John Perry (Sligo-North Leitrim, Fine Gael)

We are all aware of the seismic events in Europe and the uncertainty in the markets which the ongoing developments are causing. This makes it all the more necessary that the motion is recognised for what it is: a sensible step which will play its part in bringing certainty to a vital element in the economic and financial measures being taken as part of our economic adjustment programme. I am referring in particular to the actions that have been and continue to be taken in restoring our domestic banking system to health.

The Government announcement on 31 March last of its plans for the recapitalisation and re-organisation of the banking sector had a number of key elements. These were: the provision of additional capital to ensure adequate capitalisation under a rigorous stress scenario established by the Central Bank; the creation of two universal pillar banks in AIB and Bank of Ireland, with consequential mergers and restructuring; a significant deleveraging involving amortisation and sale of non-core bank assets totalling circa €70 billion; the provision of credit to SMEs and other important sectors; and a focus on addressing the banks' funding concerns through reaching a more prudent loan-to-deposit ratio, especially through first maintaining and then rebuilding deposit levels. The eligible liabilities guarantee, ELG, scheme remains of great importance in helping to achieve this latter objective.

Therefore, 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, 2011. The ELG scheme is one which has to be renewed, and indeed reviewed, on a regular basis. This is because it is not intended to be in place indefinitely but rather is of a short-term nature to deal with what we hope will be a short-term problem. I am speaking of the fact that the scheme is a backstop measure designed to provide absolute certainty to depositors and holders of unsecured bank debt in the credit institutions participating in the scheme that their money is secure. The institutions that originally joined the scheme, and are defined as participating institutions, are AIB, Bank of Ireland, Irish Life and Permanent and the Irish Bank Resolution Corporation, formerly Anglo Irish Bank and the Irish Nationwide Building Society, together with their subsidiaries, including EBS. Participating institutions benefit from a Government guarantee which covers deposits taken or debt issued by them, provided these liabilities qualify as eligible. This guarantee remains extremely important in providing confidence and security to the holders of eligible bank debt.

The scheme is a time-limited one which requires that any proposal to extend it be brought before the Houses of the Oireachtas for approval. The relevant legislation which governs this is Section 6 of the Credit Institutions (Financial Support) Act 2008, the CIFS Act, as amended. In November last year the scheme was extended in national law for a year with the result that, at present and without any prolongation, the scheme would expire at the end of this month if no action were taken. For this reason, the scheme needs to be amended in two respects.

First, amendment No. 1 will amend paragraph 3.1(b) of the Schedule to the scheme which sets out the period within which institutions may apply to join the scheme. The amendment will extend this period of application so that the current date of 31 December 2011 will be replaced by 31 December 2012, subject to the continuing approval of the European Commission. The amendment reflects the proposed extension in law of the scheme itself to 31 December 2012.

Amendment No. 2 will amend paragraph 11.1(c)(ii) of the Schedule to the scheme, which deals with the period during which eligible liabilities must be incurred if they are to be considered eligible under the scheme. The amendment will replace the current end date of 31 December 2011 with 31 December 2012, subject to the continuing approval of the European Commission. Again, this amendment reflects the proposed extension of the scheme in law to 31 December 2012.

The condition, in both amendments, of the approval of the Commission is necessary because all banking guarantee schemes are subject to EU state aid rules and these provide that such schemes be approved for a maximum period of six months in advance only. Therefore, in accordance with established practice, the ELG scheme will remain subject to six-monthly Commission approval, notwithstanding the proposed one-year extension in national law. This approval has already been sought from the Commission and is expected to be formally given within a matter of days. When given, this will mean explicit EU approval for the scheme until 30 June 2012. It is also necessary to seek the views of the European Central Bank in these matters and it has already given a favourable opinion on the proposed extension of the scheme, stating: "Taking into account financial stability considerations, a further extension of the ELG scheme would be beneficial." The authorities will review the requirement for the continuation of the ELG scheme in consultation with the Commission and the ECB in advance of 30 June 2012.

