JOINT COMMITTEE ON EUROPEAN SCRUTINY debate -
Tuesday, 23 Nov 2010

Proposed Directives on Deposit Guarantee and Compensation Schemes: Discussion

Chairman

On behalf of the committee I welcome from the Department of Finance, Mr. Pat Casey, Mr. John Moore and Mr. Frank Maughan.

Before we begin, I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

By virtue of section 17(2)(l ) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If witnesses are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons, or entity by name or in such a way as to make him, her or it identifiable.

We will have a short presentation from Mr. Pat Casey which will be followed by a question and answer session with members. I am sure members will have a number of questions on various aspects of their concerns.

Mr. Pat Casey

I thank the joint committee for the invitation to the Department to brief it on the proposal to recast the deposit guarantee schemes directive and the proposal on investor compensation schemes. I am principal in the EU financial services legislation section of the Department. With me today are my colleagues Mr. Frank Maughan and Mr. John Moore from the Department.

The committee recently met the Central Bank, the Investor Compensation Company Limited and the Irish Banking Federation on these directives. My intention is to set out the context and the main elements of the proposals from the perspective of the Department of Finance. It is useful to provide some context on the legislative framework of which the deposit guarantee scheme is a part. The legislative regime for financial regulation in Ireland is largely based on a comprehensive framework of directives that apply throughout the European Union, of which the deposit guarantee schemes directive is an integral part.

The original deposit guarantee scheme directive was introduced in 1994 and implemented in Ireland through SI 168 of 1995, the European Communities (Deposit Guarantee Scheme) Regulations. Members of the committee will recall that these regulations set the coverage level at €20,000 with only 90% coverage of eligible deposits and subject to off-setting. This remained the situation until September 2008, when the Irish Government raised the coverage level to €100,000 per depositor per institution, eliminated setting-off arrangements, and widened the scope of the scheme to credit unions.

The proposal before us today has its origins in the financial crisis and the events of September 2008. It is a comprehensive reform of the EU deposit guarantee schemes directive and follows on from the EU emergency measures taken in 2009, through Directive 2009/14/EC, which included a provision for a review of the deposit guarantee scheme framework. That Directive raised the guarantee level to €100,000 in EU states where it did not already exist and was transposed into Irish Legislation on 30 June 2009 through the Financial Services (Deposit Guarantee Scheme) Act 2009 and the European Communities (Deposit Guarantee Scheme) (Amendment) Regulations 2009.

The main elements of the proposal are: simplification and harmonisation, in particular as to the scope of coverage and the arrangements for payout; further reduction of the time limit for paying out depositors; sound funding arrangements for the deposit guarantee scheme; and cross-border co-operation between deposit guarantee schemes.

The Department, like the Central Bank welcomes the broad aims and ambitions of the proposed directive. The main benefit attached to the proposal is that depositors' protection is expected to be significantly enhanced by a higher level of coverage, faster payout and better funding arrangements of the deposit guarantee scheme. It is also expected that all relevant bodies, government, regulatory authorities, industry and consumers will benefit from the overall financial stability to which the proposed deposit guarantee scheme reform is expected to contribute.

I will now provide a short overview of each of these areas. First, I will focus on harmonisation and simplification of scope of coverage. There are currently about 40 deposit guarantee schemes in the EU. These cover different groups of depositors and deposits up to a different coverage levels. They impose different financial obligations on banks and therefore limit the benefits of the internal market for banks and depositors. By harmonising coverage, the maximum level of compensation will be set at €100,000 per customer, per credit institution and all credit institutions will now be covered by national schemes. Furthermore, all banks must join a deposit guarantee scheme. In addition, cover is being extended to all non-financial companies, whereas at present only deposits in small companies are eligible for compensation.

Under the proposal, deposits will now be more clearly defined and certain financial products with an investment character, in particular those that are not repayable at par and those whose existence can only be proven by a certificate, will be excluded from protection; It will now be easier for competent authorities and members of the deposit guarantee scheme to identify eligible deposits, and thus simplify the associated administration.

The draft directive proposed that payout times will be reduced from 20 working days to seven calendar days (one week) to be effective from the end of 2013. The proposal is underpinned by: simplified coverage scope; improved access by the deposit guarantee scheme to customer data in institutions; and requirements on credit institutions to hold depositor data in readily accessible formats such as "single customer view".

The aim of this shorter payout period is to allay any fears that customers may have about accessing their deposits. This may entail additional costs for banks and credit unions in relation to investment in IT infrastructure to move to what is know as a ‘single customer view'. These IT upgrades may happen in any event.

In relation to funding, members will be aware that under the current Irish deposit guarantee scheme, there is an element of ex-ante and ex-post funding. In Ireland all participating deposit-taking institutions make a contribution to the deposit protection account held in the Central Bank. This is recalculated annually by the Central Bank depending on the level of deposits held by the institution. In the event of the insolvency of a credit institution, claims by depositors would be met in the first instance by that account. As provided for by the Financial Services (Deposit Guarantee Scheme) Act 2009, any shortfall in the account would be met from the Central Fund, which would ultimately be recouped in due course by additional contributions levied from the banking sector.

