An Roinn Airgeadais Department of Finance Sraid Mhuin?ean Uacht, Upper Merrion Street, Teileaf?n lTelephone: 353?1 6?6 7571 Belle Atha Cliaih 2, Dublin 2, Facsuimhiri Facsimile: 353-1 678 9936 Eire. Ireland. Glao Aitii?iil LoCall: 1890 66 10 1o 30 September 2011 Mr Alan Dukes Chairman Anglo lrish Bank Corporation Limited Connaught House 1 Burlington Road Dublin 4 Dear Alan Further to your letter, dated 5 September, i set out below responses to a number of the points you raise: Lower capital requirement i am very happy to note the lower estimated capital re be reduced further as the Bank?s balance sheet reduces. This surplus capital to the Shareholder wh en appropriate. quired, and hope that this estimate can should involve the return of residential mortgage book When we ?rst discussed the matter, noted with concern the quality of the INBS Book, repeated in your letter 01?5"1 the Banking Unit in the Department sought a meeting with which was declined. The governance of such interactio re?ected in the existing relationship framework. i would make sure that your management team understand that, Department, such meetings are to be facilitated. On our sid also to the competing priorities in terms of scheduling of same. your preliminary observations about September. You may be aware that the Bank on this subject on August between us, and other matters, is here-fore appreciate it if you could if it is deemed appropriate by the e, we shall try and be understanding To move this important issue along, i would appreciate it if you could provide an initial assessment of the nature, extent, and possible impact of perceived problems with the residential mortgage book. Given that this book was the subject of PCAR earlier this year you will understand that this is a sensitive and important issue for both the Department and the Minister. Expert group on mortgage arrears The Department is awaiting the initial output of the expert group on mortgages which the Minister convened to explore possible initiatives by month end. Your concerns about the potential impact of this review on the provisioning levels on the INBS book are noted but Firm?" 1m A?ith?r?il?le Printed on 100% warm-g paper hopefully the later comments by the Minister and the Government when considered along with the statement you quote from the Minister will help in reaching conclusions about the IBRC wind-down capital cost. Resignation letter of have not yet had time to read in full Mr Carswell?s book or the extracts from MvE?s letter. Mike may already have told you that Maarten himself wrote to me in April to share some views and, inter alia, expressed his happiness that he had heard I had put the topic of more speedy delays-raging on the table with some urgency to the remaining management ofthe bank. Governance i am not sure that you intended to leave in your bracketed text which dealt mainly with Central Bank discussions which I have not separately verified. In any event, in the interest of good governan ce, since you raise them in your letter, I would like to point out that: As I explained, I also would have believed issues might be un-necessarily dealt with at Board level; The Central Bank as I understand, have a preference, as would we, for attendance at meetings in person and your note worryingly says in a number of cases "most members participated by teleconference?; and Your note suggests that it is not unusual for the CEO to be present at Audit Committee meetings which we would strongly discourage. Board membership You should rest assured that I also ?nd time to consider the more macro challenges facing the banking sector and the country. i would prefer though that alignment of interest between the State as shareholder and your management's views might take place more easily as it would consume less of my time. However, in the light of so many conflicts between the views ofthe State (and its advisers) and your management, I have felt the need to give full and ample time to you, and your management, to understand your point of view and the rationale for you reaching these contrary views. i believe it is also very unhelpful for discussions of variations in the future strategy ofthe bank to be taking place in public before being finalised between your management and my team. I would ask that you and your team bear this in mind. We remain fully available to you for discussions ofthis type. Any other ideas you might have to ease this situation would be more than welcomed. have expressed the view to Mike, for example, that we need to move to a situation where only one advisor is providing views to both the Bank and the State which should aileviate the situation. Operating model and GEXCO In our previous conversations we had agreed an operating model for Anglo consistent with the 31 July 2011 preposals. You yourself spoke to me by reference to the "Day 2 model?. Mike Aynsley has since provided yet another amended organisational structure as approved by the Board on 25 August 2011 and which, I understand, became effective on 1 September (see figure 1 attached). The amended interim organisation structure both increases the number of members and adjusted the direct reports to the chief executive. As you know, our experienced advisors were strongly of the view these should all be reduced speedily (to aid effective and efficient decision? making). 1 had to short?circuit our discussion and agreed to a somewhat eXpanded team despite their advice. Except with respect to the internal audit matter you explained to me, I had certainly not expected these further unilateral changes. While you may feel that this is micro management, it is important to the Shareholder that this and other commitments made between you and to move things along are respected. I would ask that you re?commit to the agreed rtarget operating model? we discussed (see figure 2 attached - adjusted to move internal audit, as requested by the Central Bank} and ensure it is implemented as soon as possible. Could you let me know the proposed implementation date? 1 am setting up meetings with two of the candidates for board membership with strong restructuring experience who have emerged through our process to con?rm that they remain interested. At the same time, perhaps you could provide for our consideration your deadlines for Board reduction as we discussed? Relationsth framework We are currently working on a revised relationship framework which we will share with you when the drafting is ?nalised. I look forward to hearing from you. Yours sincerely cc Ministerfor Finance Michael Torpey Danny Buckley Figure 1: Angle?s Day Two Operating model, approved by Board on August 25 l?umunal mammal rd "we km?: Imo-nal Audrt? . Corporate run ctiu nu Inwazrnonl 8 Llan n: or: on.? A Instxumnal Rw'v' A A ralar? a Swmnu Fen-aver.- I oomph. nce a Hm Tree?; r; CFO ?lo-up Emu-.mwn GI uup Ex ICUIIVI I . 'nuuy. I Slaulaliaed Asnsl I I J: Managemo-n (?gnu-I. m. IJVOIrlnma Ireland I u, RM. Pawn; Mana;9manl Retell Mortgages 1 wary Manage-man: Uh l' 9170013!" Munoaoumm as ."f?llh Hangar mu- PO-mllo 1 Fair! Halos Asset Mnnagamant Support Services Figure 2: Anglo?s Target Operating model, approved by Board on July 31 ?#5175515 Corporate Affairs -i CEO Purpomtelunclions Rum", Roam-o; Sun-Jansen I me Gar I "stand Mgr?: UK Assn] mom: I r-euury ?ak I I Group Group mom 1 I I Exucmlw Execute" WM 'rll n. 655M and T?aasuq Doubt): Sula Imam"! ~an Asset Management - - 8150' moment: 3 FronI-o?lce GE) :0 mambers 3 Bank-of?ce GEXC f) 3 mhers