Current Irish Bank

By Simon Kennedy, MarketWatch

LONDON (MarketWatch) -- Shares in Allied Irish Banks continued their recent slump Tuesday, falling as much as 24%, ahead of a critical government announcement that could leave the firm majority-owned by taxpayers.

After markets close Tuesday, the government will announce details on the discount that will be applied to loans being transferred to the National Asset Management Agency -- the country's "bad bank" which is buying up risky assets.

In addition the financial regulator will also give details on the new capital ratios that are going to be required of banks.

Irish Finance Minister Brian Lenihan is expected to announce the banking sector will need a further injection of around 16 billion euros ($21.6 billion) to meet the capital requirements, according to media reports.

That's likely to result in the government holding a stake of 70% or more in Allied Irish Banks /quotes/comstock/30b!aib (IE:AIB 1.21, -0.15, -11.28%) /quotes/comstock/13*!aib/quotes/nls/aib (AIB 3.39, -0.19, -5.31%) and around 40% in Bank of Ireland /quotes/comstock/30b!bir (IE:BIR 1.25, +0.01, +0.40%) /quotes/comstock/13*!ire/quotes/nls/ire (IRE 6.82, +0.22, +3.34%) , reports indicated.

"Today is probably one of the biggest days for the Irish economy for decades," said Stephen Taylor, a strategist at Dolmen Stockbrokers.

"It looks like capital ratios are going to have to go up by more than expected. It looks like they are going to try and take all the pain now, get everything out and try and bulletproof the financial systems for coming years," he added.

Shares in AIB dropped 13.6% Tuesday, having fallen as much as 24% earlier in the session. The stock has dropped a total of 34% over the last three sessions, almost wiping out strong gains since the start of the month.

Shares in Bank of Ireland were broadly flat, having dropped 10.1% in the previous session.

"Bank of Ireland doesn't need as much money as AIB as their development loans weren't as bad," said Taylor.

The state currently has a 25% potential stake in both banks held in the form of preference shares, which could be converted into common stock as part of the plan to be announced Tuesday by Lenihan. It also has a 16% stake in the common stock of Bank of Ireland.

Goodbody Stockbroker analyst Eamonn Hughes said in a note to clients on Monday that he expects AIB will need another 4.7 billion euros to 4.8 billion euros of equity assuming that it sells assets to NAMA at a 35% discount to their face value.

Bank of Ireland is likely to need around 3 billion euros of additional equity if it sells its assets at a smaller discount of 30%, he added.

Simon Kennedy is the City correspondent for MarketWatch in London.