Brian Hayes (Dublin South West, Fine Gael) | Oireachtas source

I thank Senators for the opportunity to come before the House. The motion before us was passed earlier by Dáil Éireann and I believe Senators will also see the justification for approving the scheme the Government has placed before the House. What is proposed is a practical step whereby the Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme will be extended into 2013, although it is intended to wind down the scheme as soon as is practicable. While the details are still being worked out and finalised, the scheme must be kept in place to ensure the transition is smooth.

Events in the European Union continue to be of concern to the Government. Notwithstanding that the agreement reached this week with respect to Greece has been helpful, macro-financial conditions are not as settled as we would like them to be. Nevertheless, they have improved to the point where the argument for the necessity of the eligible liabilities guarantee is no longer compelling.

We consider the next phase in the normalisation of the banking industry to be the prudent disengagement from the eligible liabilities guarantee, ELG, scheme, commencing in the first quarter of next year if possible, subject to conditions remaining favourable.

In these circumstances, it is important that this motion be recognised for what it is, namely, a sensible step that, notwithstanding the fact that it provides the legal basis for the continuation of the ELG scheme, will facilitate bringing closure to an unwelcome episode in our financial history and constitute another element in restoring our domestic banking system to full health.

Therefore, I will turn to the motion before the House to approve the draft statutory instrument, entitled the Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2012. I shall give some details of the scheme and the reasons for its proposed continuation. The guarantee in its original form was known as the Credit Institutions (Financial Support) Scheme, or CIFS, and was introduced by the then Government on 20 October 2008 following on from the declaration of the blanket guarantee on 29 September. Subsequently, a successor scheme - the ELG - was introduced on 9 November 2009 and has since been extended a number of times from its original conclusion on 29 September 2010, most recently to the end of the current year. 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 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.

Regarding deposits, it needs to be emphasised that, as qualifying retail deposits of up to ¤100,000 are already guaranteed under another scheme, namely, the deposit guarantee scheme, DGS, the ELG scheme only guarantees sums above this figure in such cases. Other deposits, mainly corporate, in participating institutions are normally guaranteed exclusively under the ELG scheme. The distinction between the two schemes is important because, for most people classified as falling within the customer base of the retail banking sector, the DGS is the only scheme of relevance. This is due to the fact that it covers qualifying bank, building society and credit union accounts of up to ¤100,000, an amount that is well in excess of the average cash holdings of the majority of people. Furthermore, this coverage is per institution. The potential amount of an individual's money that may be guaranteed in this fashion is only constrained by the number of qualifying credit institutions operating in the State. This serves to illustrate the rather limited nature of the ELG scheme as it applies to most individuals and the importance of not exaggerating the significance of its role.

As a banking guarantee scheme, the ELG scheme falls within the scope of state aid and is subject to six-monthly approvals by the European Commission. Since its inception, it has been reviewed on a regular basis and, if appropriate, renewed for six months at a time as befits what was only ever intended as a temporary measure, albeit one designed over the years to help provide certainty of security to a particular category of depositors and holders of unsecured bank debt in the participating credit institutions.

Some 16 institutions are participating in the ELG scheme, the main ones being AIB, Bank of Ireland, Permanent TSB and the Irish Bank Resolution Corporation, IBRC, formerly Anglo Irish Bank. Participating institutions benefit from the Government guarantee provided under the scheme, which covers deposits taken or debt issued by them, provided those liabilities qualify as eligible. The scheme is a time-limited one and requires that any proposal to extend it in law be brought before the Houses of the Oireachtas for approval. The relevant legislation governing this matter is section 6 of the Credit Institutions (Financial Support) Act 2008, as amended.

Last December, the scheme was extended in national law for one year to run from 1 January 2012, with the result that the scheme would expire at the end of next month were no further action taken. If the scheme is to be prolonged, it needs to be amended in two respects to effect a date change in each case. In addition, this opportunity is being taken to make a technical amendment to the scheme to update a cross-reference made in the ELG scheme to the CIFS scheme in 2008.