I shall now move on to details of the scheme itself and the reasons for its proposed continuation. The scheme, which commenced in December 2009, has been extended twice already from its original end-date of 29 September 2010, to the end of that year and, subsequently, from that date to 31 December of this year. It succeeded the CIFS scheme which had been introduced following on the announcement by the then Government of a blanket guarantee for all bank liabilities in September 2008. The ELG scheme is narrower in scope than its predecessor and does not guarantee asset-covered securities or dated subordinated debt. The scheme covers eligible liabilities as defined in paragraph 11 of the Schedule to the scheme. These 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 EU Commission.

As regards deposits, it needs to be emphasised that because retail deposits of up to €100,000 are already guaranteed under another scheme - the deposit guarantee scheme - the ELG scheme only guarantees sums above this figure in such cases. Otherwise, all deposits, retail or corporate, in participating institutions are normally guaranteed under the ELG scheme. The participating institutions I have referred to are those credit institutions which joined the ELG scheme after its commencement. These institutions may take deposits and issue debt of the type I have described as eligible liabilities, with a maximum maturity date of five years, provided the liabilities have been incurred during what is called the issuance period. This runs from the date the institutions joined the scheme to the end-date of the scheme, currently 31 December 2011.

There are approximately €100 billion in liabilities currently guaranteed under the scheme. This figure is significantly reduced in comparison with that covered by the CIFS scheme at its inception, €375 billion, and that subsequently covered by both schemes, €256 billion, just before the expiry of the CIFS scheme. At the time that the new ELG scheme began to operate alone in the second half of 2010, the liabilities covered had further reduced to €147 billion. Much of the reduction from the €256 billion figure to €147 billion can be explained by the fact that certain liabilities, namely senior unsecured debt and deposits that existed under the CIFS scheme were not renewed. In addition, asset covered securities and dated subordinated debt which had been covered under the CIFS scheme were excluded from eligibility under the ELG scheme. Another factor, especially in the second half of the year and which accounted for a further fall in liabilities guaranteed to €113 billion by December 2010, was that the banking system lost access to market funding and that corporate deposit outflows accelerated against a background of an unsustainable rise in the cost of Government debt and negative market sentiment about our economic situation. The position since around June of this year is relatively unchanged on the whole, however, when account is taken of NTMA deposits covered by the ELG scheme that were withdrawn from inclusion in the scheme and converted to capital in the banks.

Because of the current weak state of the market in terms of funding for the Irish banks, it is vital that we act in such a way so as to ensure that confidence in the banking system is maintained, especially in the critically important retail and corporate deposit sector. These deposits account for approximately 60% of the eligible liabilities of the participating institutions in the scheme and their importance cannot be underestimated. Present market conditions do not allow alternative sources of funds, such as debt securities, to be accessed in any significant quantity by the institutions. In these circumstances, the Governor of the Central Bank is of the strong view that an extension of the ELG scheme is essential to help maintain and promote confidence over the short term and that it would continue to complement the other initiatives that have been taken to stabilise the domestic banking sector. The bank therefore considers that the extension of the scheme for one year in national law is reasonable, while acknowledging that approval of the scheme beyond 30 June 2012 would be subject to EU Commission approval. The bank has pointed out also that one of the working assumptions made in the context of the prudential capital assessment review last March is that the guarantee would remain in place in 2012, again of course, subject to EU Commission approval.

The operator of the scheme, the NTMA, has also been consulted on this matter and is of a similar view. It believes that the continuation of the scheme is of paramount importance if the institutions are to be successful in normalising their funding profile and in reducing their reliance on Central Bank funding. In return for the guarantee provided by the Minister for Finance in respect of liabilities deemed eligible under the scheme, the participating institutions pay fees to the Exchequer. The fee structure is set down under recommendations which apply to all EU banking guarantee schemes, which are based on recommendations, dated 20 October 2008 of the governing council of the European Central Bank, on government guarantees for bank debt and on subsequent recommendations from the EU Commission set out in a DG competition staff working paper, dated 30 April 2010, which apply state aid rules to government guarantee schemes concerning bank debt issued after 30 June 2010.

The effect of the Commission recommendations was a gradual increase in fees payable by the institutions over the remainder of 2010. The level of fee applied was dependent on the maturity of the debt concerned and the credit rating of the institutions involved. The objective was to incentivise a reduction in dependence on short-term funding, especially that of less than three months' duration. At present, the fee structure applicable to eligible liabilities is as follows: for debt or deposits with a maturity less than 90 days, the guarantee fee is 160 basis points, excluding retail deposits, which attract a fee of 90 basis points, while all debt and deposits with a maturity of between 90 days and one year attract a fee of 90 basis points also. For longer-maturity debt, the fee is between 126.5 and 134.5 basis points.

