Martin Mansergh (Tipperary South, Fianna Fail)

This Bill is one part of a two stage package, the other being a complementary statutory instrument, which the Minister will make as soon as the Bill has been enacted, to amend and update the Irish deposit guarantee scheme, DGS, in line with the Government's announcement of 20 September last.

The main provisions of the Bill are to empower the Minister to make regulations prescribing the amount payable to an eligible depositor of a credit institution which fails and to empower the Minister to prescribe by regulation the contribution to be made by credit institutions to the Central Bank to fund the scheme.

The follow-on statutory instrument to be made by the Minister will increase the statutory limit for the DGS for banks and building societies from €20,000 to €100,000 per eligible depositor per institution; abolish the requirement for the depositor to bear the first 10% of his or her loss; extend the coverage of the scheme to credit union savers; reduce the minimum payout period within which duly verified depositor claims must be paid from three months, which can be extended by a further nine months in exceptional circumstances, to 20 working days and with the possibility of an extension of a further ten working days in exceptional circumstances; and make various other amendments, mainly of a technical nature, to update the 1995 scheme.

It is a very short Bill and almost half of its sections consist of provisions lifted from the existing 1995 statutory instrument, which is the basis for our deposit guarantee scheme. The provisions in question are being switched to primary legislation so as to give them a more secure legal basis. While the Bill itself is short, its importance lies in the fact that it gives the Minister the power to extend the provisions of our deposit protection arrangements to the 419 credit unions, which are currently outside the scope of that scheme and to give effect to reforms required by the EU, such as ensuring a quicker payout in the event of a credit institution failure.

I might briefly touch upon the background to deposit protection arrangements. The guaranteeing of deposits was pioneered in the US, with the creation of the Federal Deposit Insurance Corporation in 1934 in the aftermath of the depression. In Europe and other developed countries, despite some precedents dating from the 1930s, it was not until the 1970s that deposit protection schemes started to become a feature of the institutional framework. Ireland came relatively late to this type of facility. The Central Bank Act 1989 established a deposit protection scheme involving the Central Bank setting up 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 a new EU-wide scheme was established under the 1995 regulations, which I mentioned earlier.

The basic intention behind a deposit protection 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 thus 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 we have seen both here and in other countries over the past year. Thus, deposit protection schemes are seen as just one part of the financial safety net, but they can be helpful in protecting an otherwise solvent institution from failure.

In the wake of the turmoil that has affected the global financial system over the past two years or so, there is a general acceptance that deposit protection needs to be enhanced, and also that information, funding and immediacy of payment are important factors in ensuring the effectiveness of a deposit protection framework in supporting confidence in the banking system. No doubt, economists and financiers will say the soundness of the financial system rests upon effective regulation and supervision by independent supervisors, together with adequately high levels of institutional development covering corporate governance, transparency, accountability and deterrence. Whatever about having robust systems of financial regulation in place, developments over the past few years have also highlighted the risks to financial stability if deposit holders are not assured of timely access to their funds in the event of their bank failing.

The EU directive which gave rise to and still underpins our current deposit protection arrangements specifically prohibits state funding of such schemes on state aid considerations. The industry itself is required to bear the cost. In Ireland, the scheme is funded by a contribution by credit institutions of 0.2% of bank deposits. These contributions are maintained in a deposit protection account at the Central Bank and Financial Services Authority of Ireland, CBFSAI, and the current total in the fund stands at €670 million. Should a compensation event arise subsequent to the failure of a credit institution, and if the funds in the deposit protection account prove to be insufficient to meet the required payout costs in full, then the Exchequer would have to step in on a temporary basis to ensure prompt payment of depositors. However, it would then have to recover the cost concerned from the industry as quickly as possible.

All institutions authorised by the Financial Regulator to carry on banking activities here are required to become members of our deposit guarantee scheme and to hold a balance in the deposit protection account at the CBFSAI. There are currently about 50 such institutions which have been so authorised by the Financial Regulator. To sum up, what the Irish deposit protection scheme guarantees is to compensate eligible depositors up to a maximum of €100,000 per depositor, per institution. It covers deposits held in current accounts, demand deposit accounts and term deposit accounts with banks, building societies and, as of last September's Government announcement, credit unions also.