Beginning with the latter, the three amendments set out in the draft statutory instrument are as follows. The first will amend Article 3 of the scheme so that the reference there to section 6(3B) is replaced by section 6(4A) following on from changes to the CIFS Act made by the Credit Institutions (Stabilisation) Act 2010. The reference in question is to the provision in the CIFS Act concerning the legal basis for the making of a financial support period order.

The second will amend paragraph 3.1(b) of the Schedule to the scheme, which sets out the period within which institutions may apply to join it. The amendment will extend this period of application so that the current date of 31 December 2012 will be replaced by 31 December 2013, subject to the continuing approval of the European Commission.

The third will amend paragraph 11.1(c)(ii) of the Schedule to the scheme, which deals with the period during which eligible liabilities will be incurred if they are to be considered eligible under the scheme. This amendment would replace the current end date of 31 December 2012 with 31 December 2013, subject to the continuing approval of the European Commission.

The condition relating to the second and third amendments of the approval of the European Commission is necessary because all banking guarantee schemes are subject to EU state aid rules, which provide that such schemes must 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. Approval from the Commission has already been sought and is expected to be formally given shortly. When given, this will mean explicit EU approval for the scheme until 30 June 2013. It is also necessary to seek the opinion of the European Central Bank in these matters. That opinion is awaited.

The participating institutions to which I referred are those credit institutions that joined the ELG scheme after its commencement. They may take deposits and issue debt of the type 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 that the institutions joined the scheme to the scheme's end date, currently 31 December 2012.

In comparison with the liabilities covered by the CIFS scheme at its inception, which totalled ¤375 billion, liabilities outstanding at the date that the new ELG scheme began to operate alone in the second half of 2010 had reduced to ¤147 billion. At the beginning of 2012, this figure had decreased further to ¤102 billion and has since fallen again to ¤78 billion. When one considers the historical import of the guarantee, one can see the incremental progress that has been made in shrinking the umbilical cord - the State guarantee - since the height of the crisis.

One can see the type of sustained progress that has been made in trying to breathe life back into the Irish banking sector. Among the factors accounting for this fall during 2012 are the following. First, in the normal course, bank debt held by the banks has matured and has not been replaced by new issues, which is good news. Second, as a consequence of Irish banks' UK subsidiaries reducing their participation in the ELG scheme, deposits under guarantee have fallen by approximately ¤11 billion. The EU subsidiaries do not have access to a guarantee because they are EU banks with subsidiaries in Ireland. Third, there has been the welcome success of some of the participating institutions, Bank of Ireland and Allied Irish Banks, in raising unguaranteed deposits totalling approximately ¤11 billion, as well as the recent opening up to the banks of access to the international debt markets.

On that point, it is worth mentioning that for a sustained period, because of the difficulties that have emerged across the eurozone, the pillar banks had no access to the interbank lending markets that are normally in place. As those difficulties subsided and normality returned, these opportunities in terms of accessing money on the interbank markets are presenting for the pillar banks, which is a significant development which the Government welcomes.

Effectively, the scene has been set to push on from these developments, in particular the mechanism used in the case of the participating institutions in the UK whereby the Minister for Finance, under paragraph 13 of the Schedule to the ELG scheme, allowed certain categories of deposits to fall away from guarantee coverage from a given date in the future. Together with the power given to banks by the Minister in November 2011 to issue unguaranteed deposits in certain cases, these two approaches to reducing liabilities under guarantee have been instrumental in laying some of the groundwork for a more comprehensive strategy to winding down the scheme.

The Governor of the Central Bank is of the view that an extension of the ELG scheme until June 2013 is necessary and would facilitate an orderly withdrawal from the scheme when macro financial conditions are conducive to such a step. The operator of the scheme, the National Treasury Management Agency, has also been consulted in this matter and is of a similar view. While it believes the removal of the guarantee would be seen as a further positive step in restoring normal market conditions in Ireland in the context of its sustained return to the capital markets, it believes it is important the ELG scheme would be renewed until conditions are judged appropriate by the authorities to move to end the scheme.

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 bank guarantee schemes and which are based, first, on recommendations of the Governing Council of the European Central Bank on government guarantees for bank debt and, second, on subsequent recommendations from the European Commission. The latest changes to the pricing regime were introduced on 1 January 2012.

