BANK OF IRELAND has said tonight that it intends to try and raise the €4.2bn in extra capital demanded by the latest round of stress tests through private means – without having to recourse to the state.

In a statement this evening, the Bank said today’s stress tests had been based on a “what if”, worst-case hypothetical scenario – and said it was set to significantly reduce the ratio of loans on its books to its deposits by the end of 2013.

But while the other financial institutions in the state are likely to go directly to the state to receive the capital now required of them, Bank of Ireland said it was keen to try and raise the capital itself, without taxpayer assistance.

“The Bank is working actively, with its advisors, on initiatives with a view to meeting the €4.2 billion equity capital requirement through a combination of capital management initiatives, other capital markets sources, and support from existing shareholders,” it said tonight.

The bank welcomed the assurance from finance minister Michael Noonan that it would be given time to raise its own capital, with any shortfall in the €4.2bn target then being covered by the taxpayer.

“We expect to be in a position to make an announcement on our capital plans in the coming weeks,” the bank said.

Elsewhere, a joint statement from the European Commission, European Central Bank and IMF said that the “comprehensive announcements” made by the Irish authorities regarding the stress tests were “a major step toward restoring the Irish banking system to health”.

The ECB later said it was suspending the minimum thresholds it usually required for collateral, in order to continue accepting Irish bank or government debt as collateral for lending.

The move means that even if the credit rating of the Irish banks, or the state itself, is cut in the coming days, the ECB will continue to accept their bonds as collateral in order to lend them enough cash to stay operational.

That move, however, could be open to a challenge by other member states – because it would appear to be a fundamental breach of the basic treaty founding the European Union.

Article 123 of that Treaty says:

…Any other type of credit facility with the European Central Bank [...] in favour of [...] public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

That article also appears to ban the ECB from buying the bonds of its member states, however – meaning the ECB would have been in contravention of the EU’s founding treaties for some time already.

[hat-tip to Lorcan Roche-Kelly]