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The Group’s exposure to liquidity risk is governed by the Group’s liquidity and funding policy approved by the Court and the GRPC. The objective of the policy is to ensure that the Group can meet its obligations, including deposit withdrawals and funding commitments, as they fall due. The operation of this policy is delegated to the Group’s Asset and Liability Committee (ALCO).

See Item 11 ‘‘Quantitative and Qualitative Disclosures about Market Risk’’ for further details about our risk management policies. (See also note 60 to the consolidated financial statements.)

Capital Management Objectives and Policies

The objectives of the Group’s capital management policy are to at all times comply with regulatory capital requirements and to ensure that the Group has sufficient capital to cover the risks of its business and support its strategy. It seeks to minimise refinancing risk by managing the maturity profile of non-equity capital whilst the currency mix of capital is managed to ensure that the sensitivity of capital ratios to currency movements is minimised.

The capital adequacy requirements set by the Central Bank are used by the Group as the basis for its capital management. These requirements set a floor under which capital levels must not fall. The Group seeks to maintain sufficient capital to ensure that even under stressed conditions these requirements are met.

The following table sets out the Group’s capital resources (stockholders’ equity and subordinated liabilities):

31 December 31 December

2010 2009

Em Em

Stockholders’ funds

Equity (including other equity reserves) . . . 7,326 6,345 Non-cumulative preference stock . . . 25 42 Total Stockholder’s Equity . . . 7,351 6,387 Non-controlling interests—equity . . . 56 50 Undated subordinated loan capital . . . 769 1,521 Dated subordinated loan capital . . . 2,006 4,532 Total capital resources . . . . 10,182 12,490

Twelve month period ended 31 December 2010 compared to the nine month period ended 31 December 2009 In the twelve month period ended 31 December 2010, the Group’s total capital resources reduced by A2.3 billion to A10.2 billion. This movement is primarily driven by the following: a series of liability management exercises of subordinated debt securities which generated an equity gain of A1.4 billion (offset by a reduction in subordinated capital of A2.4 billion); the redemption of A0.75 billion of subordinated debt securities; the 2010 Capital Raising initiatives which increased equity by A1.3 billion (net of 2009 (NPRFC) preference stock converted to ordinary stock); a gain of A0.4 billion due to changes in actuarial

assumptions in the defined benefit pension schemes and an after tax loss of A0.6 billion (driven by impairment charges on loans and advances to customers and losses incurred on the sale of assets to NAMA).

An explanation of the movements in stockholders equity during the twelve month period ended 31 December 2010, is as follows:

(a) The loss attributable to stockholders of B614 million for the twelve month period ended 31 December 2010 shows a decrease of B846 million compared to the loss attributable to stockholders of B1,460 million in the nine month period ended 31 December 2009.

(b) During 2010 the Group successfully completed a series of capital raising initiatives which increased its stockholders equity by B1,006 million (net). Further details are set out on pages 119 to 120.

(c) Foreign exchange movements relate primarily to the impact on the translation of the Group’s net investments in foreign operations arising primarily from the 3.08% weakening of the euro against sterling in the twelve month period ended 31 December 2010.

(d) The AFS reserve movement in the twelve month period ended 31 December 2010 is driven by the impact of wider credit spreads and interest rate changes on the value of the AFS portfolio, partly offset by the transfer of B168 million to the income statement arising on impairment of Allied Irish Banks plc’s subordinated debt and the NAMA subordinated bonds. The AFS reserve is expected to reverse as the underlying financial assets mature.

(e) The cash flow hedge reserve movement reflects the impact of changes in interest rates on the mark to market value of cash flow hedge accounted derivatives. Over time, the reserve will flow through the income statement in line with the underlying hedged instruments, with no net income statement impact.

(f) The movement in pension fund obligations is primarily as a result of changes in key assumptions used in the calculation of the schemes’ liabilities, including the inflation rate, the discount rate, the rate of increase in salaries and in pensions in payment and the level of commutations, in addition to the increase in asset values resulting from the continued recovery of the global economy.

An explanation of the movements in stockholders equity during the nine month period ended 31 December 2009, is as follows:

(g) The loss attributable to stockholders of B1,460 million for the nine month period ended 31 December 2009 shows a significant decrease compared to the profit attributable to stockholders of B53 million for the twelve month period ended 31 March 2009. This is primarily due to the substantial increase in the impairment charge on Total loans.

(h) Foreign exchange adjustments reflect the impact of any euro related movements on the translation of sterling and US dollar denominated net investments in foreign operations.

(i) The AFS reserve movement in the nine month period ended 31 December 2009 is driven by tighter credit spreads and interest rate changes on the value of the AFS book. The AFS reserve is expected to continue to reverse as the underlying financial assets mature.

(j) The cash flow hedge reserve movement reflects the impact of changes in interest rates on the mark to market value of cash flow hedge accounted derivatives. Over time, the reserve will flow through the income statement in line with the underlying hedged instruments, with no net income statement impact.

