent legislation replacing it.

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5. AMOUNT OF AID /.ANNUAL EXPENDITURE19

In case of an individual aid, indicate the overall amount of each measure concerned:The State investment involves the proposed capital injection by the Irish State of1.5billion into Anglo Irish Bank.

In case of a scheme, indicate the annual amount of the budget planned and the overallamount: Not applicable.

For tax measures, please indicate the estimated annual and overall revenue losses due to taxconcessions for the period covered by the notification:Not applicable.

If the budget is not adopted annually, please specify what period it covers:Not applicable.

If the notification concerns changes to an existing scheme, please give the budgetary effectsof the notified changes to the scheme:Not applicable.

1 All data should be provided in national currency.30


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6. FORM OF THE AID AND MEANS OF FUNDING

Specify the form of the aid made available to the beneficiary (where appropriate, for eachmeasure):

Direct grant[~~| Reimbursable grantI | Soft loan (including details of how the loan is secured)

Interest subsidyI | Tax advantage. Please specify:

I I Tax allowanceI | Tax base reduction

Tax rate reductionC~l Tax defermentD Other:

I 1 Reduction of social security contributionsProvision of risk capitalOther forms of equity intervention. Please specify:D Debt write-off

|~~1 Guarantee (including amongst others information on the loan or other financialtransaction covered by the guarantee, the security required and the premium to bepaid)

EX] Other. Please specify:The State investment in Anglo Irish Bank will be in the form of1.5 billion ofCore Tier 1 non-cumulative perpetual preference shares in the bank with a fixedannual dividend of 10%. The Shares will carry 75% of the voting rights in AngloIrish Bank. Further details of the terms and conditions of the State investment,including details of the instruments used, are set out above in the section entitled"Part One: General Information".

For each instrument of aid, please give a precise description of its rules and conditionsof application, including in particular the rate of award, its tax treatment and whether

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7. DURATION

7.1. In the case of an individual aid:Indicate the planned date to put into effect the aid If the aid will be granted in tranches,indicate the planned date of each tranche)

The proposed timetable for the State investme nt is as follows:

Sunday, 21st December, 2008: Government announcement of capitalinjection

Tuesday, 23rd December, 2008: Anglo Irish Bank published ashareholders' circular

Friday, 16th January, 2009: A nglo Irish Bank EGM to be held to approvethe capital increase

Tuesday, 20th

January, 2009: the Shares to be issued to the Minister (orthe NTMA on behalf of the M inister)

Specify the du ration of the measure for which the aid is granted, if applicable

Th e remuneration level and the redemption terms are designed to encourage Anglo IrishBank to redeem the Minister's investmen t as soon as market circumstances permit.

7.2. In the case of a scheme: Not applicable.

Indicate the planned date from which the aid may be granted

Indicate the planned last date until which aid may be granted

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If the duration exceeds six years, please demonstrate that a longer time period is indispensableto achieve the objective(s) of the scheme:

8. CUMULATION OFDIFFERENT TYPES OFAID

Can the aid be cumulated with aid received from other local, regional, national or Communityschemes to cover the same e ligible costs?

D yes no

If so, describe the mechanisms put in place in order to ensure that the cumulation rules arerespected:

Not applicable.

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9. PROFESSIONAL CONFIDENTIALITY

Does the notification contain con fidential inform ation which should not be disclosed to thirdparties?

[X] yes I I no

If so, please indicate which parts are confidential and explain why:

The confidential sections of the notification will be identified in a version of thenotification which will be provided to the European Commission shortly, together withthe grounds for confidentiality.

Does the Member State submit a non confidential version of the notification on a voluntarybasis?

0*0 ys I I no

A non-confidential version of the notification will be submitted shortly.

If yes, the Commission may publish this version without further asking the Member State toconfirm its content.

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10. COMPATIBILITY OF THE AID

10.1 Please identify which of the existing Regulations, frameworks, guidelines and othertexts applicable to State aid provide an explicit legal basis for the authorisation of theaid (where appropriate please specify for each measure) and complete the relevantsupplementary information sheet(s) in part III

Please refer to Section 10.2 below.

