Brian Hayes (Dublin South West, Fine Gael) | Oireachtas source

Almost one year ago to the day, the Minister for Finance addressed colleagues in the House on the subject of the bank guarantee scheme, otherwise known as the ELG scheme. A lot has happened since in the banking sector. The covered banks have continued to make progress overall under the financial measures programme - the rigorous analysis of the capital and liquidity requirements of the domestic banks presented in March 2011 - and advanced in terms of recapitalisation, asset deleveraging, deposit inflows and restructuring plans. The recapitalisation of the PCAR banks - AIB, Bank of Ireland and the PTSB - and the IBRC has been successfully completed. According to the survey of European banks carried out by the European Banking Authority published late last year, the Irish banks more than met the minimum standard set down for core tier 1 capital ratio of 10.5%. Deleveraging has progressed well so far and total covered bank deleveraging of about €63 billion had been achieved up until the end of September this year. Further significant disposals have also been targeted for completion by the end of the current quarter of 2012 as part of the pillar banks' planned run-down of non-core balances. With respect to funding, the banks' positions have improved significantly. Deposits in AIB, Bank of Ireland and the PTSB have stabilised, with a gain in net inflows achieved since last year; international debt markets have opened up to the Irish banks; and reliance on ECB funding sources is down on previous levels. As part of the EU-IMF programme, the Irish authorities had submitted revised restructuring plans for all of the participating institutions by the end of September this year. On a related and supportive level, market sentiment towards Ireland as a sovereign borrower has improved considerably and this has been assisted by the re-entry of the NTMA into the bond auction markets, the fall in Irish Government bond yields, from 7.34% last May to 4.47% yesterday, and the prospect of a future agreement on breaking the link between bank debt and sovereign debt.

Against this background, as I have outlined, we have been looking in recent months at the future of the eligible liabilities guarantee scheme. In reply to a parliamentary question to the Minister for Finance on 4 October it was mentioned, inter alia, that an ad hoc working group chaired by the Department of Finance and involving both the Central Bank and the NTMA was looking to develop a strategy to exit the scheme, consistent with preserving financial stability.

In the context of the subsequent recent visit of the troika partners and the eighth review of the programme, it was agreed that such a strategy would be finalised by year end. The early indications from this strategy are that a withdrawal of the scheme could occur in the first quarter of 2013. However, I can assure the House and give reassurance to depositors that the Minister for Finance will give sufficient notice in advance of the withdrawal of the scheme.

I do not want to pre-empt what that strategy will recommend but I am very much conscious of the negative effect that the payment of fees by the participating institutions, in return for the guarantee, is having on those banks' profitability. Furthermore, I am aware that the banks themselves are anxious to continue to move away from the cover of the guarantee as soon as is practicable. From the perspective of the Government also, and the contingent liability on the State that results from the scheme, I consider its removal would be seen by the markets as a further positive step with respect to re-establishing Ireland's borrowing credentials.

In the meantime, however, while the details of winding down the scheme in the near future are being worked out, it is necessary to address the prolongation of the scheme. In the normal course, the scheme would expire after 31 December 2012 if steps were not taken to extend it beyond that date. Expiry would mean that new deposits made, or debt issued, from 1 January next year would not be covered by the guarantee, although of course liabilities incurred up until that time would continue to be guaranteed until their maturity. It is in this context that the extension of the ELG scheme needs to be considered and 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 2012.

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 Irish credit institutions. As I have referred to already, and because of its nature, the scheme is time-limited so any prolongation requires that the scheme be amended periodically. 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) Act 2008 - the CIFS Act.

The Statutory Instrument before the House, therefore, contains two amendments to the Schedule of the scheme which relate to its extension in time. The opportunity is also being taken to include a third amendment, which is essentially a drafting or technical one. I will deal with these amendments in the order in which they appear in the draft statutory instrument. Item 1 updates a cross-reference which appears in the list of definitions set out in Article 3 of the Credit Institutions (ELG) Scheme 2009. This clarifies that a financial support order means an order under section 6(4A) of the CIFS Act 2008 rather than under section 6(3B), a change that resulted from amendments to the Act made by section 74 of the Credit Institutions (Stabilisation) Act 2010.

Item 2 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 2012 with 31 December 2013.

Item 3 amends paragraph 11.1(c)(ii) of the Schedule to the scheme, which sets out the time-related criteria which a liability must meet to be considered eligible. This amendment seeks to replace the current end date of 31 December 2012, by which eligible liabilities must be incurred if they are to be guaranteed, with a proposed new date in national law of 31 December 2013.

The amendments are, in both cases, "subject to the continuing approval of the European Commission". This role for the Commission arises because, under state aid rules, all banking guarantee schemes require an assessment - every six months - of the case for their continuation. It follows, therefore, that, if approved, such schemes can only be prolonged for a maximum period of six months at a time. Consequently, the ELG scheme would remain subject to biannual Commission approval, notwithstanding the proposed one-year extension in national law, which is essentially a practical step to avoid having to legislate on a too frequent basis.

The necessary approval for prolongation has already been sought from the Commission and is expected to be formally given shortly. Once given, this would mean explicit EU approval for the scheme until 30 June 2013, that is, for the six months from the end of 2012, in line with existing practice. If, and only if, extension beyond this period were required, would further state aid approval be sought. In addition to obtaining the approval of the European Commission as I mentioned, it is necessary to consult with the ECB: this process is already underway and the bank's opinion awaited. For reasons of good administrative practice and timeliness, it has been necessary to proceed on this basis in advance of the formal consideration of the motion before the House, in line with the procedure on previous occasions.