(k) The movement in pension fund obligations is primarily as a result of changes in key assumptions, including the inflation rate and the discount rate used in the calculation of the schemes’ liabilities, together with the positive impact of the recovery in global equity and bond markets on the valuation of pension fund assets at 31 December 2009.

In the twelve month period ended 31 March 2009, the Group paid an equity dividend of A387 million which related to the payment of the final dividend for the fiscal year ended 31 March 2008. On 31 March 2009 the National Pensions Reserve Fund Commission (NPRFC) invested A3.5 billion in 8% redeemable preference stock and warrants to subscribe for up to 25% of the enlarged ordinary stock in the Group.

On 21 February 2011 the Group paid the dividends due on its euro and sterling Preference Stock totalling A3.7 million. In addition, on 21 February 2011 the Group paid a dividend totalling A214.5 million on the 2009 Preference Stock (A1.8 billion outstanding) held by the National Pensions Reserve Fund Commission (NPRFC).

As at 31 December 2010, the Group had A769 million of Undated Loan Capital and A2,006 million of Dated Loan Capital (including fair value adjustments), a total of A2,775 million in aggregate of subordinated liabilities. Of the Dated Loan capital A1,923 million is repayable in five or more years. The cost and availability of subordinated debt are influenced by credit ratings. A reduction in the ratings assigned to the Group’s securities could increase financing costs and reduce market access.

The long term credit ratings of the Group as at 16 June 2011 are as follows:

Senior Debt

Moodys . . . Ba2 Standard & Poors . . . BB Fitch . . . BBB DBRS . . . BBB(high) Depending on the degree of subordination the ratings assigned to Loan Capital may be one or more notches below the level for senior debt. Credit ratings are not a recommendation to buy, hold or sell any security and each rating should be evaluated independently of every other rating. These ratings are based on current information furnished to the rating agencies by Bank of Ireland and information obtained by the rating agencies from other sources. The ratings are only as of 16 June 2011 and may be changed, superseded or withdrawn as a result of changes in, or unavailability of, such information. (See page 18 for the impact of downgrades on the Group’s access to funding).

As at 31 December 2009, the Group had A1,521 million of Undated Loan Capital and A4,532 million of Dated Loan Capital (including fair value adjustments), a total of A6,053 million in aggregate of subordinated liabilities. Of the Dated Loan Capital A3,778 million as of such date was repayable in five or more years.

Capital Adequacy Requirements

The objectives of the Group’s capital management policy are to at all times comply with regulatory capital requirements and to ensure that the Group has sufficient capital to cover the risks of its business and support its strategy. It seeks to minimise refinancing risk by managing the maturity profile of non-equity capital whilst the currency mix of capital is managed to ensure that the sensitivity of capital ratios to currency movements is minimised.

The capital adequacy requirements set by the Central Bank are used by the Group as the basis for its capital management. These requirements set a floor under which capital levels must not fall. The Group seeks to maintain sufficient capital to ensure that even under stressed conditions these requirements are met.

The EU Capital Requirements Directive (CRD) came into force on 1 January 2007 and is divided into three sections commonly referred to as Pillars.

Pillar I introduced the Internal Ratings Based Approach (IRBA) which permits banks to use their own internal rating systems to calculate their capital requirements for credit risk. Use of IRBA is subject to

regulatory approval. Where credit portfolios are not subject to IRBA, the calculation of the minimum capital requirements is subject to the Standardised Approach.

Pillar II of the CRD deals with the regulatory response to the first pillar whereby banks undertake an Internal Capital Adequacy Assessment Process (ICAAP) which is then subject to supervisory review.

Pillar III of the CRD (Market Discipline) involves the disclosure of a range of qualitative and quantitative information relating to capital and risk. The Group’s Pillar III disclosures are available at www.bankofireland.com.

The CRD also introduced a requirement to calculate capital requirements, and to set capital aside, with respect to operational risk. The Group is also required to set capital aside for market risk.

The Group also considers other methodologies of capital metrics used by rating agencies. Separately, it also calculates economic capital based on internal models.

The Group stress tests the capital held to ensure that under stressed conditions, it continues to comply with regulatory minimum ratios.

The following table outlines the components of the Group’s regulatory capital together with key capital ratios at 31 December 2010 and 31 December 2009.

31 December 31 December

2010 2009

Basel II Basel II

Capital base

Share capital and reserves . . . 7,407 6,437 Regulatory retirement benefit obligation adjustments . . . 424 1,632 Available for sale reserve and cash flow hedge reserve . . . 1,063 1,118 Goodwill and other intangible assets . . . (435) (488) Preference stock and warrants . . . (1,877) (3,521) Other adjustments . . . (782) 80 Equity tier 1 capital . . . . 5,800 5,258 Preference stock . . . 60 59 2009 Preference stock and warrants . . . 1,817 3,462 Core tier 1 capital . . . . 7,677 8,779 Hybrid instruments (undated, without incentive to redeem) . . . 299 752 Hybrid instruments (dated or incentive to redeem) . . . 280 574 Supervisory deductions . . . (580) (454) Tier 1 capital . . . . 7,676 9,651 Undated loan capital . . . 183 225 Date loan capital . . . 2,018 3,716 IBNR provisions . . . 174 772 Revaluation reserves . . . 14 40 Supervisory deductions . . . (580) (454) Other adjustments . . . 54 11 Total tier 2 capital . . . . 1,863 4,310 Total capital before supervisory deductions . . . . 9,539 13,961 Supervisory deductions