D SME aidn Notification of an individual aid pursuant to Article 6 of Regulation (EC) No

70/2001 as amended by Regulation (EC) No 364/2004|~~1 Notification of an individual aid or an aid scheme pursuant to Article 6a of

Regulation (EC) No 70/2001 as amended by Regulation (EC) No 364/2004|~1 Notification for legal certaintyI | Aid for SMEs in the agricultural sector

Training aid0 Notification of an individual aid pursuant to Article 5 of Regulation (EC) No

68/200las amended by Regulation No (EC) 363/2004| | Notification for legal certainty

I | Employment aid1 | Notification of an individual aid pursuant to Article 9 of Regulation (EC) No

2204/2002I | Notification of a scheme pursuant to Article 9 of Regulation (EC) No

2204/200236


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I I Notification fo r legal certainty

I | Regional aidI | Notification of aid pursuant to Guidelines on national regional aid for 2007-

201320I | Notification of aid pursuant to point 64 of Guidelines on national regional aid for

2007-2013 (large investment projects)D Notification of aid pursuant to Article 7 of Regulation (EC) No 1628/2006I | Notification for legal certainty

Research and development and innovation aidI I Aid for rescuing firms in difficultyI I Aid for restructuring firms in difficultyI I Aid for audio-visual production

Environmental protection aidI I Risk capital aidI I Aid in the agricultural sectorI I Aid in the fisheries sectorI [ Aid in the transport sector

Shipbuilding aid

10.2 Where the existing Regulations, frame works, guidelines or other texts applicable to Stateaid do not provide an explicit basis for the approval of any of the aid covered by thisform, please provide a fully reasoned justification as to why the aid could be consideredas compatible with the EC T reaty, referring to the applicable exemption clause of theEC Treaty (Article 86(2), Article 87(2) (a) or (b) , Article 87(3) (a), (b), (c) or (d)) aswell as other specific provisions relating to Agriculture and Transport.

20 Guidelines on national regional aid for 2007-2013, OJ C 54, 0403.2006, p. 13.37


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INTRODUCTION

The Irish Government is committed to ensuring that any measure that it takes tosupport financial institutions in the context of the current global financial crisis isconsistent with EC State aid rules.

The Government accepts that, in the current market circumstances, the Stateinvestment may contain elements of State aid. However, for the reasons set out inthis section, the Government is of the view that the State investment iscompatiblewith the Common Market on the basis of Article 87(3)(b) of the EC Treaty as it isnecessary in order to remedy a serious disturbance in the Irisheconomy.

ARTICLE 87(3)(B) OF THE EC TREATYArticle 87(3)(b) provides that the following aid may be considered to be compatiblewith the Common Market:-

"aid to promote the execution of an important project of common Europeaninterest or to remedy a serious disturbance in the economy of a Member State"

The following Commission Communications provide guidance on the application ofState aid rules, in particular Article 87(3)(b) of the EC Treaty, to measures takenfor financial institutions in the context of the current global financial crisis:

the Communication from the Commission on the application of State aidrules to measures taken in relation to financial institutions in the contextof the current global financial crisis of 13th October, 2008 (the "BankingCommunication"); and,

the Communication from the Commission on the recapitalisation offinancial institutions in the current financial crisis: limitations of the aidto th e minimum necessary and safeguards against undue distortions ofcompetition of 5 th December, 2008 (the "RecapitalisationCommunication").

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CQMPATABILITY OF THE MEASURE UNDER ARTICLE 87(3)(B)The terms and conditions of the State investment have been designed to beconsistent with th e Banking Communication and the RecapitalisationCommunication. In particular, the State investment is:

well-targeted to its objective, which is to remedy a serious disturbance inth e economy;

limited to the minimum amount necessary and takes the form mostappropriate to remedy the disturbance; and,

designed to minimise any negative spill-over effects on competitors, othersectors and other Member States.

An assessment of how the State investment fulfils these conditions is set out below.Well-targetedAnglo Irish Bank is considered a fundamentally sound institution. [Confidential -commercially sensitive] [Department to confirm] Following the introduction of theGuarantee Scheme, the Financial Regulator commissionedPricewaterhouseCoopers to prepare a report on the financial position of the sixmain domestic institutions participating in the Guarantee Scheme (the PwCReport). The PwC Report concluded that the capital positions of each of theinstitutions reviewed, including Anglo Irish Bank, was in excess of regulatoryrequirements as of 30th September, 2008 and that, under a number of stressscenarios, capital levels in each of the institutions will remain above regulatoryminimum levels in the period to 2011. A copy of a letter from the Central Bank an dFinancial Regulator to the Minister dated 18th November, 2008 summarising andcommenting on the conclusions of the PwC Report is attached in ConfidentialAnnex 5.

