DUBLIN (Reuters) - Ireland's central bank wants lenders to "overcapitalize" beyond a new target agreed with the IMF and the EU to cover potential future losses, it said on Sunday.
The central bank has raised its target for core Tier 1 capital ratio, a measure of financial strength, to 12 percent from 8 percent currently but wants Allied Irish Banks <ALBK.I>, to maintain a ratio of 14 percent.
Under an 85 billion euros ($115 billion) emergency loan package, 35 billion euros is earmarked to help restructure the banking sector, including 10 billion euros for recapitalization, meaning the government will likely end up effectively nationalizing Allied Irish Banks, once the country's largest listed lender.
Dublin will also likely end up with a majority stake in Bank of Ireland <BKIR.I>, the biggest lender. It nationalized Anglo Irish Bank <ANGIB.UL>, the top 3 bank, last year.
"The programme ... provides the necessary assurance to achieve a convincing and rapid reconfiguration and downsizing of the banks, putting the Irish banking system on a convincingly secure footing," central bank governor Patrick Honohan said in a statement.
"The central bank will continue to provide all necessary support to the system."
The central bank said the minimum capital requirement was 10.5 percent and Bank of Ireland, Allied Irish Banks, and EBS Building Society <EBSBS.UL >had until the end of February 2011 to get the ratio up to a 12 percent target.
Bancassurer Irish Life & Permanent <IPM.I> has until the end of May next year.
But as part of its new regime, the central bank is requiring the Bank of Ireland to raise its core Tier 1 ratio to 12.5 percent and EBS Building Society <EBSBS.UL> to raise its core tier 1 ratio to 13.5 percent.
Irish Life & Permanent has to raise its ratio to 12.7 percent.
Overall, the banks need to raise an additional 8 billion euros in capital and given that they already had to beef up their books that brings the total capital that they need to raise to 13.2 billion euros.
The central bank will conduct a fresh stress test in March 2011 and if the banks are judged to be at risk of falling below the 10.5 percent minimum capital ratio then future capital injections will be required.
An independent third party will review the banks' assets as part of the stress test.
The central bank will also carry out a liquidity assessment of the banks in the first quarter of next year and set out specific funding targets consistent with the new Basel 3 international requirements.
As part of the liquidity targets, the banks will have to produce detailed asset disposal plans by the end of April.
The central bank will also move to shore up the credit union sector, which has been bedeviled by rising arrears, next year.
(Reporting by Carmel Crimmins; editing by Steven Slater)