Dáil debates
Thursday, 30 September 2010
Other Questions.
Bank Guarantee Scheme
10:30 am
Michael Noonan (Limerick East, Fine Gael)
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Question 6: To ask the Minister for Finance the liabilities of banks that will be covered by the extended bank guarantee; his plans to phase out the guarantee; the charges being paid by the banks which avail of the guarantee; and if he will make a statement on the matter. [33930/10]
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The Deputy will be aware that a statutory instrument which extends the eligible liabilities guarantee (ELG) scheme to 31 December 2010 was approved by both Houses of the Oireachtas yesterday, having previously received EU state aid approval. The following liabilities are classified as eligible liabilities for the purposes of the ELG scheme: deposits; certificates of deposit; commercial paper; senior unsecured bonds and notes and; other senior debt specified by the Minister for Finance in accordance with EU state aid rules which are incurred in the issuance period, which runs from the date the financial institution received approval to join the scheme to 31 December 2010. The guarantee can be applied to stand-alone debt securities or to securities issued under programmes.
Term deposits with a term of five years or less which are made after the institution joined the scheme and before midnight on 31 December 2010 will be guaranteed for their term. The maximum maturity of any eligible liabilities guaranteed is five years.
My Department and the relevant state authorities along with the EU Commission will continue to monitor market developments over the coming months so as to confirm that the guarantee continues to underpin the core principles of financial stability and funding access for the financial institutions. Progress in relation to the phasing out of the guarantee will be achieved over time consistent with any requirement for continued support of the funding conditions of the banks and the maintenance of financial stability overall. As at end August, €730 million in respect of the CIFS scheme and €295 million in respect of the ELG scheme has been collected in fees from the institutions.
The Deputy may also wish to note that the pricing of the guarantee has increased for new liabilities issued after 1 July in line with the pricing structure outlined in the European Commission's latest guidance on state aid rules for Government guarantee schemes covering bank debt. The additional pricing will range between 20 and 40 basis points depending on the rating of the institution concerned. In addition, the approval granted by the European Commission on 21 September 2010 in respect of short-term liabilities and deposits under the ELG scheme places an additional fee of between 20 and 70 basis points on such short term guaranteed funds issued up to 31 December 2010.
The exact level of the charges accruing to the State will be dependent on the level of issuance by the participating institution.
Michael Noonan (Limerick East, Fine Gael)
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Could the Minister state the total value of various financial instruments that were covered by the CIFS scheme but which are no longer covered by the scheme invoked by statutory instrument yesterday? Could he give an indication of the spread across the different paper?
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I can give the Deputy figures for the total covered liabilities for each scheme, which may be of assistance to him. The total covered liabilities under the original CIFS scheme were €103 billion, of which retail and corporate deposits were €31 billion. The total covered liabilities on the ELG scheme are €153 billion, of which retail and corporate deposits are €121 billion. However, the information Deputy Noonan is seeking to elicit is the liabilities guaranteed under the original scheme which are no longer guaranteed now that the scheme has expired. Asset covered securities and dated subordinated debt are not eligible liabilities under the terms of the new scheme and are no longer guaranteed, as of today. Also, any term deposits taken or debt issued before the participating institution joined the scheme in the beginning of 2010 and which has an expiry date that falls after the 29 September 2010 is no longer guaranteed after 29 September. Undated subordinated debt was never guaranteed.
The amount of dated subordinated debt and senior debt issued before September 2008 and which will remain on the books of the six covered institutions is as follows: subordinated debt €5.3 billion; and senior debt €25.88 billion.
Joan Burton (Dublin West, Labour)
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We were given a short briefing in the Department of Finance yesterday morning. The Minister's officials that something like €36 billion was coming off the guarantee at midnight last night in relation to senior debt. The Minister made various statements earlier today suggesting that he had legal advice of some kind - the Attorney General, I think, was quoted - that it was not possible to negotiate with the senior bond holders.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I never said that.
Joan Burton (Dublin West, Labour)
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I ask the Minister to bear with me. The figures we were advised of by the Minister's officials at the briefing yesterday were somewhat higher than the €26 billion he has just mentioned. Why is there any real impediment to negotiating with bond holders who have come off guarantee? What impediment can there possibly be to that? When businesses fail and go into receivership, creditors, which is what bond holders are, make schemes of arrangement and sacrifices because they hope to do business again in the future. Why have we turned our face against that in respect of what-----
Brendan Howlin (Wexford, Labour)
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The Deputy's question is clear.