In addition, on 19th December, 2008, the Department of Finance (the"Department") provided the Commission with an assessment carried out by itsfinancial advisers, Merrill Lynch, concerning th e risk profile of Anglo Irish Bankbased on the criteria contained in Annex 1 to the Recapitalisation Communication.T-he-assessffl&nt-by Merrill Lyaeh supports the position that Anglo Irish Bank is

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fundamental ly sounA [Confidential - commercially sensitive]' [Department toconfirm]A copy of the correspondence from the Department to the Commissiondated 19th December, 2008 setting out the assessment by Merrill Lynch is attachedin Confidential Annex 7, together with updated information on CDS spreads as atit h8tn January, 2009.

Despitebeingfundamentallysound [Confidential - commercially sensitive][Department to confirm], the difficulties faced by Anglo Irish Bank due to thecurre nt exceptional market circum stances hav e led to a significant deterioration inthe financial position in the Bank. In particular, as noted above, the current globalfinancial crisis has led to a significantly raised level of capital deemed adequate fo rfinancial institutions. Market perceptions concerning the inadequacy of Anglo IrishBank's capital ratio levels have led to a deterioration in investor sentiment withregard to Anglo Irish Bank. As a result, Anglo Irish Bank's shares have lost mo rethan 98% of their value over the last 12 months.

In addition, as noted above, corporate governance issues at Anglo Irish Bank haveaccelerated the deterioration in the financial position of the Bank recently andexposed specific vulnerabilities for the Bank.

Anglo Irish Bank is of key importance to the maintenance of stability of the Irishfinancial system. Anglo Irish Bank is one of the six core banks in the State.AngloIrish Ban k has a ba lance sheet size in excess of 100 billion (approximately 50% ofGDP) and accounts for a significant share of customer deposits and lending in theIrish economy. As noted above, further deterioration in market investor sentimentin relation to Anglo Irish Bank would represent a threat to the stability of both thefinancial system in the State and the wider economy. In particular, a loss ofconfidence in Anglo Irish Bank could undermine confidence in the Irish financialsector as a w hole, which is very de pend ant upon international funding throughwholesale money markets. This constitutes a serious risk of a systemic crisis in theIrish financial system, which, in turn, would have significant negative spill-overeffects into the wider economy. In a letter dated 8th January, 2009, the Governorhas confirmed the systemic importance of Anglo Irish Bank to maintaining thestability of the financial system in the State. A copy of the Governor's letter isattached in Confidential Annex 8.

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In these circumstances, the objectives of the State investment are to ensure thatAnglo Irish Bank is adequate ly capitalised to preserve financial stability and toensure that the Bank's capital ratio levels meet the expectations of internationalinvestors. It is envisaged that this, in turn, should facilitate private sectorinvestment in Anglo Irish Bank, which has been negatively affected by thedeterioration in the financial position of the Bank.

A further objective of the State investment is to facilitate lending to the realeconomy, which may be negatively impacted by the difficulties caused by thecurrent financial crisis. As noted above, in the context of the Government'srecapitalisation programme, the Recapitalised Banks (including Anglo Irish Bank)have agreed to contribute to the economy in a verifiable manner in relation tocredit and to the mai nten anc e of a paym ents system whic h is socially inclusive. Forthis purpose, the Recapitalised Bank have agreed to a series of conditions inrelation to lending to the real economy. These conditions are considered in moredetail below.

Fo r these reasons, the State investment is well-targeted to its objective, which is toremedy a serious disturbance in the economy.

NecessaryAs noted above, in their letter dated 18th November, 2008, the Central Bank and theFinancial Regulator stand over the conclusion in the PwC Report that, under anumber of stress scenarios, capital levels in each of the institutions will remainabove regulatory minim um levels in the period to 2011. However, the Central Bankand the Financial Regulator comment that th e assumptions underlying theconclusions in th e PwC Report arc challenging an d that "a n even more pessimisticeconomic outturn cannot be ruled out". For this reason, the Central Bank and th eFinancial Regulator go on to recommend that: "bearing in mind the volatility of theeconomic and financial environment, the Board and the Authority are of the view thaturgent steps should be taken to strengthen the capital positions of the CoveredInstitutions. Such action would put the Covered Institutions in a stronger position to

