Brian Lenihan Jnr (Dublin West, Fianna Fail)

I move: "That the Bill be now read a Second Time."

The Financial Services (Deposit Guarantee Scheme) Bill 2009 is one part of a two-stage legislative package - the other being a complementary statutory instrument which I will make as soon as the Bill has been enacted - to amend and update the Irish deposit guarantee scheme in line with the Government's announcement of 20 September 2008.

The main reforms announced then comprised increasing the statutory limit for the deposit guarantee scheme for banks and building societies from €20,000 to €100,000 per eligible depositor per institution with effect from 20 September 2008; the discontinuance of the co-insurance requirement whereby the depositor bore 10% of the loss up to the statutory ceiling on cover which had a maximum payout of €20,000; and extending the guarantee scheme to apply to credit union savers. These came into effect immediately and, as I indicated then, I would provide the appropriate legislative underpinning as soon as possible afterwards. The purpose of the Bill is therefore to provide the first step in this process.

Deposit protection in Ireland is a new intervention. The Central Bank Act 1989 put in place a deposit protection scheme which involved the Central Bank establishing a deposit protection account and transferring to that account 0.2% of deposits of the licensed banks held by the Central Bank. This was repealed in 1995 when the deposit guarantee scheme was established under the European Communities (Deposit Guarantee Schemes) Regulations 1995, SI 168 of 1995. This gave effect to an EU directive under which protection was provided at the minimum level of 15,000 ECU, the forerunner to the euro, and increased to €20,000 from 31 December 1999.

In simple terms, the Irish deposit protection scheme guarantees to compensate depositors, subject to certain limits, when a credit institution fails. It covers deposits held in current accounts, demand deposit accounts and term deposit accounts with credit institutions. The basic intention behind such a scheme is to reassure small and relatively unsophisticated depositors that there is a safety net that will enable them to recover all, or at least most, of their savings in the event of a failure of a credit institution. This reassurance, in turn, helps to reduce the likelihood of a run on an otherwise solvent bank and helps to contribute to the stability of the financial system.

A deposit protection scheme is not, of course, intended to cope with a systemic financial crisis. In such a scenario, government intervention to restore confidence might be necessary, as has been seen both in Ireland and in other countries over the past year. Thus, while deposit protection schemes can be seen as just one part of financial safety net, they can be helpful in protecting otherwise solvent institutions from failure. In the wake of the turmoil that has affected the global financial system in the past two years, there is a general acceptance that deposit protection needs to be enhanced and that information, funding and immediacy of payment are important factors in ensuring the effectiveness of a deposit protection framework by supporting confidence in the banking system.

All institutions authorised by the Financial Regulator to carry out banking activities here are required to become members of the deposit guarantee scheme and in this sense, it is wider than the scheme for the covered institutions. All these institutions must hold a balance in the deposit protection account, which is maintained by the Central Bank and Financial Services Authority of Ireland, CBFSAI. At present, there are approximately 50 such institutions which have been so authorised by the Financial Regulator and the extension of coverage to credit unions will bring in another 419 institutions. The balance in the deposit protection account in the CBFSAI at the end of 2008 was €617 million.

The Government decision last September to increase the guarantee limit from €20,000 to €100,000 was prompted by a number of factors. First, there was the significant uncertainty in international financial markets at that time, which had begun to play on some customers' fears regarding the security of their savings and financial institutions at home. Second, given the passage of time since the guarantee limit was last changed approximately ten years ago and the very substantial growth in the number and value of deposits, the case for raising the payout ceiling of €20,000 had been clear for some time. Finally, the case for an increase in the limit had been made by various Members on both sides of this House at that time.

The decision to remove the co-insurance requirement, whereby the depositor carried 10% of the loss on his or her deposit, was a necessary amendment because of the public's heightened sensitivity to the broader savings protection debate, particularly regarding people's fear of losing even a small portion of their savings because of a credit institution becoming insolvent. It was important to remove any incentive for people to withdraw their deposits from credit institutions and to reassure those with relatively small deposits in particular that all of their savings would be protected.

The extension of the scheme's coverage to credit union savers was based on the need to provide a level playing field for all depositors. In this connection, it should be noted that the Irish League of Credit Unions has, since 1989, operated on an all-island basis a savings protection scheme, SPS, for credit unions. To date, it has operated on the basis that it stood ready to provide financial support to any of its member credit unions that got into difficulty. Fortunately, it has never been necessary for the league to carry out that promise, as no credit union has become insolvent and no member of a credit union has experienced any loss of shares or deposits.

Nevertheless, last autumn I had a concern that any difference in the treatment of depositors, as between banks and credit unions, potentially could have been highly damaging for any class of credit institution that was considered by the public at large to have had inferior deposit protection terms. At the time, the Government decided the scheme should be applied to credit unions. It is important to stress that this legislation complements the more comprehensive guarantee made on 30 September 2008 under the credit institutions financial support scheme. That wider guarantee scheme provides a State guarantee for all deposits and certain liabilities of the guaranteed institutions to the extent that they are not covered by existing deposit protection schemes in the State or any other jurisdiction. In short, depositors must first claim from the deposit guarantee scheme and then move on to claim any balance from the credit institutions financial support scheme. Accordingly, notwithstanding the wider scheme to safeguard the banking system, this reform must be furthered in its own right, given the legal requirement for a compensation claim to be made first upon the deposit guarantee scheme. It is also important to emphasise that whereas the credit institutions financial support scheme applies to the seven covered credit institutions, the deposit guarantee scheme applies to all credit institutions authorised in this State and this now includes credit unions, which hitherto did not benefit from statutory deposit protection.