As is also the normal practice, before deciding to notify the Commission of our wish to seek prolongation of the scheme, the views of the other relevant Irish authorities, the Central Bank and the NTMA, which are part of the usual starting point in any assessment of the future of the scheme, were sought and they were supportive of its extension. I shall return to this matter later.

At this point however, it might be helpful to go into some detail on the scheme itself and set out the background to, and reasons for, its proposed continuation. As I mentioned earlier, the scheme commenced in December 2009. It succeeded the CIFS scheme, although both schemes over-lapped for a time until the expiry of the earlier scheme on 29 September 2010. The scheme has been extended three times already, from its original end date of 29 September 2010 to the end of that year; subsequently, to 31 December 2011; and, on the last occasion, to the end of the current year.

The ELG scheme was designed to be more focused in application than its predecessor and to cover both a narrower range and smaller amount of liabilities. The ELG 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. Because eligible deposits of up to €100,000 are already covered under another scheme - the deposit guarantee scheme - the ELG scheme only covers the balances, where they exist, above this threshold. Deposits which do not qualify for deposit guarantee scheme coverage in the first instance but are nevertheless eligible under the ELG scheme, for example, corporate deposits, are covered by the latter scheme alone.

The credit institutions which avail of the guarantee provided under the ELG scheme are described as the "participating institutions". Essentially, there are four main ones, apart from their subsidiaries. The four are AIB, Bank of Ireland, Permanent TSB and the IBRC or Irish Bank Resolution Corporation, formerly Anglo Irish Bank and Irish Nationwide. Among the best-known subsidiaries are EBS and ICS Building Society. The full list can be viewed on the NTMA website. The participating institutions in the scheme 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 2012.

Compared with liabilities of €375 billion at the beginning of the CIFS scheme in 2008, eligible liabilities outstanding under the ELG scheme at end-September this year stood at €78 billion, which represents a major reduction in coverage. Over the course of 2012 itself, liabilities have fallen by about €25 billion, down from the €102 billion that was outstanding when the scheme was last discussed in the House.

The decrease in liabilities under guarantee during 2012 has been due to a number of factors. First, the subsidiaries of the two pillar banks, Bank of Ireland and AIB, in the UK have been reducing their participation in the scheme since March last by not taking on new deposits under guarantee.

The Minister for Finance facilitated this move by issuing a series of notices under paragraph 13 of the schedule to the ELG scheme, whereby he is empowered to limit the applicability of the guarantee to different categories of deposit. In this way it was possible to restrict the guarantee to that category of deposits existing up to - but not after - a given date in the case of the UK institutions concerned. The outcome is that deposits under guarantee have fallen by approximately €11 billion to date in these entities, but without any significant accompanying loss to the institutions of the deposits concerned. In other words, the deposits were successfully retained even in the absence of the guarantee.

A second reason for the fall in liabilities covered during 2012 is that bank debt that has been maturing this year has not been replaced. This accounted for approximately €6 billion of the reduction in liabilities. A third, albeit more modest, factor has been the uptake of unguaranteed deposits which in turn displaced an equivalent amount of guaranteed deposits to a total of almost €1 billion. This positive move stems from the original request - also made in accordance with paragraph 13 of the schedule to the ELG scheme - from the participating institutions to be allowed to offer unguaranteed deposits to certain corporate and institutional customers. Again, the Minister for Finance facilitated this request by allowing such offers to be made, subject to certain conditions. This move may now be seen, in retrospect, as being a small but significant first step towards removing the necessity for the maintenance of the guarantee in the first place.

I previously mentioned 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 wish to 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 of the Credit Institutions (Financial Support) Act 2008. 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. I have set out what the two orders are in my speech for the information of colleagues.

I believe that we are in a much stronger position than we were a year ago but, notwithstanding that, I am bringing this statutory instrument before the House today. We are very near to bringing closure to the guarantee narrative. There have been similar guarantee schemes internationally, including in Europe - for example, in Finland, Austria, Denmark and Sweden - and these have all been successfully ended when the time was judged right. For Ireland, this time is close. We want to continue our return to more normal banking conditions under which, inter alia, a guarantee should not be necessary. To facilitate this move, it is proposed that we provide for prolongation of the ELG scheme into 2013 with the intention that this will be the last time we will have to discuss such a motion in the House.

I wish to make a final point, one which is often not fully comprehended when the ELG scheme is being discussed. The vast majority of bank, building society and credit union depositors are not affected by the existence of the ELG scheme at all. Most account holders, excluding the corporate sector, in the participating institutions are covered by the deposit guarantee scheme only, operated by the Central Bank of Ireland, which guarantees qualifying deposits of up to €100,000 per depositor per institution. This is the standard form of guarantee scheme in the majority of EU member states.

I began by setting out the improvements in the banks' capital, deposit and funding positions. All of these improvements point to a normalisation of our banking system. The removal of the guarantee will be a further reinforcement of this return to normal operations. I again assure the House that the vast majority of depositors will continue to benefit from the deposit guarantee scheme. I commend the motion to the House.

See this speech in context