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support the needs of the economy and satisfy market demands for higher capitalratios."- [Confidential - commercially sensitive] [Department to confirm]

In a letter dated 8th January, 2009, the Governor has confirmed that a capitalinjection of1.5 billion into Anglo Irish Bank is fully consistent with the CentralBank's advice to Government on the need to strengthen the capital position of theBank in order to maintain its credit standing in the continuing very difficult marketconditions. A copy of the Governor's letter is attached in Confidential Annex 8. Inits announcement of 21st December, 2008, the Government stated that it wouldcontinue to reinforce the position of Anglo Irish Bank and would make furthercapital available if required so that Anglo Irish Bank remains a sound and viableinstitution. A minimum capital injection of1.5 billion into Anglo Irish Bank isfully consistent with the advice of the Governor and is based on the systemicimportance of Anglo Irish Bank to maintaining financial stability and on a numberof other factors, including:-

The need to boost Anglo Irish Bank's Core Tier 1 capital ratio, in lightofthe change in market and investor expectations and to address concernsabout the Bank's financial stability, as noted above. The State investment

71will boost Anglo Irish Bank's Core Tier 1 capital ratio from 5.9% to7.7%22.

The results of a recent detailed review of the Bank's loan book carried outon behalf of the Financial Regulator.

The assessment that there was a low likelihood that Anglo Irish Bankwould be successful in raising additional equity from existing shareho ldersand new private investors. [Confidential - commercially sensitive forAnglo Irish Bank] [Department to confirm]

Source: Merrill Lynch. Basis:Current CT1:5,068m (incl.371m prefs)Current RWA:685,798m==> Current CT1 ratio of 5.9%22 Source: Merrill Lynch. Basis:After 1,5bn additional CT1Pro forma CT1: 66,568m==> Pro forma CT 1 ratio of 7.7%

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The need to reassure investors, bondholders and the public market of theGovernment's commitment to support the Bank in light of the disclosuresregarding failures in corporate governance in the Bank.

As stated above, the instruments that will be used to make the State investment arenon-cumulative perpetual preference shares in the Bank with voting rights. TheFinancial Regulator has confirmed that the Shares will be treated as Core Tier 1Capital fo r regulatory capital purposes.The Shares have a fixed dividend of 10% payable annually at the discretion of theBank and in priority to dividends on ordinary shares. Dividends on the Shares arepayable in cash, or if not able to pay in cash, in ordinary shares on the basis of theaverage daily closing price over the previous30 trading days.The Shares are a hybrid form of Core Tier 1 capital. While they are deeplysubordinated, non-cumulative and only have a discretionary dividend, they are alsonon-dilutive and, in relation to dividends, they rank in priority to ordinary shares.In its Recapitalisation Communication, the Commission accepts a minimum pricecorridor for fundamentally sound banks of 7% to 9.3%, depending on theinstrument used. It is submitted that, given the characteristics of the Shares, adiscretionary remuneration of 10% per annum, which is above th e minimum pricecorridor for fundamentally sound banks, is consistent with the RecapitalisationCommunication.In addition to an adequately high remuneration level, the terms and conditions ofthe State investment contains other incentives for State capital redemption as soonas market circumstances permit. Redemption is at Anglo Irish Bank's discretion.While the Bank can repurchase the Shares at par for up to five years, after thatperiod, Shares can be repurchased at 125% of par. This provides an incentive forAnglo Irish Bank to redeem the Shares during the initial five year period. Inaddition, replacement capital must be Core Tier 1, which ensures that the Stateinvestment is replaced with private equity investment in Anglo Irish Bank.Finally, there is a restrictive dividend policy while the State holds the Shares:dividends on ordinary shares are not allowed where a dividend on the Shares is notpaid to the State. This encourages the Bank to redeem the State capital injection assoon as possible, while also providing th e Bank with the flexibility to incentivise