Most member states operate their schemes on an ex-post funding basis. Under the new proposal, all schemes within the EU must have an element of ex-ante funding. This entails that the Irish deposit guarantee scheme, like all other deposit guarantee schemes must be pre-funded to the tune of 1.5% of eligible deposits from 2020, that is, after a transition period of ten years. This means that all credit institution will have to increase their contributions to the deposit guarantee scheme. This will be done on a phased basis taking into account that various member states are starting from different starting points and the difficulties that some credit institutions in the EU and elsewhere are experiencing. It should be noted that the level of contribution by a credit institution will depend on the level of eligible deposits held by the institution and on its risk profile, in accordance with criteria proposed in the amended directive, so it is not possible to say at this stage what the contribution of individual credit institutions will be.

The Department's assessment is that harmonised and sound funding arrangements of a deposit guarantee scheme and the significantly accelerated timeframe for paying funds will help strengthen depositor confidence regarding the protection of their deposits across the European Union. This is clearly an important objective in the context of enhancing financial stability arrangements overall.

While the level of funding will be subject to further negotiation at EU Council level, it is important that the right balance be struck, that ensures the putting in place of a more effective deposit guarantee scheme is aligned with the continuing ability of a credit institution to contribute to the growth and economic recovery.

In relation to mutual borrowing facility and cross-border co-operation, the draft directive includes proposals to improve the level of co-operation between deposit guarantee schemes in cross-border situations. Where a bank has a branch in another member state, the draft directive foresees the host scheme acting as a single point of contact for consumers in the host member state. The responsibilities of the host scheme include communications and pay-out on behalf of the home scheme. It is also envisaged that the deposit will be paid in the currency of that host state.

The draft directive also proposed an obligation to establish a mutual borrowing facility between deposit guarantee schemes. The purpose of such a facility is that, in the event of the deposit guarantee scheme fund being unable to meet its liabilities, it may borrow from all other deposit guarantee scheme funds in the European Union. The other deposit guarantee funds will be required, if needed to lend to the deposit guarantee scheme a maximum of 0.5% of its eligible deposits on short notice, proportionate to the amount of eligible deposits in each country. The loan must be repaid by the borrowing deposit guarantee scheme within five years and new contributions to the deposit guarantee scheme must be raised to reimburse the loan. This aspect of the proposal merits further examination and is subject to ongoing negotiations at Council level.

The Department shares the Central Bank assessment that the general obligation on deposit guarantee schemes to lend may not be appropriate in all circumstances, for example where a deposit guarantee scheme fund has already been diminished due to payouts or could be required in the short-term to meet its obligations to its own deposits. However, we will approach discussion on this issue - as with all elements of the directive as a whole - with an open mind and in a constructive and positive way.

It is important to note that proposed amendments within the directive are aimed at improving depositor confidence and through this, overall financial stability. These requirements include clearer information for depositors, through the provision of a standard consumer information sheet on coverage, which depositors must countersign before making a deposit. Advertising by institutions of deposit based products can only reference factual information on coverage, to avoid guarantees being used as a marketing tool.

The draft directive is expected to impact at a number of levels. For credit institutions there will be increased costs associated with complying with the new requirements but the directive will help strengthen deposit confidence by allowing deposit holders access to funds more efficiently and in a faster timeframe. The provision of transition periods for faster payout and the provision of ex-ante contributions should allow credit institutions to make the necessary adjustments in an orderly timeframe and ensure that the deposit guarantee scheme is credible in terms of meeting any requirements placed upon it, which will ultimately protect the interests of taxpayers in any possible activation of the deposit guarantee scheme. This is a key objective. There will also be benefits to having increased EU-wide harmonisation. It is important to keep in mind that this is a draft directive and certain aspects may be clarified and changed as it works its way through the EU legislative process.

The second directive to be considered deals with amending the provisions on investor compensation schemes. The 1997 investor compensation directive has been an important investor protection tool. In Ireland the Investor Compensation Company Limited was established under the Investor Compensation Act 1998, to administer the Irish investor compensation scheme. I understand the committee recently heard from the chief operating officer of the Investor Compensation Company about how the company has performed its tasks and how it has handled matters which arose from failures of three investment firms. The Department of Finance has welcomed the proposal to revise the ICD, investor compensation directive and believes it is a timely initiative to enhance investor protection.

The most significant issue in the draft directive is probably the increase of the compensation limit from €20,000 to €50,000. The limit of €20,000 has been in place for a long period and on that basis, it needs to be reassessed. The Department, while being mindful that estimates indicate that approximately 95% of investors would be covered by the existing €20,000 limit, recognises the need to increase this amount to reflect the effects of inflation during the intervening period and in light of increases, for example, in depositor protection under the deposit guarantee scheme, DGS. It should be noted that the compensation limit used in most member states is also €20,000. However, in some states, the figure is higher than the €50,000 set out in the proposal.

The proposed inclusion of harmonised funds within the scope of the investor compensation scheme is an issue of particular relevance to Ireland. These harmonised funds which are authorised throughout the EU under the provisions in the undertakings for the collective investment in transferable securities, or UCITS directives, form a major part of the Irish funds industry. It should be noted that UCITS benefit from a number of significant investor protection mechanisms which enable such funds, once authorised in one member state, to be marketed in all other members states, via a UCITS passport. All UCITS are required to appoint independent depositories or custodians to ensure that client assets are held securely. Depositories are typically very large international financial institutions. The proposed inclusion of UCITS and their depositories, coupled with the proposal to within ten years to create a reserve of 0.5% of the total value of financial instruments or funds held by relevant institutions would entail a significant increase in the level of reserves required to be held by the Investor Compensation Company Limited. The ICCL's annual report for 2009 shows that it currently holds a total of approximately €30 million in the two compensation funds it manages. At present, the value of Irish authorised UCITS amounts to approximately €700 billion which means that within ten years the reserves held in the Irish compensation fund scheme would rise from €30 million to €3.5 billion.

