As Deputies will be aware, the Minister for Finance signalled in the supplementary budget last April the Government's intention to revisit and make technical adjustments to the bank guarantee in ways which would continue to underpin financial stability and also support banks in Ireland in accessing longer-term finance.
In June this year, the House approved the Financial Measures (Miscellaneous Provisions) Act 2009, which contained an enabling provision to allow for the extension of period of financial support contained in the Credit Institutions (Financial Support) Act 2008 beyond the current expiry date of 29 September 2010 by ministerial order. On foot of this, the Minister has drawn up a new guarantee scheme, the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 or ELG scheme. This draft scheme is being presented to the House for a resolution, pursuant to section 6(5) of the Credit Institutions (Financial Support) Act 2008.
The main elements of the ELG scheme were announced by the Minister as part of his Second Stage speech on the NAMA Bill in mid-September and the details were published on the Department of Finance's website at that time. The draft scheme was approved by the European Commission on 20 November 2009, in line with state aid rules, and I am presenting it to the Dáil today for approval.
It is important to emphasise that the ELG scheme will be somewhat more targeted in approach than the CIFS scheme and is not a blanket extension of the guarantee. It will allow for greater longer-term debt issuance under the guarantee, moving it towards the European model, and consistent with EU state aid rules. Participating institutions will be able to issue liabilities and take deposits with a maturity of up to five years, but these liabilities must be issued, and deposits taken, within the time period that ends on 29 September 2010 — the same end-date as for the CIFS scheme. However, newly issued dated subordinated debt and asset covered securities will not be guaranteed going forward.
A key feature is that it allows the participating institutions to access unguaranteed funding and to issue unguaranteed deposits, which will help reduce their reliance on State support over time in line with improving market conditions. Over recent weeks, certain Irish institutions have successfully issued partially guaranteed term debt, and this positive trend is welcome. The ELG scheme will represent the necessary first step in the exit strategy for the State from the blanket guarantee offered in September 2008 consistent with the maintenance of financial stability and ensuring that the funding needs of the banking system in Ireland are met. Consequently, the extensive guarantee for deposits will be retained up to 29 September 2010, subject to six-monthly review and approval by the European Commission.
Institutions will be required to pay a fee to the Minister in respect of all liabilities guaranteed. The fee will be in line with ECB recommendations and will be significantly higher than the current fees payable under the CIFS scheme, as required under the terms of the State aid approval for the scheme. The higher fee is intended to encourage participating institutions to explore fully the potential for issuing unguaranteed debt and reducing their reliance on the State guarantee.
The longer maturity limit for guaranteed debt issuance is consistent with the position under guarantee schemes that have been introduced by a number of other EU member states, including Finland, Germany, Hungary, Italy, Portugal, Spain, Sweden and the UK. Access to longer-term funding in line with the mainstream approach in the EU will maintain the continued stability of the banking system in Ireland and enable the institutions to support the credit needs of the economy and underpin economic recovery
It is important to be clear in view of the level of interest among investors in these issues, existing liabilities — including dated subordinated debt and asset covered securities — guaranteed under the CIFS scheme will remain guaranteed under that scheme until the maturity of the debt or 29 September 2010, whichever is the earliest. This continued guarantee of existing liabilities is in accordance with the general nature of guarantees.
I now wish to outline some important and key aspects of the ELG scheme. The scheme provides for a guarantee for participating institutions over certain liabilities with maturities of up to five years, which are incurred in the period between the commencement date and 29 September 2010. The guarantee is being provided at a charge to the participating institutions on specific terms and conditions, so that the taxpayers' interest can be protected.
Eligibility for the ELG scheme will be open to systemically important and solvent credit institutions and their subsidiaries, including Irish subsidiaries of credit institutions authorised in another member state, that have been specified by the Minister as requiring financial support. All current-covered institutions under the CIFS scheme will be eligible to join the ELG scheme. Credit institutions seeking to participate in the ELG scheme must make an application to the scheme operator to be designated as a participating institution. Those covered institutions under the CIFS scheme have a 60-day window from the commencement date to make this application, while all others can apply up to 29 September 2010. To be accepted by the scheme operator, the institution must accept the terms of the scheme, by way of an eligible liabilities guarantee scheme agreement, and be certified in accordance with the rules as being a participating institution.
Eligible liabilities shall be any of the following: deposits, to the extent not covered by deposit protection schemes other than the CIFS scheme; senior unsecured certificates of deposit; senior unsecured commercial paper; other senior unsecured bonds and notes; and other forms of senior unsecured debt specified by the Minister that satisfy certain eligibility criteria which are set out in paragraph 12 of the scheme. Term deposits with a term of up to five years will be covered by the ELG scheme, provided that they are incurred between the period from the commencement date of the scheme up to and including 29 September 2010, subject to the approval of the EU Commission at six monthly intervals; and demand deposits will remain guaranteed until 29 September 2010, subject to the approval of the EU Commission at six-monthly intervals — the first such approved six monthly interval runs from 1 December 2009 to 1 June 2010.
Once a participating institution accepts a deposit or issues debt under the ELG scheme, it no longer has the facility to avail of the guarantee under the CIFS scheme for the new liabilities. However, the guarantee for existing liabilities guaranteed under the CIFS scheme will remain in place until 29 September 2010.
It is important to note that the guarantee of all deposits up to €100,000 under the revised deposit protection scheme remains in place, is not affected by the introduction of the ELG scheme and continues beyond the expiry of the CIFS and ELG schemes on 29 September 2010.
Each participating institution must pay a quarterly fee to the State in respect of the deposits and liabilities of the institutions which are availing of a State guarantee under the ELG scheme. The fees payable are based on standard pricing recommendations published by the European Central Bank in respect of guarantees of this nature and are consistent with the fees applicable for similar guarantees provided by other EU Governments in respect of their credit institutions. Under the ECB pricing recommendation, which has been endorsed by the European Commission, the fee in respect of debt and deposits with a maturity of one year or less will be 50 basis points per annum. The corresponding fee for maturities exceeding one year will be based on the median value of the banks' five-year CDS spreads for a sample period, with an add-on fee of 50 basis points. It is important to emphasise that the fees applicable will be higher than those applicable under the CIFS scheme, albeit for a lower quantum of liabilities.
Pursuant to paragraph 7 of the scheme, the Minister plans to delegate its operation to the NTMA. Given its market expertise, the NTMA is, in the view of the Minister, best placed to perform the role of scheme operator on a day-to-day basis on his behalf.
I should highlight that the same reporting and information requirements and the identical restrictions on commercial conduct, as were provided for under the CIFS scheme, remain available to the Minister under the new scheme. Paragraph 22 provides the Minister with the power to issue such direction or directions to a participating institution, which he believes are necessary to ensure that the objectives of the Act and the scheme are being met. This may include directions to comply with some or all of the restrictions on conduct, transparency and reporting requirements applicable under paragraphs 24 to 52 of the CIFS scheme. These restrictions have been debated previously in the House and are important in preventing any abuse of the scheme. These powers are supplemented by enforcement provisions in the scheme. For example, the Minister can increase the charge payable for an institution that is in material breach of its obligations.
Participating institutions are required to submit any reports or information which the Minister, the regulatory authority or the scheme operator believe are necessary to monitor compliance of the institutions with the scheme.
In summary, the ELG scheme will underpin the financial stability of the Irish banking system, allow institutions to access longer term debt, move the arrangements for the guarantee into line with the mainstream approach in the EU, provide the basis for a measured exit strategy from the guarantee and allow banks in Ireland to meet the credit needs of the economy and underpin economic recovery. I commend the motion to the House.
