That Dáil Éireann approves the terms of the draft scheme entitled Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2010, a copy of which draft scheme was laid before Dáil Éireann on 23 September 2010.
The draft statutory instrument entitled the Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2010 amends the bank guarantee scheme, known as the Eligible Liabilities Guarantee Scheme or ELG scheme, which was introduced in December 2009. Consequently, the scheme before Members is not a new one. It is, however, different from the original guarantee, that is, the Credit Institutions (Financial Support) Scheme introduced this time two years ago. That scheme was supported by the vast majority of this House and provided for a blanket guarantee of the deposits and liabilities of Irish institutions by the Government in the face of clear and present danger to the financial stability of the State at that time.
It is a source of bewilderment that the brave decision to introduce the original guarantee, supported by the vast majority in this House, is now being characterised by some as the root of all our problems. Let me be clear: had that guarantee not been introduced, we would not now have an economy, never mind a banking system. On that night two years ago, our banking system was perched on a on precipice. Funding had all but dried up and the banks faced closure within days. Anyone who doubts that has not read the report of the Governor of the Central Bank. In the first chapter referring to the discussions that took place on the night of 29 September, Professor Honohan states:
[I]t is hard to argue with the view that an extensive guarantee needed to be put in place, since all participants (rightly) felt that they faced the likely collapse of the Irish banking system within days in the absence of decisive immediate action. Given the hysterical state of global financial markets in those weeks, failure to avoid this outcome would have resulted in immediate and lasting damage to the economy and society. There would have been additional lost income and employment surely amounting, if it could be quantified, to tens of billions of euros.
Professor Honohan went on to criticise the inclusion of dated subordinated debt in the guarantee, and the scheme before Members this evening excludes this category. However, on the night of 29 September, there simply was too much at stake to discriminate between different types of bondholders and in the end, those whom the Governor felt should not have been included accounted for just 3% of the covered liabilities. Furthermore, a number of covered institutions have engaged in liability management exercises in respect of their subordinated debt. In other words, in plain language, subordinated bondholders have been forced to take losses in these institutions.
Members also should be clear that the Labour Party did not simply quibble, as its Members would like to portray it, with the blanket nature of the guarantee. They opposed it tooth and nail and in its entire substance. As it moves to the centre ground of Irish politics in its bid to be all things to all voters, it is as well for everyone to stop and think where this economy would now be had that party been in the driving seat this time two years ago. There is no doubt but that we are in stormy waters. We weathered a tsunami of international financial collapse two years ago and we will come through this storm also.
The scheme before us this evening is a more focused and targeted scheme than the original guarantee scheme and it is in line with the European model of bank guarantees that was developed in its wake. This scheme no longer covers subordinated debt and it imposes significantly higher fees on participating institutions for the benefit of a State guarantee of their liabilities. According to the latest data available to my Department, at the end of June 2010 bank liabilities covered under the ELG scheme stood at €153 billion.
The serious challenges that continue to face the Irish banking system demand that the State underpin through guarantee mechanisms the funding position of our domestic institutions. The original guarantee provided a necessary and vital support to our banking system as other measures to repair and renew the system have been introduced. The Government's guiding principle in all its interventions since September 2008 has been to provide a financial system that will serve our industry, businesses and households. In doing this, we are safeguarding the lifeblood of our economy, the engine that keeps people in jobs and that will create jobs for our young people coming into the workforce. No vested interest has influenced the Government's actions. Our sole motivation is the common good.
The actions we have taken since September 2008, in particular the establishment of NAMA and the recapitalisations, allow us to plan gradually to phase out the extent to which guarantee arrangements are available. That process begun with the introduction of the ELG scheme last December and the expiry of the original guarantee scheme from midnight tonight. However, the inherent weaknesses in our banking system have meant that the phasing out process must be measured, incremental and responsible.
The ELG scheme which has been running in tandem with the original guarantee since last December has enabled the banks to issue longer-term debt so as to improve their funding profile. For this facility, the banks have been charged a higher fee. It has been suggested by some commentators that the covered institutions have benefited from a low-cost guarantee from the State. In fact, since September 2008 the banks have contributed over €1 billion in fees. This extension of the guarantee will impose a further increase in fees on the institutions involved. Our objective is to incentivise the banks to lengthen the term of their funding and to lessen their reliance on State guarantees.
