Irish Banks sold off sharply since the start of October as Bank of Ireland and AIB are both over 40% lower than the year to date high level reached in mid September. However yesterday both banks suffered the largest declines since Lehman Brothers filed for bankruptcy in September 2008. Equity markets around the world declined yesterday, although the Irish banks under-performed as concerns about the sustainability of the economic recovery weighed on investors. Since the start of October economic data has by and large disappointed forecaster expectations, most recently yesterday data on the housing market were lower than expected. All risky asset classes, which had benefited greatly from the rally since the start of March gave back some gains as credit spreads widened, the US dollar rallied, while commodities such as gold and oil moved lower. Elsewhere the VIX index, a measure of volatility for the US S&P 500 index also pushed higher.

Comments by Finance Minister Brian Lenihan that the loans to be transferred to Nama may be delayed until into the New Year pressured the Irish banks yesterdays. Any delay in transferring the loans will extend the banks ability to raise capital through the financial markets, therefore may leave the sector more reliant on the government, which will dilute shareholders equity. Both AIB and Bank of Ireland have committed to raising additional capital. AIB is hoping to sell off units and was hoping to tap the equity markets, while Bank of Ireland is also expected to hold a rights issue. However failing support from the capital markets, the government help also remains an option for the banks.

However further concerns have been brewing around that the European Commission may take a tough stance on Nama and whether or not the commission sees it as state aid. The European banking sector has been suffering this week on concerns that European Commission took a tough stance on the sector especially after it forced the Dutch bank ING to sell some of units in order to shrink its balance sheet. Lloyds and RBS are now awaiting decisions from the commission. The EU competitions authorities had allowed state aid to financial companies during the crisis but are now looking at the sector with more scrutiny particularly if generous supports continue.