Michael Noonan (Limerick City, Fine Gael)

I move:

That Dáil Éireann approves the terms of the draft scheme entitled Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2011, a copy of which draft scheme was laid before Dáil Éireann on 28 November 2011.

This year has been a significant one for the Irish banking sector. The financial measures programme, FMP, announced on 31 March last by the Central Bank was a rigorous analysis of the capital and liquidity requirements of the domestic banks and formed the backdrop against which the Government announced proposals to comprehensively restructure and reform the banking sector. These proposals represented a benchmark in the process of reorganising and strengthening credit institutions in Ireland and were a necessary follow-up to the decision to accept assistance from the external partners in November 2010, and to carry out the consequential adjustment programme.

Given the main role played by the weakness in our financial system in bringing about the need for external intervention, it was vital to quickly address this issue. This has and is being done through a number of actions, in particular, by requiring an increase in bank capital sufficient to ensure adequate capitalisation based on conservative and rigorous assumptions about future requirements; by initiating a sizeable de-leveraging of the banks concerned through the amortisation and sale of non-core assets, with the intention of achieving a more prudent loan-to-deposit ratio; by creating a domestic banking system centred around two universal, pillar banks, AIB and Bank of Ireland; and by focusing on a drive to meet bank funding requirements, both in terms of deposits and issuance of debt securities. It is in this latter context that the extension of the eligible liabilities guarantee, or ELG, scheme remains of crucial importance, and so I would like to turn to the motion before the House to approve the draft statutory instrument entitled the Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2011.

As the House is aware, the ELG scheme, which was introduced in December 2009, provides a Government guarantee in respect of certain liabilities of a number of credit institutions in Ireland. Given its nature, the scheme is time limited so that any prolongation requires that the scheme be amended periodically, and this must be done by bringing a motion before the Houses of the Oireachtas in accordance with section 6 of the Credit Institutions (Financial Support), or CIFS, Act 2008, as amended. As matters stand, the ELG scheme would expire at the end of December of this year in the absence of a prolongation.

The statutory instrument contains two necessary amendments. Item 1 amends paragraph 3.1(b) of the Schedule to the scheme, which sets out the period within which institutions may apply to join it. This amendment seeks to extend the application period by replacing 31 December 2011, with 31 December 2012, to reflect the one-year time extension to the scheme in law. Item 2 amends paragraph 2.1 (c)(ii) of the Schedule to the scheme which sets out the temporary criteria which a liability must meet to be considered eligible. This amendment seeks to replace the current end date of 31 December 2011, by which eligible liabilities must be incurred if they are to be guaranteed, with a new date in national law of 31 December 2012. Both amendments are subject to the continuing approval of the European Commission.

This conditionality arises because all banking guarantee schemes are subject to EU state aid rules and these rules provide in practice that schemes be approved for a maximum period of six months in advance. Therefore the ELG scheme will remain subject to six-monthly Commission approval, notwithstanding the proposed one year extension in national law. This necessary approval has already been sought from the Commission and is expected to be formally given within a matter of days. Once given, this will mean explicit EU approval for the scheme until 30 June 2012, that is, for the next six months, in line with existing practice. Further state aid approval could then be sought before this date in order to cover the final six months of the scheme's extension to the end of December 2012 if this is required.

It is also necessary to seek the views of the European Central Bank in these matters and the ECB has already given a favourable opinion on the proposed prolongation of the scheme, stating that: "Taking into account financial stability considerations, a further extension of the ELG scheme would be beneficial". The views of the relevant Irish authorities, the Central Bank and the National Treasury Management Agency, NTMA, which are fundamental in any assessment of the future of the scheme, are also supportive of its extension. I shall return to this matter later.

I shall now give some detail on the scheme and on the raison d'être for its proposed continuation. The scheme, as I already mentioned, commenced in December 2009. It was effectively a successor to the credit institutions financial support, CIFS, scheme, although both schemes co-existed for a period until the expiry of that scheme on 29 September 2010. The ELG scheme is more focused than its predecessor and covers both a narrower range and smaller amount of liabilities. The scheme covers eligible liabilities as defined in paragraph 11 of the Schedule to the scheme. These liabilities can be summarised as consisting of certain deposits and various unsecured debt securities. As retail deposits of up to €100,000 are already covered under another scheme, the deposit guarantee scheme, the ELG scheme only covers sums above this figure in such cases.

