THE STATE’S two largest banks, Allied Irish Banks and Bank of Ireland, have submitted preliminary responses to the Government’s proposals to set up a State asset management company to remove bad loans from the banks.

Both banks are understood to have accepted that the company will assume the development loans of both lenders, which would lead to loans worth almost €35 billion being transferred to the company from the two financial institutions.

The two banks and a spokesman for the Department of Finance declined to comment.

The proposals were submitted this week following meetings with the guaranteed financial institutions last week to discuss the creation of a variation on the “bad bank” scheme tailored for Irish bank assets linked to property.

Transferring all developments loans from the six guaranteed Irish-owned financial institutions would lead to the creation of a State-owned company with more than €56 million in property loans.

AIB is the largest lender in the property and construction sector with development loans of €20 million in Ireland and the UK, while Bank of Ireland has €13 billion in loans in this sector. Anglo Irish said at its annual results presentation last December that it has development loans of €16.9 billion.

Analysts at JP Morgan have estimated that Irish Nationwide has a development loans of €3.8 billion.

Irish Life Permanent did not lend to developers, while EBS has a €500 million development book.

The Government is expected to announce a broad outline of its plan for an asset management company to free up new bank lending when it publishes its emergency budget next Tuesday.

Bank of Ireland said last week that it would assess the Government’s proposals over the coming weeks.