The Department does not believe such a proposal is proportionate to the risks to which investors in UCITS are subject. Most other member states have expressed concerns about including UCITS which already have robust investor protection regimes. In view of the high costs associated with this proposed measure, many member states, including Ireland, have called for the Commission to reconsider the inclusion of UCITS at this stage. The Department would welcome the 0.5% funding requirement if UCITS and depositories were excluded from the scope of the proposal.

The proposal also provides for a speedier payment in case of investor claims. These proposals are welcome but it must be borne in mind that an administrator appointed by the Investor Compensation Company Limited, ICCL, might encounter difficulties in identifying the ownership of assets, particularly in the event of fraud. Such difficulties were encountered in a compensation case where client assets were fraudulently used. The Department supports efforts to speed up compensation payments but it is mindful that operational problems may arise for the ICCL. The Department is in close contact with the ICCL on the discussions as they evolve on all these matters.

I thank the committee for the opportunity to make this presentation on these matters and I welcome the views of members of the committee. I am available to take questions or to clarify any points.

Deputy Aengus Ó Snodaigh

I thank Mr. Casey for his presentation. I have a number of questions about the deposit guarantee schemes. What would be the amount of eligible deposits with regard to a possible move from €20,000 to €100,000? Is it envisaged that large depositors would break up their accounts into separate accounts of €100,000 in each account to ensure they fall within the scheme? Mr. Casey referred to the concern about the size of the deposits being covered. Given the current crisis, has the Central Bank the funding to cover the existing scheme if there were to be a run on one of the banks, as was recently suggested?

I have a concern about the credit unions. I presume the vast majority, if not all, of the accounts or deposits in credit unions would fall within this scheme, given the type of custom in credit unions compared with other financial institutions which have a different clientele. This would be of great interest to credit union account-holders.

With regard to the investor compensation scheme directive, Mr. Casey stated that approximately 95% of investors would be covered by the existing limit. What would be the percentage of investors covered if the limit were to be changed? Would it be a substantial number? This is a proposal to compensate investors. My limited knowledge of this field would suggest that many of those who are investors have a separate insurance policy in any case. Would there be an element of double payment in the event of them availing of the compensation if a disaster happens? For instance, many of the bondholders currently have insurance policies in case of a default. Is it common practice for investors to take out separate insurance policies?

Chairman

Does Mr. Casey wish to deal with questions individually or grouped?

Mr. Pat Casey

I can take a couple together if that is helpful.

Senator Alex White

I thank Mr. Casey for the presentation which is very informative. The opportunity to lend as between deposit guarantee schemes is almost a statement of the obvious where Mr. Casey stated there were circumstances where the Central Bank thinks that might not be appropriate, for example, where the fund has already been diminished due to pay-outs or could be required to meet its own obligations. That there would be any suggestion they would be in a position to lend if their own funds are being diminished, is so self-evident that I wonder why it would merit a mention. I suppose it has to be stated. If they were under pressure, I would have thought they could not lend.

My main question relates to the funding of the deposit guarantee scheme, which was dealt with on page 4 of the Department's presentation. Mr. Casey mentioned that the scheme "must be pre-funded to the tune of 1.5% of eligible deposits from 2020, that is, after a transition period of ten years". We are all aware of what is going on in the credit institutions. It was euphemistically referred to in the Department's presentation as "the difficulties that some credit institutions in the EU and elsewhere are experiencing". Is that the main reason the date on which this pre-funding will be put in place is to be delayed from 2010 to 2020? Is there any risk arising from that, in terms of the funding of any calls that might be made on such schemes in the meantime? How will they be funded in the meantime? If it is deemed appropriate that there is pre-funding of 1.5% from 2020 onwards, will there be a gap between now and 2020? Will there be any exposure or risk in respect of the funding of these schemes?

I am asking these questions in the general context of what we have seen. The banking system has failed, has almost failed or is at risk of failure. Various states, or "sovereigns" as we are getting used to calling them, have been overwhelmed. I refer particularly to this State. I am concerned about whether the Department believes the institutions themselves have a sufficient level of self-funding or pre-funding. The biggest concern that all politicians will have in the future will relate to protecting and insulating the State from any call that might be made, including an actual call on funds. We will have to ensure the State is not drawn into the risk and does not have to pay out on the risk at any point. That will be one of the biggest preoccupations of politicians and Governments for many years to come. What kind of risk will exist between now and 2020? Will there be any residual risk on the sovereign, as we are getting used to calling the State, in respect of these schemes into the future? Is the Department aware of any calls made on deposit guarantee schemes in member states in the last ten, 15 or 20 years? Are there any statistics on that?

Senator Paddy Burke

I welcome the delegation. This scheme will have serious consequences for banking in Ireland and throughout Europe. Mr. Casey said it will be extended to non-financial companies. Can he specify the type of institutions about which he was talking? Will solicitors' practices that hold large client deposit accounts be covered?

On the increase in the extent of pre-funding, from the current level of 0.2% to 1.5%, that will involve a considerable jump in the funds held by the Central Bank, from €600 million to €4.5 billion, over a ten-year period. Where is that money held? Is it held in the Central Bank on deposit? Is it invested in banking institutions that could go bust? Is it held in gold bullion? Where is it held?