As a result of the revised pricing structure now applicable, the level of fees earned by the Exchequer has increased in spite of a decrease in the amount of the liabilities guaranteed by the scheme. Participating institutions now pay an average of 100 basis points compared with the 50 basis points for short-term debt that was charged at the beginning of the scheme. The value of fees paid to the Exchequer to date is €1.8 billion. In excess of half of this amount, or €947 million, has been incurred in the first three quarters of 2011 compared with €855 million paid for all of 2010. It is understood that a new Commission fee structure will be in place from 1 January 2012 which will leave fees unaltered for short-term debt but may result in a small fee decrease for debt whose maturity is greater than one year.

In regard to the amending draft scheme, I have already detailed the two specific amendments proposed. In reality, they are, in themselves, minor amendments since the objective is to change the operative dates involved and thus extend the life of the scheme rather than make any substantive amendments to the provisions of the scheme as a whole.

I should mention, however, 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. 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(3B) of the Credit Institutions (Financial Support) Act 2008, as amended. These orders do not have to be placed before the House as they are consequential to the proposed amendment to the scheme being passed in the first instance.

The first order specifies the issuance period during which financial support, that is, the Government guarantee, may continue to be given, in accordance with section 6(3B) of the Credit Institutions (Financial Support) Act 2008, in respect of liabilities incurred under the ELG scheme. Effectively, this allows the current end date of the scheme of 31 December 2011 to be extended to 30 June 2012 for the purposes of allowing the guarantee to continue to apply to new eligible liabilities incurred. The new issuance period will, therefore, run from 1 January 2012 to 30 June 2012, that is, the period approved by the Commission under state aid rules. It replaces the existing issuance period which runs from 1 July to 31 December 2011.

The second order sets down the end-date for financial support in accordance with section 6(3B) of the Credit Institutions (Financial Support) Act 2008 which allows the Minister for Finance to specify the date beyond which such support cannot be given. This date will now be extended to 30 June 2017 instead of the current date of 31 December 2016. The objective is to guarantee those liabilities under the ELG scheme which may have a maturity of up to five years and which would, therefore, have to be covered even if the scheme itself were to expire on 30 June 2012. For example, a depositor who made a fixed-term five-year deposit with an institution on 31 May 2012 would enjoy a guarantee of the sum involved up until 31 May 2017.

Before concluding, and to signal a positive note, I wish to mention a recent development relating to the scheme, of which Senators may be aware. There have been some recent indications that there may be a nascent demand from some quarters for the placement of unguaranteed deposits with the participating institutions. This manifested itself formally in written requests from these institutions to the Minister for Finance, made in accordance with paragraph 13 of the schedule to the ELG scheme, to be allowed to offer unguaranteed deposits to certain corporate customers. The Minister responded positively to this request by publishing the necessary technical notice under paragraph 13 on 16 November last which allowed such offers to be made subject to certain conditions. These make it quite clear, inter alia, that unguaranteed deposits must be clearly described as such in the relevant terms and conditions that apply to them. Moreover, since the unguaranteed deposits are aimed at corporate and institutional investors only, there is no risk of the normal retail investor being confused.

I would suggest the development I have described and initiated by the institutions is a positive sign which is also a necessary one if a start to the removal of the guarantee is to be made. However, one must wait to see if this new capability on the part of the institutions can be translated into a significant contribution to a growth in unguaranteed corporate deposits.

This motion deserves Senators' approval in order to ensure that an essential cornerstone of the support for the domestic banking system remains intact. It would be better if there were no need to extend the ELG scheme but unfortunately, we must deal with the situation as it is and that situation demands that the essential support and security provided by the guarantee for both banks and customers, respectively, be continued.

I assure Senators, however, that the need for the bank guarantee will be reviewed. In this regard, the requirement to obtain formal EU state aid approval every six months will ensure that the ELG scheme will be extended again only if necessary and only after a full consultation has taken place with the authorities concerned. I commend this scheme to the House.