Ireland has not been alone in providing this form of support for institutions. We were the first to introduce a guarantee but we were quickly followed by other member states in the European Union. About a dozen other EU countries — for example, Austria, Denmark, Germany, Poland, Spain and Sweden — have extended their guarantees until the 31 December. The European Commission recently estimated that crisis measures put forward by EU member states have been approved under State aid rules to an overall maximum volume of €4.1 trillion and guarantees accounted for over 75% of that volume.
The argument has frequently been made that Anglo Irish Bank should have been excluded from the guarantee. Let us return to the Governor's report. He stated, "Anglo was clearly systemically important in the prevailing conditions at the end of September 2008". He also stated, "There can be little doubt that a disorderly failure of Anglo would, in the absence of any other protective action, have had a devastating effect on the remainder of the Irish banks". The Governor went on to explore the option of excluding Anglo Irish Bank from the guarantee. He concluded that it would have been what he describes as a "second Lehmans", which would have had "a destabilising spill-over effect" on the entire European banking system.
What we have been through is an unprecedented global financial crisis. Markets worldwide have been in uncharted territory for the past two years. This has forced the hands of Governments all over the world, and that of Ireland is no exception. No country is fully out of the woods yet. The cost has yet to be reckoned in many countries. However, we have faced up to our problems. Tomorrow, the Regulator will announce the final cost of Anglo, our most troubled institution. That is much further than many other countries have travelled. As The Economist stated recently, “Ireland is paying for its decision to set up a toxic-loan repository that forces banks to clean up their balance-sheets vigorously, rather than put off dealing with problems (as Germany has done) or insure dodgy loans and just hope they improve (as Britain has).” These are the words of The Economist, not mine, and I am not expressly confirming them as my opinion.
We have also taken action to reform our system of regulation. The Government's appointment of Professor Honohan as Governor of the Central Bank and Mr. Matthew Elderfield as Financial Regulator has been welcomed by all and will renew the credibility of our regulatory regime at home and abroad. I have decided to appoint five members to the Central Bank Commission, which is the unitary board that holds responsibility for the management and control of the Central Bank's activities and functions. The members I am appointing are Mr. Max Watson, Professor John FitzGerald, Mr. Des Geraghty, Mr. Michael Soden and Professor Blanaid Clarke.
The new commission members bring a wealth and diversity of knowledge to their work at the Central Bank, from the areas of economics, financial services, social policy, corporate governance and law. The new members will serve alongside the Central Bank Commission's ex officio members, who include Governor Patrick Honohan, Mr. Matthew Elderfield, head of financial regulation, Mr. Tony Grimes, head of central banking, and Mr. Kevin Cardiff, Secretary General of the Department of Finance.
The Central Bank Reform Act 2010 will be commenced this Friday, 1 October. Commencement of the Act will bring into being the reconstituted Central Bank and will give effect to the dissolution of the Irish Financial Services Regulatory Authority. I wish the Central Bank Commission every success in tackling the vitally important tasks ahead and I thank its outgoing members for their services.
Turning specifically to the draft statutory instrument before the House, this statutory instrument proposes to amend the ELG scheme and under the Credit Institutions Financial Support Act 2008 requires the approval of both Houses in order to do so. The ELG scheme was commenced in December 2009 following Oireachtas approval and allows the banks and building societies that joined it thereafter to accept all deposits and issue short-term and long-term debt on either a guaranteed or unguaranteed basis. Institutions can issue debt and take deposits under the ELG scheme with a maturity of up to five years, but these liabilities must be incurred within a limited issuance window or period that currently runs to midnight tonight, 29 September.
This draft amending statutory instrument proposes to extend the issuance period under the ELG scheme so that it will now run from tomorrow, 30 September, to 31 December 2010. Many other European countries have sought and obtained extensions in respect of their guarantee schemes.
In this draft amending statutory instrument, the opportunity has also been taken in consultation with the Office of the Chief Parliamentary Counsel to rationalise and update the drafting of some provisions of the scheme. However, the only substantive amendment made by the statutory instrument is the extension of the issuance window to 31 December 2010.
Market conditions have been quite challenging in recent months for banks internationally and those for Irish banks have been no exception. The extension of the ELG scheme has been recommended to me by the Governor of the Central Bank and the Financial Regulator. EU state aid approval has recently been granted for the extension of the issuance period under the ELG scheme to 31 December 2010 for all eligible liabilities under the scheme. This full extension to the ELG scheme will help underpin financial stability and enable the institutions to continue to access funding and in turn support lending to the economy. The ECB has also endorsed the extension of the scheme. The statutory instrument which I am now presenting to the House gives legal effect to this time extension to the guarantee.