If the level of pre-funding is to be increased from 0.2% to 1.5%, it is likely that some financial institutions will not be able to come up with the necessary funding. Therefore, there will be a limited number of financial institutions here and perhaps throughout Europe. It might be a good thing that we will have less competition because we had too many financial institutions in recent years. How will we pay for this pre-funding? Where does the Department envisage that the money will come from? Will higher interest rates be necessary to cover this pre-funding? Will it be paid for by the shareholders? How does the Department believe it will pan out?

Deputy Michael P. Kitt

I welcome the delegation. I am sorry I missed some of the presentation. I have read through the notes. I have heard on umpteen occasions that the deposit guarantee scheme covers 97% of deposits. In what way are the other 3% of deposits covered?

Deputy Ó Snodaigh raised an issue relating to credit unions. We were told one of the reasons we invested in Anglo Irish Bank was to save the credit union movement. Could Mr. Casey clarify how the guarantee scheme affects the credit union movement? In this context, I refer not just to Anglo Irish Bank but to several banks. People trust the credit unions, but they have concerns about how the guarantee operates in this sector.

The savings scheme operated by An Post is very popular nowadays. Is the Department of Finance involved with An Post, in this area?

Chairman

Page 4 of the Department's document states "it should be noted that the level of contribution by a credit institution will depend on the level of eligible deposits held by the institution and on its risk profile". Can Mr. Casey elaborate on that? If all of our institutions were subjected to risk profiles, none of them would achieve a positive outcome.

On the amount of money on deposit, I know many people who have moved savings from one institution to another. They believe certain institutions are safer than others. Will some institutions have to pay a higher percentage as a result? Perhaps Mr. Casey can provide some detail in that regard.

Mr. Casey also said "the loan must be repaid by the borrowing deposit guarantee scheme within five years and new contributions to the deposit guarantee scheme must be raised to reimburse the loan". Where can such contributions be raised to reimburse these loans? Why will we have to wait until 2013 for the payment period to be reduced to seven days from the current period of 20 days? Can Mr. Casey explain why substantial deposits have been taken out of our credit institutions in the past 12 months, following the introduction of the deposit guarantee scheme?

Mr. Pat Casey

I will begin by replying to the questions asked by Deputy Ó Snodaigh. In relation to the new draft directive, the total amount of deposits held in accounts in banks covered by the Irish deposit guarantee scheme that are eligible for coverage under the draft scheme is approximately €2.8 billion. I understand that information was contained in a letter sent to the clerk by the Central Bank on 5 November last. If the proposed contribution of 1.5% is applied under the new directive, a deposit guarantee scheme fund of approximately €3 billion will be envisaged. That is based on the figure of €2.8 billion, which comes from a survey of deposit accounts carried out by the Central Bank in June. It is based on information held by each bank on 30 May last. That is the information point in this regard. That is the amount of eligible deposits from banks.

The credit unions have approximately €12 billion that is potentially eligible for compensation under the deposit guarantee scheme. Based on the ex ante contribution of 1.5% that would require a total fund of €180 million. That is the amount of eligible deposits.

Deputy Ó Snodaigh asked about depositors holding a number of accounts and how that would be managed. The issue here is to allow banks to begin to manage their customer accounts from a single customer view, in other words, to develop an appropriate IT system that could identify all the relevant accounts attached to a particular customer so that they have a single customer view. It is on that basis that individuals would have access to funds under the scheme.

Deputy Aengus Ó Snodaigh

In the event of a calamity occurring, would that customer be entitled to compensation based on each account?

Mr. Pat Casey

They would be entitled to €100,000 per depositor per institution under the terms of the scheme.

Senator Alex White

Did Mr. Casey say per depositor?

Mr. Pat Casey

Yes, €100,000 per depositor per institution. The next question related to the size of deposit, however, my notes are not clear on that issue.

Deputy Aengus Ó Snodaigh

My next question related to the Central Bank, given the current crisis, and if it had the funds to cover exposure?

Mr. Pat Casey

It does have funding to hand. It has approximately €605 million in the deposit protection fund as it currently stands. While that can vary from year to year, depending on the level of deposits held by the credit institutions, it is in or around that amount. There is also a facility available under the central fund whereby the Central Bank can get money from the central fund in the event of a shortfall and that is repaid to the central fund by an appropriate charge. In regard to credit unions, the Deputy asked about the appropriate clientele and whether they are covered. The letter from the Central Bank sets out the position on credit unions. It states that if the new rules are applied to credit unions, the respective numbers under the proposed directive will be €12 billion of eligible deposits with a DGS fund of approximately €180 million. Therefore, credit unions are covered.

Deputy Aengus Ó Snodaigh

The only other questions I had were on the investor compensation directive.

Mr. Pat Casey

I might deal with those questions after my next comment.

Chairman

Perhaps Mr. Casey will move on since Deputy Ó Snodaigh has been called away.

Mr. Pat Casey

Did Senator White ask about the reason for the timeframe between now and 2020?

Senator Alex White

Yes, and any risk associated with it. If it is deemed necessary from 2020 onwards, will a gap open up if there are any calls on it and in the meantime will it be properly funded?