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private equity investment through the payment of dividends on ordinary shareswh ere a dividend is paid to the State on the S hares.On the basis of the above, the State investment is limited in scope an d duration towhat is strictly necessary to achieve its objective.ProportionateThe terms and conditions of the State investment, together with the terms andconditions already imposed on Anglo Irish Bank under the Guarantee Scheme,contain an extensive range of safeguards against possible abuses an d distortions ofcompetition.First, the terms and conditions of the State investment envisage management andboard changes at Anglo Irish Bank and Gov ernment representation on the Board ofDirectors of the Bank. In addition, it will be a condition for the State investm ent inAnglo Irish Bank that the Bank will not use the fact that it has received the capitalinjection for advertisement or prom otion purposes.Second, in the context of the Gove rnm ent's recapitalisation prog ram me , theRecapitalised Banks (including Anglo Irish Bank) have agreed to a series ofconditions in relation to sustaining lending to the real economy and themaintenance of a payments system which is socially inclusive. These conditions arefocussed on SMEs and individuals. These conditions are set out in more detailabove in the section entitled "Behavioural Conditions". In particular, they includeincreased capacity for lending to SMEs and first time buyers, a new code ofpractice for business lending and increased assistance for householders in arrearson mortgage repayments, including a commitment not to seek enforcement actionor repossession for at least six months.As noted above, on account of Ang lo Irish Bank's specific business model, which isspecialised in commercial property lending and property developm ent finance, notall of the elements of the agreed credit package will directly impact on Anglo IrishBank, at least initially. However, given the envisaged future changes in the Bank'sbusiness model and strategic direction under its restructu ring plan, it is anticipatedthat in time further elements of the credit package will become applicable to Anglo

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Irish Bank accordingly^ [Confidential commercially sensitive fo r Anglo IrishBank] [Department to confirm]As will be the case for all credit institutions participatin g in the Gov ernm ent'srecapitalisation programme, credit granted by Anglo Irish Bank under the creditpackage will be issued on a commercial basis and will not involve any aid tobusinesses. If in any circumstances it does involve any element of aid, it will benotified to the Com mission for approval un der State aid rules.Third, Anglo Irish Bank continues to be subject to the behavioural conditions andtransparency and reporting conditions that may be imposed und er paragraphs 24to 50 of the Guarantee Scheme. These behavioural conditions are set out in moredetail above in the section entitled "Behavioural Conditions". In summary, theyinclude conditions relating to:

balance sheet growth constraints (paragraph 36 of the GuaranteeScheme);

controls over acquisition of shares in other financial institutions,establishing subsidiaries and/or entering into new business (paragraph 38of the Guarantee Scheme);

compliance with targets on assets and liabilities, including in relation toloan/deposit ratio, wholesale funding/total liabilities ratio, d eposit grow than d max imu m loan-to-value on new loans (paragraph 39 of the GuaranteeScheme);

compliance with liquidity, solvency and capital ratios (paragraph 41 of theGuarantee Scheme);

limitations on dividends (paragraph 42 of the Guarantee Scheme); controls on executive remuneration (paragraphs 46-49 of the Guarantee

Scheme); reporting and comp liance obligations (paragraphs 24-27 and 29 of the

Guarantee Scheme); and,

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controls on board representation and executive management (paragraphs32-34 of the Guarantee Scheme).

As noted above in the section entitled "Behavioural Conditions", Anglo Irish Bankhas been required to prepare and submit a strategic report to the Departmentsetting out how it proposes to align the future direction of the Bank to meet theobjectives of the Guarantee Scheme. In addition, Anglo Irish Bank is required toprovide regular reports to the Department that describe progress made incomplying with the principles and objectives of the Guarantee Scheme, and anyspecific directions issued by the Minister in connection with the Guarantee Scheme.As noted above, Anglo Irish Bank has made specific progress in relation tocompliance with a range of elements under th e Guarantee Scheme. In summary,these are:

public interest nominations to the Board of Directors; remuneration arrangements for directors and executives; ban on dividends until further notice; prohibition of buy-backs without prior approval; prohibition of funding initiatives without prior consultation; prior consultationin relation to public disclosures concerningits assets; prohibition on advertisingon the basis of the Guarantee Scheme; Corporate Social Responsibility arrangements; controls over recourse to interbank deposits; requirements for quarterly compliance certificates in relation to the terms

and objectives of the Guarantee Scheme; and

risk management arrangements to guard against technical default underthe Guarantee.Together, this extensive range of behavioural conditions under both the terms andconditions of the State investment and the Guarantee Scheme ensure that anynegative spill-over effects on competitors, other sectors an d other Member States, ifany, are limited to the minimum necessary to achieve the objectives of the Stateinvestment.