The credit institutions which are part of the ELG scheme are described as the "participating institutions". They are, principally, AIB, Bank of Ireland, Irish Life & Permanent and the IBRC or Irish Bank Resolution Corporation, formerly Anglo Irish Bank and the Irish Nationwide Building Society, and their subsidiaries, including the EBS. The full list is published on the NTMA website. Participating institutions may take deposits and issue debt, with a maximum maturity date of five years, during the so-called issuance period which runs from the date the institutions joined the scheme to the end date of the scheme, currently 31 December 2011.

At present, some €100 billion in eligible liabilities are covered under the ELG scheme, compared with liabilities of €375 billion at the beginning of the CIFS scheme. Later, in mid-2010, a combined figure of €256 billion was guaranteed by both schemes when they overlapped and just before the CIFS scheme expired. After this expiry, at the end of the third quarter of 2010, the amount guaranteed under the ELG scheme alone was €147 billion.

The decrease in these eligible liabilities figures from €256 billion to €147 billion and, later, to the €100 billion figure mentioned, reflects a number of factors. These were, principally, the non-renewal of some senior unsecured debt and deposits which matured under the CIFS scheme; second, a "fall-out" of those liabilities - asset covered securities and dated subordinated debt - which were not eligible to be covered under the ELG scheme; and, third, there were the turbulent market conditions and negative sentiment that prevailed about the financial system in Ireland in 2010, which resulted in large outflows of corporate deposits from the institutions in the latter half of that year. However, this year the rate of deposit outflows from the institutions has slowed significantly and the level of deposits since mid-year has been steady. Nevertheless, the market remains fragile and it is imperative that no action be taken that would cause any negative movement in deposits which remain so important as a funding source for Irish credit institutions in the absence of conditions that would allow normal debt issuance by the participating institutions.

It is against this background that the Central Bank has advised of the necessity to continue and extend the ELG scheme until 30 June next, in line with the EU six monthly approval period, while also agreeing with the extension of the scheme in national law until 31 December 2012. The operator of the scheme, the NTMA, has also confirmed that an extension is advisable. The consensus of the authorities is that in a market where there is little opportunity for Irish banks to issue debt or paper and where depositors, especially the public, still need to be reassured that both bank funding and their deposits remain secure, the need for the continuation of the scheme is beyond question. Moreover, the extension of the scheme complements the financial measures programme announced in March as it was assumed by the Central Bank, in the context of the prudential capital assessment review, that the ELG would remain in place during 2012 and 2013, subject to EU approval.

Of course, since the Minister for Finance, and thus the State, is guarantor for all eligible liabilities under the ELG scheme, there must be a quid pro quo for the provision of the guarantee and therefore the participating institutions must pay a significant fee to the Exchequer. The fee structure is set down under recommendations which apply to all EU banking guarantee schemes and which are based on first, recommendations dated 20 October 2008 of the governing council of the European Central Bank on government guarantees for bank debt and, second, on subsequent recommendations from the EU Commission set out in a DG Competition staff working paper, dated 30 April 2010, which apply state aid rules to government guarantee schemes concerning bank debt issued after 30 June 2010.

The outcome of the Commission recommendations was a staggered increase in fees payable in respect of new issuances in the second half of 2010, in accordance with the maturity of the debt concerned and the credit rating of the institutions involved. In a nutshell, the fee structure is aimed at encouraging banks to move away from dependency on short-term funding, in particular that less than three months in duration. Consequently, for debt or deposits issued today which fall into this category, the guarantee fee is 160 basis points, excluding retail deposits which attract a fee of 90 basis points. All debt and deposits with a maturity of between three months and one year attract a fee of 90 basis points also. For longer-maturity debt, the fee is between 126.5 and 134.5 basis points.