Before describing in detail the provisions of this Bill, I wish to explain the reason there has been some delay in bringing forward the legislation. As we began to draft legislation to give effect to our domestic reforms, the European Commission published a proposal to amend the deposit guarantee schemes directive of 1994. The main elements of the Commission's reforms were, as with our own proposed changes at that time, an increase in the ceiling of payouts and the abolition of the co-insurance requirement option. Other critical reforms announced by the EU in October related to the deadline within which compensation must be made. As our deposit protection arrangements were based on the original European Union directive of 1994, it made sense to cover our domestic changes and those of the EU within a single item of legislation. The Government was of the view that the decision of 20 September 2008 on our domestic changes to our deposit guarantee scheme provided a sufficient safeguard in the interim period. However, once the EU measure was finalised and published as a directive on 11 March 2009, steps were taken to finalise the drafting of the necessary legislative amendments and to have the Bill published as soon as possible.

One might also mention that the additional time has enabled the Department of Finance to reflect further on aspects of the existing statutory framework and as a result it is proposed to strengthen it by transferring a number of provisions from the statutory instrument of 1995, which is the basis for our deposit guarantee scheme, into primary legislation in the form of this Bill. These changes, on which I will elaborate in a few minutes, will provide greater legal certainty to our general scheme. I now wish to describe the main provisions of the Bill.

Section 2 empowers the Minister for Finance to make regulations prescribing the amount of compensation payable to a person maintaining deposits within a credit institution. Its purpose is to give effect both to our own protection ceiling increase and to the recent European Union amending directive on deposit guarantee schemes. However, it provides the power to prescribe a higher level of coverage up to 31 December 2010 than that set out in the directive. The directive requires member states to increase coverage to €50,000 immediately, with a further increase to €100,000 from 31 December 2010. As I mentioned earlier, our deposit guarantee scheme is set out in secondary legislation, which transposed the original European Union directive of 1994. Without this enabling provision, I would not be able to make legislative provision by statutory instrument for the €100,000 coverage rate announced last September as, at this point, it is outside the scope of the directive.

Section 3 confirms the establishment of the deposit protection account at the CBFSAI and was already catered for by regulation No. 4 of the existing regulations. However, this is an example of a provision that has been incorporated into the Bill to ensure that it has greater clarity and is more safe from legal challenges.

Section 4 empowers the Minister for Finance to prescribe by regulations the amount of the deposit which a credit institution shall lodge to the deposit protection account in respect of its participation in the scheme. It also enables the variation by order of the amount payable by a credit institution or credit institutions or class or classes of credit institution. The current level of contribution is set at 0.2% of a prescribed deposit base. It is not proposed to change that figure at present, having regard to the significant charges already being levied on credit institutions participating in the separate bank guarantee scheme.

Sections 5 and 6 deal with annual recalculation of the amount of deposit and charges on the deposit protection account. They are being transferred from the existing regulations. Section 7 permits the payment of aggregate contributions on behalf of a group or groups of credit unions and is being incorporated to facilitate the existing structure of the movement, as well as the administration of the scheme by the Central Bank, as it will facilitate a bulk payment in lieu of a plethora of small payments by individual credit unions.

Section 8 is being introduced to cater for a position in which, in the event of the insolvency of a credit institution and the funds available in the deposit protection account that funds the deposit guarantee scheme not being sufficient to meet the required payout, the Central Bank might cover the shortfall with its own resources on a temporary basis. However, as European Central Bank rules prohibit such monetary financing other than on a short term and urgent basis, this section provides that the Exchequer will recoup the Central Bank for any outlay within three months. As the deposit protection account was replenished, the remaining credit institutions would repay the Exchequer over time. I intend to introduce an minor amendment to section 8 on Committee Stage. This amendment will make it more clear than was evident in the initial draft of this section as published that the Central Bank is not obliged or required to fund any shortfall that may arise in the deposit protection scheme in respect of any payments arising. It may, of course, decide to so do at its own discretion, if a view is taken that it is in the interests of financial stability.

Section 9 deals with offences and penalties and, again, this provision is being placed in primary legislation. Section 10 is the standard provision relating to the laying of regulations before the Houses of the Oireachtas. Section 11 amends the Central Bank Act 1942 in respect of certain technical matters. In addition to setting out the Short Title, section 12 provides that section 4 of the Bill, namely, the amount to be maintained in the deposit protection account in so far as it applies to credit unions, shall come into operation on such day as the Minister may appoint by order. After the passage of this legislation and the necessary statutory instrument, it will be necessary to have further discussions with the credit union movement for their admission into the scheme from an administrative perspective. Credit union savers are, and will continue to be, covered up to the €100,000 compensation limit the Government announced last September.

I wish to emphasise the importance of having this Bill enacted in sufficient time to enable the necessary statutory instruments under the provisions of the legislation to be made. These regulations must be commenced into law by 30 June to meet the European Union's deadline for the transposition of the amending directive. I appreciate the co-operation of Members across the floor in meeting this deadline and I commend the Bill to the House.

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