Martin Mansergh (Tipperary South, Fianna Fail)

This is a motion for a resolution to approve the draft statutory instrument entitled Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2010.

I emphasise to the House that this is not a new scheme. Rather, this draft statutory instrument amends the bank guarantee scheme introduced in December 2009, which is known as the eligible liabilities guarantee, ELG, scheme. The ELG scheme is different from the original bank guarantee scheme, the credit institutions financial support, CIFS, scheme, which was introduced in 2008 in order to maintain financial stability and which provided for a blanket guarantee of the deposits and liabilities of Irish institutions by the Government.

The ELG scheme is a more targeted and focused scheme than the CIFS scheme. It is more in line with the mainstream European model of bank guarantees and no longer covers dated subordinated debt or asset covered liabilities. Considerably higher fees are charged for the benefit of a State guarantee of participating institutions' liabilities. According to the latest data available to my Department, at the end of June, bank liabilities covered under the ELG scheme stood at €153 billion and the remaining liabilities covered under CIFS at the end of June were €103 billion.

The serious challenges faced by the Irish banking system and being addressed by this Government have shown the need for the State to underpin the funding position of our domestic institutions through guarantee mechanisms. The introduction of the 2008 CIFS guarantee scheme succeeded in stabilising a challenging liquidity situation for the Irish banks against a background of severe international financial turbulence which gave rise to a need for emergency interventions across the developed world. More importantly, it provided a necessary and vital support to the banking system as other measures to repair and renew the system were introduced. Measures such as NAMA, recapitalisation, stress-testing of the banks' ability to meet emerging international capital requirements by the Financial Regulator, reform of the institutional framework for financial services, and ongoing engagement with the European Commission on restructuring plans for individual institutions have been undertaken with the support provided to the banking system by the guarantee. The purpose of this has been to ensure that this country has a working banking system to serve the economy as it moves towards recovery.

The Government remains committed to planning for the gradual phasing out of the bank guarantee, as evidenced by the introduction of the ELG scheme late last year and the expiry of the broader CIFS scheme at 12 midnight tonight. However, in order to continue to support the stability of the banking system, this phasing-out process must be measured, incremental and responsible.

The ELG scheme introduced last December applies to newly issued or rolled-over debt or deposits. It enabled the banks to issue longer-term debt in an effort to improve their liquidity profile and, in return for continued taxpayer support, it imposed a higher fee structure on the institutions. I emphasise that, in contrast to some commentary about the guarantees provided by the State, the banks have contributed over €1 billion in fees in respect of the guarantee since September 2008. In order to provide an incentive for the banks to increase the term of their funding and issue un-guaranteed debt in line with European Commission guidelines in due course, today's proposed extension to the ELG will result in a further increase in fees for the institutions involved.

In response to the current crisis similar actions have been taken by other member states in the European Union. Countries such as Austria, Denmark, Germany, Poland, Spain and Sweden have all recently extended their guarantee schemes to the end of December. The European Commission recently estimated that crisis measures brought forward by member states had been approved to an overall maximum volume of €4.1 trillion, of which guarantees accounted for over 75%.

I now turn to the draft statutory instrument before the House. It proposes to amend the eligible liabilities guarantee, ELG, scheme. Under the Credit Institutions (Financial Support) Act 2008, the approval of both Houses is required for such an amendment. The scheme allows the banks and building societies which joined to accept all deposits and issue short-term and long-term debt on either a guaranteed or unguaranteed basis. Institutions are able to issue debt and take deposits guaranteed under the scheme with a maturity of up to five years. However, these liabilities must be incurred within a limited issuance period that currently runs to midnight tonight, 29 September. The draft amending statutory instrument before the House proposes to extend the issuance period under the ELG scheme in order that it will now run from tomorrow, 30 September, to 31 December. While the opportunity has also been taken to rationalise and update the drafting of some provisions of the scheme, the only substantive amendment made by the statutory instrument is the extension of the issuance period to 31 December.

Senators may recall that EU state aid approval was granted on 28 June for the extension of the issuance period for most liabilities under the ELG scheme. At the time the Minister for Finance noted that he would continue to monitor market developments in the coming months. Given the challenging market conditions in recent months for banks internationally and following advice from the Governor of the Central Bank, the Financial Regulator and the NTMA, the Minister sought a similar extension to 31 December of the issuance window for the remaining set of liabilities under the scheme. The extension for these short-term liabilities was approved by the European Commission on Tuesday, 21 September.

The effect of these state aid approvals is that the end date of the issuance period is approved for 31 December for all eligible liabilities under the ELG scheme. The European Central Bank has also endorsed the extension of the scheme, the full extension of which will help to underpin financial stability and should assist the institutions to continue to access funding which should, in turn, support lending to the economy. The statutory instrument which I am presenting to the House gives legal effect to this time extension of the guarantee.

I reiterate the key terms of the ELG scheme and provide further detail on the terms of the amending draft statutory instrument. Following the commencement of the scheme on 9 December 2009, the six participating institutions and their subsidiaries joined the scheme on various dates in January and February this year. Any new debt or deposits incurred or rolled over after the date the institution joined the scheme are guaranteed under the scheme. The institutions which joined and are thus "participating institutions" under the scheme are AIB, Anglo Irish Bank, Bank of Ireland, the EBS Building Society, Irish Life & Permanent plc and the Irish Nationwide Building Society. Their relevant subsidiaries also joined and a complete list is available on the Department of Finance's website.