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, and which had begun to play on some people's fears regarding the security of their savings in Irish financial institutions. Second, given the passage of time since the guarantee limit was last changed almost 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 the Houses of the Oireachtas.

The decision to remove the co-insurance requirement, whereby the depositor carried 10% of the loss on his deposit, was a necessary amendment because of the public's heightened sensitivity to the broader savings protection debate and, in particular, 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.

As regards the extension of the scheme's coverage to credit union savers, this 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, or SPS, for credit unions. The SPS has to date 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 ILCU to carry through on 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 there was a genuine concern that any difference in treatment of depositors could potentially have been very damaging for any class of credit institution which was considered by the public at large to have had inferior deposit protection terms, thus explaining why the decision was made to apply this scheme to credit unions.

It is important to stress that this legislative package complements the more comprehensive guarantee made under the credit institutions financial support scheme in October 2008. That wider guarantee scheme provides a State guarantee for all deposits and certain liabilities of the guaranteed institutions to the extent these 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 still be progressed 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 did not previously benefit from statutory deposit protection.

Before I describe in detail the provisions of this Bill, I will explain why there has been some delay in bringing forward this legislation to confirm the reforms announced last September. The primary reason for that delay is that, just as we began to draft legislation to give effect to our own domestic reform, the EU Commission published its own proposal to amend the 1994 deposit guarantee schemes directive. The main elements of the Commission's reforms were, as with our own proposed changes at that time, an increase in the ceiling on pay outs 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 has to be made. As our deposit protection arrangements were based on the original 1994 EU directive, it made sense to cover our own domestic changes and the EU's reforms in the one legislative package.

The Government was of the view that its decision of 20 September 2008 on our own domestic changes to our deposit guarantee scheme provided a sufficient safeguard in the interim period. However, once the EU directive was finalised and published on 11 March 2009, steps were taken to finalise drafting of the necessary legislative amendments and to get the Bill published as quickly as possible.

I will now 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 with a credit institution. Its purpose is to give effect both to our own protection ceiling increase and to the recent EU amending directive on deposit guarantee schemes. It provides the power, however, to prescribe a higher level of coverage up until 31 December 2010 than that set out in the directive - the directive requires countries to increase coverage to €50,000 immediately, with a further increase to €100,000 from 31 December 2010.

Section 3 confirms the establishment of the deposit protection account in the CBFSAI, and was already catered for by Regulation 4 of the existing regulations. However, this is an example of a provision which is being incorporated into the Bill to ensure that it is safe from any legal challenge. 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 a 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 this time, having regard to the significant charges already being levied on credit institutions participating in the separate, wider bank guarantee scheme.

Sections 5 and 6 deal with annual recalculation of the amount of deposit and charges on the deposit protection account respectively. They are being transferred from the existing regulations in order to strengthen the scheme.

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, and the administration of the scheme itself 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 situation where, in the event of the insolvency of a credit institution and the funds available in the deposit protection account which funds the DOS 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 ECB 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. In turn, the remaining credit institutions would, over time, as the deposit protection account is replenished, repay the Exchequer.

Section 9 deals with offences and penalties and is currently set out in regulation 27 of SI 168 of 1995, but is being switched into primary legislation so as to give it greater legal certainty. The text of the provision is also being updated.

Section 10 is a standard provision about the laying of regulations before each House of the Oireachtas.

Section 11, Amendments to Central Bank Act 1942, signposts some technical changes listed in the Schedule to the Bill.

Section 12, as well as setting out the Short Title, 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 for Finance may appoint by order.

Clearly, it will be necessary, after the passage of this legislation and the follow-on statutory instrument, to have further discussions with the credit union movement for its admission into the scheme from an administrative perspective. Lest there be doubt in anybody's mind, credit union savers now are and will continue to be covered up to the €100,000 compensation limit which the Government announced last September.

Once again, I emphasise the importance of having this Bill enacted in sufficient time to enable the follow-on statutory instrument under the provisions of this legislation to be made. Those regulations, in turn, must be commenced in law by 30 June to meet the EU's deadline for the transposition of its amending directive. The co-operation of Senators across the floor in helping to meet this deadline is fully acknowledged and is greatly appreciated. I commend the Bill to the House.