The consequences of the revised pricing structure are that the level of fees earned by the Exchequer has increased. As a result, participating institutions are now paying an average of some 100 basis points compared to the 50 basis points for short-term debt that was charged at the beginning of the scheme. In monetary terms, about €1.8 billion in fees have been paid to date under the ELG scheme of which more than half, or €947 million, has been incurred in the first three quarters of 2011, compared with €855 million for all of 2010. A new Commission fee structure is expected to be in operation in 2012 which will leave fees unchanged for debt of less than one year's maturity while resulting in some small decrease initially for debt of longer maturity. The fee structure may be revisited in the future if member states were to reach agreement on so-called pooling arrangements for EU-wide guarantees of bank liabilities.

Earlier I mentioned the two specific amendments to the scheme before the House that are necessary to extend the scheme in law. For the further information of the House, however, I should mention in passing that there are also two amending orders of a consequential technical nature which will have to be made if the statutory instrument amending the scheme is passed by this House. These are called financial support orders and will be made in exercise of the powers that are conferred on the Minister for Finance under section 6(3)(b) of the Credit Institutions (Financial Support) Act 2008 or CIFS Act. These orders do not have to be brought before the House as they are not part of the proposed amendment to the scheme but are supplementary to it.

The first order specifies the issuance period during which financial support, that is, the Government guarantee, may continue to be given, in accordance with section 6(3)(b) of the Credit Institutions (Financial Support), CIFS, Act, in respect of eligible liabilities incurred under the eligible liabilities guarantee, ELG, scheme. Effectively, this allows the current end-date of the scheme of 31 December 2011 to be extended to 30 June 2012 for the purposes of allowing the guarantee to continue to apply to eligible liabilities incurred. The new issuance period will therefore run from 1 January 2012 to 30 June 2012, that is, the period approved by the Commission under state aid rules. It replaces the existing issuance period which runs from 1 July to 31 December 2011.

The second order sets down the end-date for financial support in accordance with section 6(3)(b) of the CIFS Act 2008, which allows the Minister for Finance to specify the date beyond which such support cannot be given. This date will now be extended to 30 June 2017 instead of the current date of 31 December 2016. This is to deal with those liabilities under the ELG scheme which may have a maturity of up to five years and which would therefore have to be guaranteed even if the scheme itself were to expire on 30 June 2012. In this way, for example, a depositor who has made a fixed-term five year deposit with an institution on, say, 31 May 2012 would enjoy a guarantee of the sum involved up until 31 May 2017.

Notwithstanding the overarching need to extend the ELG scheme for an additional period, I should mention here a positive development in this area, namely, the recent indications that there may be some demand in the near future for non-guaranteed deposits from the participating institutions. This was shown by the request, made in accordance with paragraph 13 of the Schedule to the ELG scheme, from these institutions to be allowed to offer unguaranteed deposits to certain corporate and institutional customers. I responded positively to this request by publishing the necessary technical notice on 16 November last, a notice which allowed such offers to be made subject to certain conditions, which made clear that unguaranteed deposits had to be clearly labelled as such and that they were not open to normal retail depositors as defined in the rules of the scheme. It was also made explicit in the notice that guaranteed deposits were unaffected by the new development.

The fact that a request to be permitted to offer unguaranteed deposits has been made by the participating institutions is a positive sign that may yet be seen as one of the first steps in removing the necessity for the maintenance of the guarantee but I will not exaggerate the position. It is likely that internationally, especially in the European Union, market conditions will have to improve substantially before the issue of Irish bank unguaranteed paper can become significant. Nevertheless, a recommencement of the substantial downward trend in Irish Government bond yields on the secondary market evident since July until quite recently could help move sentiment in the direction of unguaranteed bank paper also.

In summing up, it would in truth be preferable if there were no need to bring this statutory instrument before the House today since such a situation would infer that a guarantee for bank liabilities was no longer required. That this is not the case is a fact of financial life, however, and we must accept it for the present. Nevertheless, the need for a bank guarantee is kept under review and the requirement to obtain formal EU state aid approval every six months is a continuing obligation that ensures that the ELG scheme will be extended only as necessary and only after the reviews of all the relevant authorities are taken into account. In the meantime, present market conditions and the need to safeguard the stability of bank liabilities in a turbulent market on the one hand while, at the same time, giving comfort to providers of such funding on the other hand mean that the ELG scheme must be extended. The position will be reviewed in advance of the 30 June 2012 date in accordance with the existing state aid approval schedule. I commend the scheme to the House.

See this speech in context