I want to deal briefly with the key terms of the ELG scheme and provide some more detail on the terms of the amending statutory instrument. The scheme was commenced on 9 December 2009 and the six participating institutions and their subsidiaries joined it on various dates in January and February 2010. Any new debt or deposits incurred or rolled over after the date the institution joined the scheme are guaranteed under the ELG scheme.
The institutions that joined the scheme and are thus "participating institutions" are Allied Irish Banks, Anglo Irish Bank, Bank of Ireland, EBS Building Society, Irish Life & Permanent and Irish Nationwide Building Society. Their relevant subsidiaries also joined and are listed fully on the Department's website.
Liabilities that may be guaranteed under the ELG scheme, or "eligible liabilities", as they are known, are deposits, 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 and approved by the EU Commission. There is no change in the draft amending statutory instrument to the range of eligible liabilities.
In regard to deposits in particular, all deposits are guaranteed under the ELG scheme. Retail, corporate and interbank deposits of any duration up to five years are now guaranteed for the full term of the deposit if placed before 31 December with a participating institution. On-demand deposits with the participating institutions are guaranteed under the terms of the amending statutory instrument to 31 December 2010.
If a deposit of up to €100,000 is covered under the EC deposit guarantee scheme, it is not also covered under the ELG scheme. The ELG scheme covers the excess over €100,000 or any deposit that does not qualify for protection under the 1995 deposit guarantee scheme which continues to apply, is not subject to any end date and continues indefinitely. A quarterly fee is payable to the Exchequer by the banks for the benefit of having liabilities guaranteed under the ELG scheme. The original fees associated with the scheme when it was introduced in December 2009 were based on the pricing recommendations published by the European Central Bank in respect of guarantees of this nature and were consistent with the fees applicable for similar guarantees provided by other European Union states in respect of their credit institutions. They represented a significant increase in the fee applicable under the CIF scheme.
The European Central Bank pricing recommendations provide that the fee for 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 bank's five year CDS spreads for a sample period, plus 50 basis points. Under European Commission requirements, the fees that institutions are required to pay under the ELG scheme increased for guaranteed liabilities incurred from 1 July. The additional pricing ranges between 20 and 40 basis points depending on the rating of the institution concerned.
Furthermore, additional pricing will apply under the new scheme from 30 September for very short-term debt and short-term corporate and inter-bank deposits, that is, debt and deposits of 90 day or less, excluding retail deposits. The fees on these liabilities will be increased by 70 basis points by year end. The real effect of these changes to the pricing regime is that the average fee now paid by institutions under the ELG scheme has increased some 11 times on the average fee paid by institutions under the original bank guarantee scheme when it was introduced in September 2008. The pricing is set out in the rules to the scheme.
As at the end of August €730 million was collected from the institutions in respect of fees for the original scheme and €296 million was collected in respect of fees from the ELG scheme. Therefore, the State has already reached its €1 billion target for guarantee fees in less than two years. It is worth noting that no fee is payable in respect of collateral provided by the European Central Bank. This accounts for the somewhat smaller amount received than was projected under the original guarantee.
The ELG scheme provides for the same reporting and information requirements and restrictions on commercial conduct which are set out under the CIF scheme. The scheme provides the Minister with the power to issue such directions to an institution as are necessary to ensure that the objectives of the Act and the scheme are being met. The operation of the scheme is delegated to the NTMA. Given its market expertise, that body is best placed to perform the operational role of scheme operator. The extension of the issuance period of the eligible liabilities guarantee scheme to 31 December 2010 will continue to allow institutions to access funding, both short-term and longer-term debt. The scheme, as amended, will help maintain the overall stability of the banking sector and complement the broad Government strategy to restore the banking system fully and maximise its contribution to overall economic recovery.
I have heard Deputy Noonan raise doubts about the Government's state of knowledge in regard to the solvency of banks on the night the original guarantee was introduced. I want to be helpful to the Deputy but must point out that any objective reading of the report prepared by the Governor of the Central Bank, Professor Honohan, of the events leading up to our decision to provide the original guarantee at the end of September 2008 confirms beyond a shadow of a doubt that the Government's advice was that the Irish banking system, and Anglo Irish Bank in particular, was faced with a liquidity crisis. There was no advice or information provided to Government throughout all of that period that Anglo Irish Bank was facing the huge losses on its loan book that have subsequently come to light thanks to the work of NAMA. The bank guarantee was provided on the basis that the Irish banking system required State support to underpin its funding position in international markets. There was no evidence presented to Government that Anglo Irish Bank faced the serious challenges to its solvency which have subsequently required the Government to provide exceptional levels of capital support.