Life business . . . (816) (797) Total capital . . . . 8,723 13,164 Risk weighted assets

Credit risk . . . 71,403 89,785 Market risk . . . 1,964 2,133 Operational risk . . . 5,678 6,415 Total risk weighted assets . . . . 79,045 98,333 Key capital ratios

Equity tier 1 (Core Tier 1 less preference stock) . . . 7.3% 5.3%

Core tier 1 . . . 9.7% 8.9%

Tier 1 . . . 9.7% 9.8%

Total capital . . . 11.0% 13.4%

Risk Weighted Assets at 31 December 2010 of A79 billion are A19 billion lower than the Risk Weighted Assets of A98 billion at 31 December 2009. This decrease is mainly due to a reduction in the quantum of loans and advances to customers, the impact of the sale of loans to NAMA during the twelve month period ending 31 December 2010, the impact of the higher level of impaired loans and the increased impairment provisions at 31 December 2010 as compared to 31 December 2009 together with a series of RWA optimisation initiatives partly offset by the impact of a stronger sterling exchange rate.

The Equity tier 1 ratio at 31 December 2010 of 7.3% compares to 5.3% at 31 December 2009. The increase in the ratio is primarily as a result of the capital generating initiatives that were completed during 2010 and the reduction in RWA, partly offset by the loss after tax incurred during the twelve month period ended 31 December 2010.

The Core tier 1 ratio at 31 December 2010 of 9.7% compares to 8.9% at 31 December 2009. The increase in the ratio is primarily as a result of the net capital generating initiatives that were completed during 2010 and the reduction in RWA, partly offset by the loss after tax incurred during the twelve month period ended 31 December 2010.

The Tier 1 ratio at 31 December 2010 of 9.7% compares to 9.8% at 31 December 2009. The reduction in the ratio is primarily due to the loss after tax incurred during the twelve month period ended 31 December 2010, the increase in the expected loss adjustment at 31 December 2010 as compared with 31 December 2009 and the net reduction in subordinated liabilities due to the liability management exercises completed during the twelve month period ended 31 December 2010, partly offset by the additional Core tier 1 capital generated during 2010 and the reduction in RWA at 31 December 2010 as compared to 31 December 2009.

The Total capital ratio at 31 December 2010 of 11.0% compares to 13.4% at 31 December 2009. The reduction in the ratio is primarily due to the loss after tax incurred during the twelve month period ended 31 December 2010, the increase in the expected loss adjustment at 31 December 2010 as compared with 31 December 2009 and the net reduction in subordinated liabilities due to the liability management exercises completed during the twelve month period ended 31 December 2010, partly offset by the additional Core tier 1 capital generated during 2010 and the reduction in RWA at 31 December 2010 as compared to 31 December 2009.

The Group’s regulatory capital includes the Group’s Stockholders’ funds (which includes A1.8 billion 2009 Preference Stock issued to the National Pension Reserve Fund Commission) together with undated and dated subordinated liabilities with appropriate regulatory adjustments and deductions applied.

Regulatory adjustments applied to the Core tier 1 capital include replacing the IAS 19 pension deficit with deductions of either three or five years supplementary contributions as appropriate, excluding AFS reserves and cash flow hedge reserves from Core tier 1 capital and also deducting goodwill and other intangible assets from Core tier 1 capital.

The adjustments applied in respect of Tier 1 capital and Tier 2 capital, taken equally from Tier 1 capital and Tier 2 capital, include a deduction with respect to the difference between expected losses and actual provisions on Internal Ratings Based Approach (IRBA) portfolios, first losses on securitisations and investments in financial services companies (other than Bank of Ireland Life) which are excluded from the Group consolidation. IBNR provisions on standardised portfolios are included in Tier 2 capital. An adjustment is applied to Total capital in respect of the Group’s investment in Bank of Ireland Life.

Off Balance Sheet Arrangements

31 December 31 December

2010 2009

Contingent Liabilities Em Em

Acceptances and endorsements . . . 35 27 Guarantees and irrevocable letters of credit . . . 1,482 1,599 Other contingent liabilities . . . 599 799

2,116 2,425

Lending commitments . . . 23,541 25,031 Total contingent liabilities and commitments . . . . 25,657 27,456

Lending commitments are agreements to lend to customers in accordance with contractual provisions;

these are either for a specified period or, as in the case of credit cards and overdrafts, represent a revolving credit facility which can be drawn down at any time, provided that the agreement has not been terminated.

The total amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire without being drawn upon.

Further information on off Balance Sheet items is shown in note 45, to the consolidated financial statements.

ANALYSIS OF RESULTS OF OPERATIONS