Mr. Pat Casey

First, the time period for 2020 allows the credit institutions to put in place the appropriate arrangements to meet the requirements of the fund but also allows for an orderly transition from the current contribution of 0.2% to the 1.5%. What was the Senator's second question?

Senator Alex White

If it is regarded as necessary to have that amount of funding from 2020 onwards and to be prudent and so on - presumably that has arisen from an analysis of the position and I understand there needs to be a transition for people to get up to speed - what is the position about the intervening period and will there be proper funding for any calls on those schemes? Given the risk, will they be funded to a satisfactory level for any calls that arise in the meantime?

Mr. Pat Casey

They will be. It will be for the Central Bank to work out in detail how the transition will be managed between now and 2020. The current fund exists to provide depositors with access to the fund in the event that it is called upon and the transition to 2020 allows for the orderly build-up of the fund to the 1.5% from the current base of 0.2%. The Central Bank will be the competent authority for ensuring that is put in place and that the credit institutions are able to make the appropriate arrangements to increase their funding over that period to meet the requirements of the fund.

Senator Alex White

Requirements that arise after 2020? Is there a continuing transitional arrangement?

Mr. Pat Casey

Yes, to increase the level from the current base of 0.2% towards 1.5%. The draft directive does not set out in detail how that is to be done. It just says that arrangements are to be made where that will happen over the transition period. In its letter of 5 November to the committee, the Central Bank indicates that if it is based on an annual increase, it would see the total amount of eligible deposits from the banks - the €3 billion in respect of the banks and the €12 billion of eligible deposits for credit unions - averaging out over an annual amount per annum, as set out in its letter.

Senator White asked whether calls on the deposit guarantee schemes in the member states would lead to a shortfall? In my statement, I referred to the Central Fund, from which any shortfall in the Central Bank account would be met and the money would then be recouped.

Senator Alex White

Have there been any calls on the deposit guarantee scheme? Mr. Casey may not know now, but is it possible to find out whether there have been calls on the scheme?

Mr. Pat Casey

There have been two calls. I understand that two building societies in the UK made a call, but I do not have information to hand. I can provide it to the committee secretariat.

Senator Burke asked about the extension of the deposit guarantee scheme to non-financial companies. The essential element is that the existing scheme applied to small and medium-sized companies, with large companies being excluded. The proposed change in the directive extends it to all companies, including larger companies, subject to the threshold of €100,000 per depositor account per institution. The distinction between, small, medium and large companies has been removed.

Senator Paddy Burke

Does that cover solicitors' practices and management companies as well?

Mr. Pat Casey

It covers sole traders and small companies, partnerships, associations, clubs and so on, as well as other organisations such as schools and parishes, which are not companies. Solicitors' practices would be covered, but in addition the Law Society of Ireland has its own protection fund, which would relate to any funds that individual solicitors would have that fall outside it. This protects deposits in financial institutions and the deposit must be under the threshold of €100,000 in the proposed directive and under the current deposit guarantee scheme. If the deposit was greater than that amount, it would be covered by the Law Society of Ireland's protection fund or by the credit institutions (eligible liabilities guarantee) scheme that exists. I do not have details on the Law Society of Ireland's protection fund.

Senator Paddy Burke

Would it be fair to say that under this scheme there would be a double obligation on the likes of a solicitor's practice, namely, the protection offered by the Law Society of Ireland and the protection under this scheme?

Mr. Pat Casey

The scheme does not place obligations on solicitors to contribute. Only the credit institutions contribute to the fund. I would expect the solicitor to comply with the obligations that the Law Society of Ireland would place on him or her and part of that would be appropriate professional indemnity cover and whatever other relevant covers the society deems necessary to practise. If that cover is called upon, part of it would be access to funds for whatever is provided for under professional indemnity. The directive applies to a deposit below €100,000 which a solicitor would have. If solicitors meet that qualification, they are entitled to access to the funds under the scheme. There is no obligation on solicitors to pay for that, as it is the credit institution that covers it on their behalf.

The Senator asked also about the 0.2% contribution from the current deposit guarantee scheme which is held in the Central Bank.

Senator Paddy Burke

Is the money on deposit with a financial institution?

Mr. Pat Casey

It is on deposit and the institutions get an interest rate for having it held in the Central Bank.

Senator Paddy Burke

I asked about the scale going from 0.2% to 1.5%, which will place a considerable obligation on the credit unions, because they will have to increase their deposit from €20 million to €180 million. How will that be paid for? Is it a cost to the borrower or will shareholders come up with the money? Will they have to take in extra money on deposit?

Mr. Pat Casey

In the first instance, these are matters for the credit union and they must decide how to meet this requirement. What it means for individual depositors is that they will have a higher level of protection and access to their funds if there is a risk to them. Each credit institution makes allowance within its own funding provisions for those additional costs or moneys that it sets aside. It is a matter for each institution, but I would expect it would have some impact on the level of service and how they charge for these services, whether through an interest rate apportionment or a cost per service.

From our perspective and the perspective of the directive, the issue is about protecting deposit holders in the event of a credit institution not being able to meet its liabilities to deposit holders. The thrust of the directive and part of the whole risk apportionment model that is suggested in the draft directive, is that wherever the risk arises it should be borne by the appropriate credit institution as well.

Deputy Michael Kitt asked about the effect of the deposit guarantee scheme on the credit union movement. The draft directive will assist credit unions by giving their members access to cover under the deposit guarantee scheme. As the scheme evolves, credit institutions will be required to comply with the higher thresholds in order to meet the obligations. There is no alteration in the coverage of credit unions under the deposit guarantee scheme.