The ELG scheme guarantees specific issuances of debt or deposits of up to five years incurred during the issuance period. Item 9 of the draft amending statutory instrument proposes to extend the issuance window end-date from 29 September to 31 December, by substituting a new paragraph 11.1 (c). The draft amending statutory instrument inserts the new issuance period end-date of 31 December in a number of places. For example, item 7 - paragraph 3.1 of the Schedule to the scheme - provides that new eligible institutions have until 31 December to join the scheme, if they have not already done so. Under item 18 of the draft amending statutory instrument, the maximum end-date for the guarantee is now 31 December 2015 in respect of five-year debt issued before the end of the issuance period. The draft amending statutory instrument also updates the drafting of the scheme. The term "commencement date" has been replaced with the actual commencement date of 9 December 2009, wherever it occurred for the sake of clarity.

Liabilities that may be guaranteed under the ELG scheme or "eligible liabilities" are 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 for Finance and approved by the European Commission. I remind the House that the scheme provided that newly issued dated subordinated debt and asset covered securities were not guaranteed from 9 December 2009. This means that from tonight there will be no continuation of the guarantee for dated subordinated debt or asset covered securities. There is no change in the draft amending statutory instrument to the range of eligible liabilities. Item 9 of the draft amending statutory instrument simply rationalises the wording of the original scheme.

With regard to deposits, in particular, all on-demand deposits over €100,000 are guaranteed under the proposed amendments to the ELG scheme to 31 December. Furthermore, term deposits in excess of €100,000 can be guaranteed for a fixed term of up to five years, as long as the deposit is made before 31 December and the institution is a participating institution under the scheme on the date the deposit is made. The scheme provides that, if a deposit of up to €100,000 is covered under the EC deposit guarantee scheme, it is not also covered under the ELG scheme. The ELG scheme covers the excess over €100,000 or any deposit that does not qualify for protection under the 1995 deposit guarantee scheme. Furthermore, for the avoidance of doubt, the existing separate coverage of deposits up to €100,000 under the EC deposit guarantee scheme regulations is not subject to any end-date and continues indefinitely.

The participating institution must pay a significant fee to the Exchequer for the benefit of this guarantee. This fee is in line with and in certain circumstances surpasses the fees applicable generally for guarantee schemes approved by the European Commission. While the original fees associated with the ELG scheme were based on the pricing recommendations published by the European Central Bank in respect of guarantees of this nature and were consistent with the fees applicable to similar guarantees provided by other EU member states for their credit institutions, the fees that institutions are required to pay under the scheme increased for guaranteed liabilities incurred from 1 July, in line with the pricing structure outlined in the Commission's staff working document on the application of state aid rules to government guarantee schemes covering bank debt. The additional pricing, in line with the Commission guidelines, ranges between 20 and 40 basis points, depending on the rating of the institutions concerned. The pricing is set out in the rules for the scheme at Annex 7. The July increase was in addition to the ECB pricing recommendations which provide 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 is based on the median value of the banks' five-year CDS spreads for a sample period, plus 50 basis points.

In addition to this significant cost for participating institutions, additional pricing will apply from 30 September for very short-term debt and short-term corporate and interbank deposits, that is, debt and deposits of 90 days or less, excluding retail deposits. The fees on these liabilities will be increased as follows: 20 basis points for liabilities incurred from 30 September; a further 20 basis points for liabilities incurred from 1 Novemberd, and a further 30 basis points for liabilities incurred from 1 December. The real effect of these changes to the pricing regime is that the average fee now paid by institutions under the ELG scheme is approximately ten times higher than the average fee paid by institutions under the original bank guarantee scheme when it was introduced in September 2008. The position at the end of August was that €730 million had been collected from the institutions in respect of fees for the CIFS scheme, while €296 million was collected in respect of fees from the ELG scheme. Thus, in less than two years, the Government has already reached the €1 billion target for guarantee fees. The yield to the Exchequer in future will depend on a range of factors such as the maturity profile of the liabilities issued by the institutions and the extent to which institutions choose to make unguaranteed issuances, all of which depend on market conditions at a given time.

The ELG scheme provides for the same reporting and information requirements and restrictions on commercial conduct which are set out under the CIFS scheme, which 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. The operation of the ELG scheme continues to be delegated to the NTMA, given its market expertise.

In summary, the extension of the issuance period of the ELG scheme to 31 December 2010 will continue to allow institutions to access funding, both short-term and longer-term debt, with the objective of helping to maintain the overall stability of the banking sector. It complements the broad Government strategy to restore fully the banking system and maximise its contribution to overall economic recovery. The relevant State authorities will continue to monitor the funding situation of Irish banks and the requirement for the guarantee going forward. We will revisit the requirement for the ELG scheme in consultation with the European Commission and the ECB, in advance of the current deadline of 31 December, and judge the need for an extension on the basis of market conditions at that time and the specific funding position of the Irish institutions, having full regard to financial stability matters generally.

I commend this scheme to the House.