Joan Burton (Dublin West, Labour)
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-----occurred with regard to the guarantee last night, the cost in respect of which - leaving aside the subordinated debt - will be €36 billion.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am somewhat alarmed that the Deputy has introduced the figure of €36 billion to the discussion. That amount relates to senior debt in all of the covered institutions - including Bank of Ireland and Allied Irish Banks, and not just those which are distressed, such as Anglo Irish Bank and Irish Nationwide.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I take it the Deputy is not suggesting that bondholders with these institutions should be informed by the management thereof that they should now face a haircut.
Joan Burton (Dublin West, Labour)
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No. I want the Minister to explain his thinking.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I want to be clear about the matter.
Joan Burton (Dublin West, Labour)
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This is a fundamental issue.
Joan Burton (Dublin West, Labour)
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That much is clear. The Deputy should allow the Minister to reply.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am trying to assist the Deputy who, I take it, is referring to senior bondholders in distressed institutions such as Anglo Irish Bank and Irish Nationwide where the total amount is substantially less than the figure to which the Deputy refers.
I do not act on the basis of my own legal views, I act on the advice of the Attorney General who is the legal adviser to the Government.
Joan Burton (Dublin West, Labour)
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What is the nature of that advice?
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The Attorney General provided advice with regard to legislative arrangements in respect of the treatment of bondholders in resolution law. His advice is that in the context of such resolution regimes, it is possible - in appropriately drawn circumstances - to give priority to the investment of taxpayers over subordinated debt in a distressed institution. In the case of senior bondholders, however, it is not possible to give such a priority because, in our legal tradition and that of the United Kingdom, the holders of these instruments rank equally with deposit holders. In other words, they rank as general creditors. I do not want to use the Latin word lawyers always use in this context. I prefer to say that they rank equally or rateably with each other.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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As the Deputy states, "pari passu" is the expression used by lawyers. That is the position.
The relevant EU directive on the reorganisation of financial institutions makes clear that in reorganising such institutions one cannot differentiate or create an inequality between creditors. There are serious European and constitutional obstacles in the context of using legislation to effect that purpose.
Brendan Howlin (Wexford, Labour)
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A number of Deputies are offering and I want to allow them to contribute. I call Deputy Morgan.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Deputy Bruton raised the matter of negotiation. Of course it is open to any financial institution to negotiate. I was not suggesting anything different. We must be careful with regard to how we use the word "negotiation". When Lehman Brothers collapsed, bondholders were invited to take part in negotiations. It is possible for senior bondholders to enter into discussions or negotiations with financial institutions in order to ascertain whether they wish to restructure their debt. However, I am anxious to avoid any suggestion that the Government and I are proposing that there can be coercion in respect of the holders of such instruments.
Arthur Morgan (Louth, Sinn Fein)
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Is the Minister aware that the terms of certain securities allow for the possibility of non-repayment in the event of a bank becoming insolvent? The Minister is nodding. In such circumstances, will he state whether the Attorney General addressed that issue in specific terms and whether he indicated that the relevant provision exists? I share Deputy Burton's view that it would be brilliant if the Minister shared the Attorney General's advice with us.
Reference is made to capitalism. I was involved in capitalism before I entered these Houses. I bought products, processed them and then sold them on. I was often caught out in respect of bad debts and neither the Minister nor his predecessors were there to support me. I was obliged to pick myself up and carry on.
Brendan Howlin (Wexford, Labour)
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Will the Deputy put a question to the Minister?
Arthur Morgan (Louth, Sinn Fein)
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Given that the Minister is aware that there is a provision relating to non-repayment of certain securities in the event of insolvency, will he inform us as to why it does not apply in this instance?
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I operated a one-man business for a substantial period of my existence so I am familiar with the factors to which the Deputy refers. Subordinated debt clearly ranks behind that relating to other creditors in an insolvency. That has always been recognised. The terms of these instruments often define their precise priority in the event of insolvency. That is the whole point. The Attorney General's advice is grounded in a recognition of that.
Apart altogether from the legal considerations, there are also policy considerations that come into play in respect of why the State should not and cannot countenance any suggestion of coercion or default with regard to senior debt.
Arthur Morgan (Louth, Sinn Fein)
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I am not suggestion that anyone be coerced.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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When one states that one is inviting somebody to enter into negotiations, the outcome depends on how big a gun one is wielding.