The Chairman asked about the risk profile model proposed in the directive. In the first element, the 1.5% ex ante contribution is the primary source of funding for the deposit guarantee schemes and in the event of that fund not being enough, there is an ex post provision on the credit institutions that are members of the scheme amounting to 0.5%. It is only in the event that this sum is not enough that the third step in providing funding to the scheme is called upon and that is the ability to borrow from one deposit guarantee scheme to another. That is an element to bear in mind.

Chairman

Before Mr. Casey proceeds, if I am right on specifics, that is a kamikaze approach in my view. At present there is €600 million on deposit in the Central Bank covering the deposit guarantee scheme.

Mr. Pat Casey

That is correct.

Chairman

That is to increase to 1.5%, which is approximately €2.7 billion by 2020. That is an increase of approximately €300 million per annum. A figure of €300 million per annum has to be ring-fenced in the Central Bank. Where will that money come from?

Mr. Pat Casey

That will come from the credit institutions.

Chairman

Will €300 million per annum come from the credit institutions?

Mr. Pat Casey

That money is coming from the banks. It is set out in their letter to the committee of 5 November. This is based on the total deposits that are in the banks

Chairman

Bearing in mind where we are today, where we are talking about rationalisation and amalgamation of banks, I cannot see how banks will come up with €300 million per annum for the next ten years to set up this fund. I know that Mr. Casey has outlined three different areas where this money can come from, but I do not think the money is there. I cannot see how that money is available.

Mr. Pat Casey

Those are the requirements as set out in the draft directive. For a credit institution to participate, it would need to meet the requirements as set out by the Central Bank and the bank will set out the proposals. The Chairman gave an example of €300 million per annum. Whether there is a provision for an alternative means by which it can get there over the time period will be a matter for the Central Bank to set out in order that the credit institutions can meet the obligations under the directive if it is passed.

Chairman

From his experience in the Department of Finance, does Mr. Casey believe this is workable?

Mr. Pat Casey

These are all part of a new regime being put in place as a result of the financial crisis. We have had a number of threats to credit institutions. The new framework sets out a number of means by which those threats can be managed. One of those ways is that institutions are required to provide higher levels of moneys to be set aside in the event of insolvency or in the event of them not being in a position to pay depositors. At present these default on to the taxpayer in the event that there is not sufficient funds to meet the obligations by the default of an institution. The purpose of the directive is to move away from that model so the taxpayer is not relied upon and that in the first instance there is sufficient in the fund to meet any call on it by a credit institution. It does this by having an amount of money set aside in the form of ex ante provision, should the fund be called upon. If this is not enough, there is a provision for a second call on an ex post basis and if that is not enough there is a provision for a borrowing arrangement between the different funds. All these steps are in place to ensure it does not fall on the taxpayer. In the fourth instance, there is a facility for other mechanisms by which the fund can call on moneys, which in our case, is the central fund but the scheme would have to repay the money to the central fund. This is a model that will take some time to achieve but which will shift the burden away from the taxpayer if a default is big enough for it to fall on the taxpayer, as would currently happen. A shift towards the fund would be much more self-reliant. Credit institutions wishing to operate will have to be able to meet those requirements. They have a decade in which they can take steps to move towards that model. That is an orderly timeframe by which the institutions will be able to meet the requirements of the directive. The Central Bank will be the relevant authority to ensure this happens.

Chairman

Why is Ireland the only member state to have included the credit unions?

Mr. Pat Casey

My understanding is that the United Kingdom has also included them. The primary reason for including them in 2008 was to give an assurance to all depositors that their savings under €100,000 were guaranteed and safe, in the event of a credit institution becoming insolvent. Ireland has a large number of people with savings with credit unions and the Government thought it prudent that they should be brought within the scope of the new legislation.

Chairman

I also asked a question about all the deposits that left the country in the past eight to ten months. With a guarantee in place why would such vast sums leave the State?

Mr. Pat Casey

I do not have information to hand but I can provide it to the committee. My understanding is that this directive deals with deposits under €100,000. It is possible that those deposits were in excess of the €100,000 but there could be a different set of reasons so I do not wish to speculate.

Senator Alex White

I have another question but in fairness to the officials, it may not be possible for them to answer. They may know from their experience rather than from their direct work. The committee discussed credit unions before it went into public session. The subject has also been raised in the questions in public session. Do Mr. Casey or his colleagues know the method by which the leading banking and credit institutions communicate their views to the Commission when this type of legislation is being prepared? I presume they know.

For example, other members have asked about the ten-year period and Mr. Casey has explained it quite well. I understand his explanation about the ten-year lead-in period. However, it would not surprise me to know - and it would not be anything sinister - that the credit institutions themselves have communicated their own view about this matter to the Commission. Does the Department know anything about the means by which it is done?

Mr. Pat Casey

I presume a number of avenues are open to credit institutions to communicate. They have the opportunity to communicate to the Department or to the Central Bank in writing to make their views known.

Senator Alex White

Have they done so with regard to this draft directive?

Mr. Pat Casey

No, their views have not been made available to us. They may have written to the Central Bank. It is also possible they may go through the European Banking Federation or perhaps the Irish Banking Federation or they may make their views known through the media or other fora. We are aware of the issues that come into the public domain regarding their concerns. We keep an eye on this as one of the elements to be considered when developing policy in these areas.

