Martin Mansergh (Tipperary South, Fianna Fail)

This motion deals with a resolution to approve the draft statutory instrument entitled the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009. The statutory instrument sets out the new bank guarantee scheme entitled the eligible liabilities guarantee, ELG, scheme. Members will recall that the enabling primary legislation was passed by the Oireachtas in June this year and that the Oireachtas would be asked to approve the terms of the guarantee in due course. I am pleased that the necessary EU state aid approval for the draft guarantee scheme was obtained on 20 November. The current guarantee, the CIFS scheme, is due to expire in September 2010. This draft scheme allows the banks to issue longer term debt in line with the EU model, which will continue to underpin financial stability.

An outline of the main elements of the revised guarantee scheme was announced by the Minister for Finance on 16 September and published on the Department's website. This is not a blanket extension of the current two-year CIFS guarantee. This new scheme will be more targeted than the CIFS scheme and will allow institutions to access unguaranteed funding. Institutions will be able to issue liabilities and take deposits with a maturity of up to five years but these liabilities must be issued, and deposits taken, within a limited time period that ends on 29 September 2010, the same end date as for the current scheme. This new guarantee will maintain the continued stability of the banking system in Ireland and enable the institutions to support lending to the economy. In recent weeks, some Irish institutions have successfully issued partially guaranteed term debt. To support this positive development, a key feature of this scheme is that it allows the institutions to access unguaranteed funding, which will help reduce their reliance on the guarantee over time, in line with improving market conditions. The revised guarantee scheme is the first step in the exit strategy from the blanket guarantee offered in September 2008.

Furthermore, institutions will be required to pay a higher fee to the State in respect of liabilities guaranteed under the ELG scheme, in line with European Central Bank pricing recommendations and EU state aid requirements. However, the stability provided by the guarantee remains important and, therefore, the guarantee will remain extensive, and the blanket guarantee for deposits will be retained up to 29 September 2010, subject to six-monthly review and approval by the European Commission. Access to longer-term funding is in line with the mainstream approach in the EU. The longer maturity limit for guaranteed debt issuance is consistent with the position under guarantee schemes that have been introduced by a number of other EU member states such as Germany, Denmark and the UK.

This ELG scheme is more targeted in approach and provides that newly issued dated subordinated debt and asset covered securities will not be guaranteed going forward. The new scheme confirms that existing liabilities, including dated subordinated debt and asset covered securities guaranteed under the CIFS scheme, will remain guaranteed under that scheme until the maturity of the debt or 29 September 2010, whichever is the earliest. This continued guarantee of existing liabilities is in accordance with the general nature of guarantees.

I would like to outline the key terms of the ELG scheme. It provides for a guarantee for institutions over certain liabilities with maturities of up to five years, which are incurred up to 29 September 2010. The guarantee is being provided at a charge to the participating institutions on specific terms and conditions in order that the Exchequer's interest is safeguarded. Eligible liabilities under the ELG scheme shall be any of the following: deposits; senior unsecured certificates of deposit; senior unsecured commercial paper; other senior unsecured bonds and notes, and other forms of senior unsecured debt specified by the Minister; term deposits with a term of up to five years will be covered by the ELG scheme, provided they are incurred between the period from the commencement date of the scheme up to and including 29 September 2010, subject to the approval of the EU Commission at six-monthly intervals; demand deposits will remain guaranteed until 29 September 2010, subject to the approval of the EU Commission at six-monthly intervals; and the first such approved six-monthly interval runs from 1 December 2009 to 1 June 2010. The €100,000 limit under the existing deposit protection scheme still applies to all deposits, including demand deposits. This scheme is not subject to review and will continue beyond 29 September 2010. Once an institution joins the ELG scheme, it will no longer have the facility to avail of the guarantee under the CIFS scheme for the new liabilities.

Systemically important and solvent credit institutions, including Irish subsidiaries of credit institutions authorised in another member state, that have been specified by the Minister as requiring financial support are eligible to join the ELG scheme. All current covered institutions under the CIFS scheme will be eligible to join the new scheme. Covered institutions under the CIFS scheme have a 60-day window from the commencement date to apply to join the scheme, while all others can apply up to 29 September 2010. To be accepted, the institution must accept the terms of the scheme by way of an eligible liabilities guarantee scheme agreement and be certified in accordance with the rules as being a participating institution.

A quarterly fee is payable to the Exchequer in respect of the guaranteed liabilities under the ELG scheme. The fees are based on the pricing recommendations published by the ECB in respect of guarantees of this nature and are consistent with the fees applicable for similar guarantees provided by other EU states in respect of their credit institutions. The ECB pricing recommendations provides that the fee for debt and deposits with a maturity of one year or less will be 50 basis points per annum. The corresponding fee for maturities exceeding one year will be based on the median value of the banks' five-year CDS spreads for a sample period, plus 50 basis points.

The draft ELG scheme provides for the same reporting and information requirements and restrictions on commercial conduct which are set out under the CIFS scheme. Paragraph 22 of the ELG scheme provides the Minister with the power to issue such directions to an institution that are necessary to ensure that the objectives of the Act and the scheme are being met. Directions may provide for restrictions on conduct, transparency and reporting requirements applicable under paragraphs 24 to 52 of the CIFS scheme. These restrictions are important in preventing any abuse of the scheme. Institutions under the ELG scheme are required to submit any reports or information which the Minister, the regulatory authority or the scheme operator believe are necessary to monitor compliance of the institutions with the scheme. In addition to the power to issue directions, the scheme contains enforcement provisions. One such provision is that the Minister can increase the fee payable by an institution in material breach of its obligations under the scheme. The Minister plans to delegate the operation of the scheme to the NTMA. The NTMA is, in the view of the Minister, best placed to perform the operational role of scheme operator, given its market expertise.

The scheme will allow institutions to access longer term debt and, thus, underpin the continued financial stability of the banking system. It will also support banks in Ireland in meeting the credit needs of the economy, consumers and business and it will help underpin economic recovery. The scheme has been designed to move Ireland's guarantee into line with the mainstream approach in the EU, including the application of ECB recommended pricing. The guarantee allows for the issue of unguaranteed funding, thus allowing a move towards an exit strategy from the guarantee.

The consequences of not introducing the eligible liabilities guarantee scheme are important. The guarantee will allow banks accessing longer term funding, beyond September 2010. This is essential to establishing a balanced funding profile for the institutions. Not introducing the eligible liabilities guarantee scheme would postpone the restoration of normal commercial unguaranteed funding lines for the banks. It would have an impact on the steps taken to put in place a credible exit strategy for State guarantees provided to the banks. Inevitably, international markets would read uncertainty into the situation and this would undermine confidence in the sector. Having succeeded in stabilising the banking sector, deciding not to provide for longer term issuance, which is available in a host of other EU member states, would not be consistent with the maintenance of financial stability and progress towards normalisation of financial market conditions in Ireland. These are the consequences of successful opposition to this motion. I commend the scheme to the House.