Arthur Morgan (Louth, Sinn Fein)
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It is not a case of wielding a gun, it is called business.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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That is the reality. If one invites somebody to enter into negotiations and one states that one will not pay, an element of coercion creeps into the equation.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I used the word "discussion" in substitution for that of "negotiation", which Deputy Burton used. It is clear that discussions take place and arrangements which may be of mutual advantage can be arrived at between financial institutions and senior bondholders. For example, a bondholder might-----
Brendan Howlin (Wexford, Labour)
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I am anxious to involve Deputy O'Donnell in the discussion.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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-----agree to a longer term by way of guaranteed deposit.
Kieran O'Donnell (Limerick East, Fine Gael)
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Does the Minister anticipate that the ELG scheme will be extended to 31 March 2011? Does he further anticipate that the recover element of Anglo Irish Bank will be involved in discussions with the senior bondholders in the context of a mutually beneficial arrangement with regard to the €4 billion in senior debt that was not guaranteed?
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Two distinct issues arise. First, in the context of the current guarantee scheme, which, as a result of the House's decision last evening, provides for a comprehensive guarantee for all deposits, I accept that the end date of 31 December is awkward. That view is shared by the Commission. However, we must monitor market developments. It is clearly important for the State that we establish an exit route from the guarantee system. Even if the exit has to begin at a very high level, we must demonstrate that we have embarked on our pathway of exit from the guarantee system. On the Deputy's question regarding discussions between bondholders in any particular institution and the management of that institution, such discussions can take place with a view to the mutual advantage of both parties.
Kieran O'Donnell (Limerick East, Fine Gael)
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That is a change in policy.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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It is not a change in policy.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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In respect of the charge of there being a change of policy, which the Deputy has repeated and which Deputy Burton made earlier-----
Brendan Howlin (Wexford, Labour)
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Perhaps the Minister might hold off answering on that until Deputy English puts the final question in respect of this matter.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I can deal with it now.
Brendan Howlin (Wexford, Labour)
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We are running out of time. I ask Deputy English to put his question.
Damien English (Meath West, Fine Gael)
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Should we make plans for New Year's Eve or should we hold off on doing so in case our presence is required in the House? Is the Minister in a position to outline the net loss or cost relating to the various bank guarantees? I accept that there are charges involved but there have been losses and gains. What is the net figure? What is the Department's estimate for the overall annual cost to the taxpayer of the various bank bailouts, including NAMA? How must extra per year are we going to be obliged to pay out? I accept that the cost with regard to opportunity is massive but I wish to concentrate on the direct costs involved. I am sure the Minister is in possession of some figures in this regard. I am of the view that some profits will accrue but in the main there will only be major losses.
Does the Minister stand over the statement that NAMA will wash its own face and make a profit? He indicated that today's events will bring closure in respect of the process of determining the level of State support required. That is not really the case. I imagine the markets are going to be monitoring matters to discover what will be the end result with regard to NAMA. The position in respect of Anglo Irish Bank has still not been really resolved. We have been informed that the cost is €29 billion with the possibility that a few billion more might be required. In his speech in the debate earlier today, the Minister said he wanted us to "have for the future a banking system that is firmly focused on meeting the needs of the real economy, sustainable employment creation and the savings, investment and credit needs of ordinary individuals, households and businesses". What does he mean by the future? When will that banking process provide credit to businesses? When the head of the Credit Review Office appeared before a committee last week, he agreed with me that even at this stage we should be considering a State recovery bank to get money to small businesses.
Brendan Howlin (Wexford, Labour)
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A number of questions are involved there.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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It is a very big number of questions. On the suggestion that there is a change of policy, there is no change of policy. It is always open to senior bondholders and bank management to discuss arrangements of mutual advantage.
Kieran O'Donnell (Limerick East, Fine Gael)
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That was all we were proposing.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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A suggestion of an invitation to negotiation under a threat is not in the same equation.
Kieran O'Donnell (Limerick East, Fine Gael)
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That was never the case.
Brendan Howlin (Wexford, Labour)
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Please allow the Minister to continue.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Deputy English asked about the cost of the guarantee. Taking the guarantee in isolation, clearly the State earned €1.025 billion in total fees under the two guarantee schemes to date.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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It is pure profit because there was not cost for the guarantee.
Joan Burton (Dublin West, Labour)
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The Minister is not a businessman if he calls that profit.