Deputy Michael P. Kitt

I had a question about An Post and the Department's relationship with An Post on savings. I also had a question about the breakdown between depositors and the subordinated bondholders in terms of the guarantee. Are any others involved?

Mr. Pat Casey

An Post is not a member of the deposit guarantee scheme, DGS. It is part of the wider system of State institutions and deposits are protected on this basis. The proposed directive only deals with depositors whose deposits are less than €100,000 so I am not sure if subordinated bondholders fall into a category of amounts as small as that.

Deputy Michael P. Kitt

Is there no other category other than deposits of less than €100,000?

Mr. Pat Casey

That is the threshold for this directive. The wider eligible liabilities guarantee scheme, ELG, renewed recently in the Dáil, covers deposit-holders with amounts greater than €100,000 but that is a separate matter.

Senator Terry Leyden

I apologise for being late. I have just returned from the Isle of Man but I assure the committee my business was to do with the British-Irish Interparliamentary Assembly.

Chairman

Was the Senator in a bank?

Senator Terry Leyden

I looked at the outside of one. The Isle of Man holds very significant deposits and I wish we could extract them out of there. With all due respect to the Isle of Man, those deposits should not be there. The depositors should repatriate money to this country. The Isle of Man has a very flexible approach to banking.

On a matter of housekeeping I ask that the election of a Vice Chairman be put on the agenda for the next meeting of this committee.

Chairman

We discussed that matter in private session.

Senator Terry Leyden

What is the Department's calculation of the total amount of savings and deposits in the Republic of Ireland? I understand it is in the region of €100 billion. I regret that money has been withdrawn from Bank of Ireland and Allied Irish Banks. Last week, I reassured an investor from New York who has €1.6 million in the Bank of Ireland in Roscommon that his money is safe. I told a councillor about the matter. He rang the man in New York. I got another call from another young man who had sold his business and invested in savings. It is a pity that I have to reassure such people. Why can the Department of Finance not reassure depositors, for example by means of publicity or advertisements, that their money is 100% safe? Bank managers could do a little more in this regard. I have made it clear that up to €100,000, in respect of each account holder in each institution, is 100% guaranteed. I have mentioned that deposits of more than €100,000 are unlimited under the EU agreement that was reached last week. That is all factual. I know all of this to be true. I received many responses when I spoke on local radio about this issue. People are very nervous. I thank the officials from the Department of Finance for coming here in the present circumstances. I appreciate that all hands are needed on deck during the ongoing negotiations on the forthcoming budget. I am aware that the Chairman is anxious to reassure people about matters of this nature.

Chairman

Yes.

Senator Terry Leyden

I hope the fact that such reassurances have been recorded and publicised will help to steady people's nerves. I ask the Department of Finance to take out public advertisements in next Sunday's newspapers to set out the facts and reassure those who are worried. The investor to whom I spoke was terrified. He woke up at 4 o'clock in the morning. He heard Bloomberg's pronouncement about Ireland. He rang a local councillor in Roscommon at 4 o'clock local time. The councillor rang me and we gave him the reassurances he sought. He has retained his money on deposit. Today's meeting has been a useful exercise. I am glad the Chairman has ensured this matter has been dealt with.

Chairman

I endorse what Senator Leyden said about the need for stronger communication from the Department of Finance. Perhaps it is a matter for the Minister for Finance to reassure people. I have spoken to elderly people who are worried. They are watching television and seeing what is happening with the country. They are wondering if their moneys are safe. If a direct comment or statement on savings was made by the Department or the Minister, it would be welcomed by our citizens.

Mr. Pat Casey

I draw the attention of the committee to the Minister's clear statement on the extension of the eligible liabilities guarantee scheme. He made it clear that he wanted to reassure all depositors in this country's guaranteed banks and building societies that their deposits continue to be safe and secure. He referred to the discussions between Irish and international authorities. He said:

In such circumstances, it is important to reaffirm the State's commitment to the safeguarding of all deposits and the other liabilities guaranteed under the eligible liabilities guarantee, ELG, scheme approved yesterday by both Houses of the Oireachtas .... The extension of the guarantee has been approved by the European Commission and was endorsed by the European Central Bank on financial stability grounds .... Let me be clear: deposits are safe. Nothing in the content of the discussions underway or anything that may arise thereafter will affect that fact. Depositors can depend and rely on the protection afforded by the State guarantee up to now and into the future.

He has-----

Chairman

The Minister has done that. Perhaps it is incumbent on us, as public representatives, to make that clear to the public in our own areas.

Senator Terry Leyden

I felt so seriously about the matter last week that I raised it at parliamentary party level. I asked the Minister to reassure people by making a ministerial broadcast under section 31 of the Broadcasting Authority Act 1960. The media does not give this issue sufficient publicity. That is a fact. We have to do it ourselves. We do it every way we can. That is the way it is. People are nervous.

Mr. Pat Casey

I bring to the attention of the committee an information notice for consumers that has been posted on the Department's website. The notice, which relates to the extension of the credit institutions eligible liabilities guarantee scheme, draws out the key points for consumers:

There is no change to the existing deposit protection under the Deposit Guarantee Scheme, DGS scheme. for retail deposits up to €100,000 - in other words, this State guarantee continues and does not have an end date. On-demand deposits with a balance in excess of €100,000 are now guaranteed under the ELG scheme up to 30 June 2011. (This date can be extended further to 31 December 2011 with EU state aid approval.)