The cost of the fees and its effect on the profitability of the banks is significant and has been one of the driving factors behind their anxiety to try to move away from dependence on the guarantee for their funding. While initially fees were quite low, at 25 to 50 basis points, the cumulative effect of the Commission recommendations on fees was a gradual increase in average fees payable by the institutions over the course of 2010, with the actual level of fee applicable dependent on the type and maturity of the debt concerned and on the credit rating of the institutions involved. Subsequently, in 2011 and during the course of this year, the average fee payable levelled off at around 110 basis points. In monetary terms, for example, this meant that in respect of average monthly liabilities under guarantee of about ¤112 billion during 2011, annual fees of some ¤1.23 billion were paid. This is effectively the amounts the banks give us for providing the guarantee. Total fees generated by the participating institutions last year for the purposes of providing the guarantee was approximately ¤1.23 billion and this year will be just over ¤1 billion.

Currently, the fee structure applicable to eligible liabilities is as follows. For debt or deposits with a maturity of 90 days or less, the guarantee fee is generally 160 basis points. As the debt maturity increases, so too does the number of points. The total of fees arising from the ELG scheme and paid to the Exchequer to date is some ¤2.83 billion. Approximately ¤741 million has been incurred in respect of the first three quarters of 2012 as compared with ¤951 million paid for the corresponding period in 2011. When one compares the first three quarters of this year with the first three quarters of last year, there is a natural weaning away of the fees as a consequent reality of the amount which is held under the guarantee reducing because of the ability of the institutions to obtain funding in the normal way.

I should mention 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 before this House is passed. These are called financial support orders and will be made in exercise of the powers conferred on the Minister for Finance under section 6 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 on the proposed amendment to the scheme being passed in the first instance. I have explained the first order and will take questions on the second order at the end of the debate.

The motion before the House is one which warrants the full support of this House. It should prove to be an essential last step which maintains support for the domestic banking system for the present while facilitating a timely exit from the scheme in the very near future. It must be borne in mind that it was never intended that this scheme would be maintained indefinitely and that it would last only for as long as was considered necessary for financial stability reasons. This is reflected in the regular assessments that have had to be carried out by the Irish authorities and the state aid criteria that have had to be met to persuade the European Commission that prolongation of the scheme to date has been warranted. The Commission and the ECB are fully aware of the Government's intentions to move to end the scheme. They also accept that the timing needs to be as right as it reasonably can before a winding-down process can be initiated. This is being worked on at present by the relevant authorities.

It would, of course, be better if there were no need to extend the ELG scheme beyond the end of this year, but we need to be practical. Preparations, in operational terms, will need to be made by the participating institutions and reasonable notice given to customers that the guarantee will be ending for new deposits made or debt issued after a given date. The guarantee remains for existing maturity up to five years. That is an important point. At the same time, a decision will need to be taken that market conditions and the macro financial environment at that point are conducive to withdrawal of the scheme. A measured, well-thought out approach is required, therefore, in reaching this point, and the prolongation of the scheme into next year will ensure the maximum flexibility can be availed of in implementing these plans.

I do not believe there is any doubt about the fact that we are now moving towards the end of the guarantee. This will be an important step towards normal market conditions and another staging post towards this county coming out of the very severe difficulties it has faced as a consequence of the appalling banking mess that emerged in 2008 and 2009.

We are asking for the approval of this House - we received that of the Lower House today - to allow us to extend this scheme. As famously stated by a former Member of the Dáil, in looking for approval, we are hoping that this scheme will come to an end in the shortest possible time next year. If this is possible for the participating institutions and the Government to achieve, it will be another milestone along the road towards recovery for this country.

This has been a difficult chapter for our people, our country and our taxpayers, who have committed significant sums of money to the banking sector for the purpose of propping it up while the banks return to profitability. The task in all of this has been to see the new banking sector, with the newly configured pillar banks, as a means through which we can obtain economic recovery.

In seeking the support of Senators for this motion to extend the scheme, we do so in the firm and honest belief that the life of this scheme is coming to an end and to tell the world and domestic audiences that we have done a good day's work and taken another step on the road to recovery.