Brendan Howlin (Wexford, Labour)
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Allow the Minister to proceed.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am. On the night the legislation was introduced in the House Deputy Burton asked about the question of capital. I replied to her by saying that it was in the first instance a matter for the institutions themselves to capitalise them and that we would go in deep to ascertain what the problems were. We have seen what the problems were.
I will not have a chance to answer Deputy English's next question on capital cost. It is easy to answer institution by institution. Clearly the State has received €500 million for its investment in preference shares in Bank of Ireland already and also has a substantial shareholding in the institution. In AIB, the payment on foot of the preference shares was suspended and the State will have a substantial equity investment in the bank in the future. The costs for Anglo Irish Bank and the Irish Nationwide Building Society have been mentioned in public discussion today.
Brendan Howlin (Wexford, Labour)
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Allow the Minister to answer.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The core central case scenario identified by the regulator is the figure in respect of which the Government is capitalising the bank. On a cash basis, a return of capital to the Exchequer at the conclusion of the period of the existence of the institution and the heavy discounting of the subordinated debt should, if anything, reduce that figure further. It is difficult to put a figure on that.
Joan Burton (Dublin West, Labour)
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Some €45 billion to €50 billion.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The figure for the Irish Nationwide Building Society was put this morning. I appeal to Deputies to be careful on this subject for the following reason. I say this in an entirely non-partisan way. One of the defects in the Standard & Poor's evaluation was a complete refusal to acknowledge the existence of a national reserve in the form of the National Pensions Reserve Fund. Given that such an institution is almost unique in European countries, it was not acknowledged in the rating assessment. Hence if figures are beamed abroad that the total cost of the bank investment made by the State is, for example, the €50 billion Deputy Burton mentioned, in the international assessment no account is taken of the fact that part of it was not funded from borrowed money but was funded from existing State resources. We know the policy in that regard, established by legislation, that only companies listed on the stock exchange can be invested in. The account is capital investment for GGB purposes and does not go onto the general Government balance. Clearly the National Pensions Reserve Fund could not be used in the context of Anglo Irish Bank or the Irish Nationwide Building Society. I make that point because some international reports naturally and properly try to estimate the total cost but do not take into account that fact.
Damien English (Meath West, Fine Gael)
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Just to clarify my question-----
Brendan Howlin (Wexford, Labour)
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We are already 15 minutes over time on this question.
Damien English (Meath West, Fine Gael)
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If the Leas-Cheann Comhairle were here this morning, he would understand.
Brendan Howlin (Wexford, Labour)
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Please allow me to speak. Please take your seat.
Damien English (Meath West, Fine Gael)
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Can I clarify my question?
Brendan Howlin (Wexford, Labour)
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Deputies are often frustrated by answers and after ten or 15 years I am sure the Deputy will learn to live with it.
Brian Lenihan Jnr (Dublin West, Fianna Fail)
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NAMA will wash its face.
Damien English (Meath West, Fine Gael)
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That is not the question.
Brendan Howlin (Wexford, Labour)
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We are starting a debate again.
Damien English (Meath West, Fine Gael)
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I will give it in one sentence and the Minister can answer it then.
Brendan Howlin (Wexford, Labour)
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I need to allow Deputies who submitted other questions to have-----
Damien English (Meath West, Fine Gael)
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I will take ten seconds.
Brendan Howlin (Wexford, Labour)
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Then the Minister would need to answer on that, which would take more time. I call Question No. 7.
Damien English (Meath West, Fine Gael)
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That is ridiculous. We got a guarantee earlier on - just as on every other thing around here.
Joan Burton (Dublin West, Labour)
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The next two questions address it, if the Deputy let the Minister proceed.
Brendan Howlin (Wexford, Labour)
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If the Deputy read ahead, he would find a number of questions that he could-----
Brendan Howlin (Wexford, Labour)
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The Deputy asked five questions.
Brendan Howlin (Wexford, Labour)
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We are over time and the Deputy did not submit a question on this matter yet.
Damien English (Meath West, Fine Gael)
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No, because it did not happen today.
Brendan Howlin (Wexford, Labour)
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I now call Question No. 7 and the Chair will not be berated.
Damien English (Meath West, Fine Gael)
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Sorry, a Leas-Cheann Comhairle, but I got a guarantee earlier that the question would be answered.
Brendan Howlin (Wexford, Labour)
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The Deputy will now obey the Chair.
Damien English (Meath West, Fine Gael)
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Yes. I got a guarantee earlier that I could ask questions.
Brendan Howlin (Wexford, Labour)
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The Deputy shall have some respect for the institution of which he is a Member.