I understand that a six-monthly renewal process has been provided for.

Senator Terry Leyden

That is the roll-over provision.

Mr. Pat Casey

The information notice also states:

Deposits in excess of €100,000 can be guaranteed for a fixed term of up to five years if made before 30 June 2011 under the extension to the ELG Scheme. (This date can be extended further to 31 December 2011 with EU state aid approval.)

Again, the normal six-monthly cycle applies. That statement is on our website and I am sure a similar one is on the website of the NTMA.

Senator Terry Leyden

What is the value of the savings that are on deposit in Ireland?

Mr. Pat Casey

I referred in my earlier remarks to a letter that was sent to this committee on 5 November last. The letter indicated that the total value of the deposits eligible for coverage under the deposit guarantee scheme - held in accounts in banks covered by the Irish deposit guarantee scheme - is approximately €208 billion. Applying the proposed contribution of 1.5% under the new directive, a deposit guarantee scheme fund of approximately €3 billion could be envisaged. In relation to credit unions-----

Senator Alex White

Can Mr. Casey repeat his last sentence? I refer to what he said after he referred to "€208 billion".

Mr. Pat Casey

Applying the 1.5% ex ante provision-----

Senator Alex White

I understand now.

Mr. Pat Casey

Yes. In relation to credit unions-----

Senator Terry Leyden

If there is €200 million in savings in the banks, building societies, post offices, prize bonds-----

Mr. Pat Casey

No. I apologise for interrupting the Senator. It relates to banks and building societies.

Senator Terry Leyden

That money is actually in the State. It is not in Britain, America or anywhere else.

Mr. Pat Casey

It could also be in deposits held outside the State by Irish banks.

Senator Terry Leyden

Yes. I understand it is approximately €100 billion here in the Republic, in Britain and elsewhere - in Irish banks abroad, whether it is in Poland, in England or in America. I heard that the total amount is $204 billion but the actual amount here within the State is approximately €100 billion. I know it is very hard to calculate that. It is a very encouraging amount of money to have in the State. We are quite a wealthy State, individually.

Chairman

At the last meeting of the committee, Mr. Molumby from the Central Bank was asked the same question about how much money is held on deposit. He gave the same figure of €208 billion. He went on to say that up to €90 billion is eligible for compensation under the deposit guarantee scheme. So this fictional figure of €208 billion, multiplied by 1.5% to give one €300 million per annum, brings us up. It does not wash if €90 billion is eligible for compensation under the deposit guarantee scheme, as Mr. Molumby said.

Mr. Pat Casey

All I can suggest is that the bank may wish to clarify that. I am also relying on the information that was provided by the bank. I am not aware of the source of the €90 billion figure.

Chairman

We will follow it up with the bank so.

Senator Paddy Burke

On the increase in pre-funding from 0.2% to 1.5%, is it fair to say it will mean the banks that take in deposits will have 1.3% less for lending, regardless of which way they roll it up? After ten years, 1.5% of deposits will be tied up with the Central Bank.

Mr. Pat Casey

Yes.

Senator Paddy Burke

Therefore, the banks will be able to lend less money, if they have the same amount of money. In other words, if the increase from 0.2% to 1.5% were to happen now, would it not be the case that the banks would have less money for lending? An additional 1.3% of their moneys would be tied up in pre-funding. I do not know how many-----

Mr. Pat Casey

At face value, one could make that argument. One must remember that the banks are now required to set aside higher levels of capital to meet the new requirements of the Financial Regulator. The first consideration should be the amount of money the banks are required to set aside to conduct their business. The Financial Regulator and the Central Bank have said they need to put a certain level of money to one side. It is one of their prudential requirements. The deposit guarantee scheme is moving from its current base, which has a low level of provision, to a base at which a higher level of money is set aside in case a credit institution is not in a position to pay its depositors and funding has to be called upon.

Senator Paddy Burke

We do not have the same mass of population as England, France or other EU countries. That means we have fewer banking institutions. Has the Department evaluated the consequences of having just one or two financial institutions? No banking facilities, other than a hole in the wall, will be available in some towns. Has the Department evaluated the consequences of increasing the level of pre-funding from 0.2% to 1.5%, not to mention the other stringent controls that will be imposed on the banking fraternity?

Mr. Pat Casey

This is still a draft proposal. We are still considering its implications.

Senator Paddy Burke

Has the Department reached any final conclusions?

Mr. Pat Casey

We have not made any final determinations on any of this. This draft proposal is still being negotiated by the working groups in Brussels. The latest version is the draft we have at present. We are considering the impact of that.

Senator Paddy Burke

If the Department has any concerns, or if it makes any determinations, can it forward them to the committee? Will the officials come back here?

Chairman

I imagine, from some of the things that have been unearthed at today's meeting, that they will do so. The committee will present its own report.

Senator Paddy Burke

That is all right.

Chairman

I assure Senator Leyden that we will include in the report strong comments and advice about the security of funds on deposit to the general public. I thank Mr. Casey and his officials for answering members' questions. Their informative presentation will greatly assist the committee as it finalises its scrutiny report on this proposal. At its next meeting, the committee will meet representatives of the Consumers Association of Ireland.

The joint committee adjourned at 1.15 p.m. until 11.30 a.m. on Thursday, 2 December 2010.