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Restructuring planUnder the terms and conditions of the State investment, Anglo Irish Bask hascommitted to draw up and submit within six months a restructuring plan to restorethe long-term viability of the Bank within a reasonable timescale. The restructuringplan will be subm itted to the Com mission for assessment and approval.CONCLUSIONOn the basis of the above assessment, it is submitted that the term s and conditionsof the State investment are consistent with the guidance issued by the Commissionin its Banking Communication and Recapitalisation Communication for measurestaken for financial institutions in the context of the current global financial crisis.On this basis, it is submitted that the State investment is compatible with theCommon Market on the basis of Article 87(3)(b) of the EC Treaty as it is necessaryin order to remedy a serious disturbance in the Irish economy.

10.3 Where the existing R egulations, framew orks, guidelines or other texts app licable to Stateaid do not provide an explicit basis for the approval and in so far that it is not requestedby the relevant supplementary information sheet(s) in part III, please provide thefollowing information concerning the likely impact of the notified measure oncompetition and trade between Member States.

This information is necessary to complete the assessment made by the Commissionwhich balances the positive impact of the aid measure (reaching an objective ofcommon interest) against its potentially negative side effects (distortions of trade andcompetition).

10.3.1 For individual aid:A) Impact on competition: Please specify and describe the product markets on whichthe aid is likely to have a significant impact, the structure and dynamics of thosemarkets and the indicative mark et share of the beneficiary:Please refer to Section 10.2 above.B) Impact on trade between Member States. Please provide information on the effectson trade (shift of trade flows and location of econom ic activity)

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Please refer to Section 10.2 above.

10.3.2 For aid schemes:A) Impact on competition: Please specify and describe the product markets on whichthe aid scheme is likely to have a significant impact, the structure and dynamics ofthose markets:Not applicable.B) Impact on trade between Member States. Please provide information on the effectson trade (shift of trade flows and location of economic activity)Not applicable.

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11. OUTSTANDING RECOV ERY ORDERS

11.1. In the case of individual aid:

There are no outstanding orders for recovery of previous State aid to the Bank pendingthe implementation of which the State investment would have to be suspended.

The authorities of the Member State commit to suspend the payment of the notified aid if thebeneficiary still has at its disposal an earlier unlawful aid that was declared incompatibleby aCommission Decision (either concerning an individual aid or an aid scheme), until thatbeneficiary has reimbursed or paid into a blocked account the total amount of unlawful andincompatible aid and the corresponding recovery interest.

CH yes EH no

11.2. In the case of aid schemes: Not applicable.

The authorities of the Member State commit to suspend the payment of any aid under thenotified aid scheme to any undertaking that has benefited from earlier unlawful aid declaredincompatible by a Commission Decision, until that undertaking has reimbursed or paid into ablocked account the total amount of unlawful and incompatible aid and the correspondingrecovery interest.

D yes D no

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12. OTHER INFORMATION

Please indicate here any other information you consider relevant to the assessment of themeasure(s) concerned under State aid rules.

The Government will provide any further information which is required for theCommission's assessment.

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13.,; ATTACHMENTS

Please list here all documents which are attached to the notification and provide paper copiesor direct internet links to the documents concerned.

A copy of the Credit Institutions (Financial Support) Act 2008 is attached in Annex 1.

Copies of the Government announcements on recapitalisation dated 21st December,2008,14th December, 2008 and 28th November, 2008 are attached in Annex 2.

A copy of the Anglo Irish Bank circular to shareholders issued on 23rd December, 2008is attached in Annex 3.

A copy of the Credit Institutions (Financial Support) Scheme 2008 is attached in Annex4.

A copy of a letter dated 18th November, 2008 from the Central Bank and FinancialRegulator to the Minister in relation to the PwC Report is attached in ConfidentialAnnex 5.

The details of the credit package under the Government's recapitalisation programmeare attached in Annex 6.

A copy of correspondence dated 19th December, 2008 from the Department to theCommission setting out the assessment by Merrill Lynch concerning the risk profile ofAnglo Irish Bank and updated information on CDS spreads as of 8th January, 2009 areattached in Confidential Annex 7.

A copy of a letter dated 8th January, 2009 from the Governor to the Minister concerningthe systemic importance of Anglo Irish Bank and the necessity for the State investmentis attached in Confidential Annex 8.

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14. DECLARATION

I certify that to the best of my knowledge the information provided on this form, its annexesand its attachments is accurate and complete.

Date and place of signature

Signature :

Name and position of person signing.

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Ireland Note to the European Commission

Documents

Transcript of Ireland Note to the European Commission