Ending the guarantee

The end of the bank guarantee represents a key milestone in Ireland’s economic recovery programme. In place since 2008, the Eligible Liabilities Guarantee Scheme (ELG) was introduced by the Fianna Fáil-led coalition. It provided reassurance to Irish banks, their depositors and bondholders that the government would fully honour all the banks’ liabilities. This controversial guarantee, which was issued against the background of a global financial crisis and a domestic financial system then close to collapse, will be withdrawn next month for deposits made after that date. The scheme has helped to stabilise the financial system and, given the improved funding position of the covered banks, is no longer required.

The closure of the scheme – covering liabilities of some €73 billion – will mark the end of a state of financial emergency, which should benefit both to the banks (AIB, Bank of Ireland and Permanent TSB) and the State. As Minister for Finance, Michael Noonan has noted, it will help the three banks to resume normal business in a restructured banking sector.

The domestic banks are likely to save over €1 billion a year in fee payments to the Government. Those annual savings should help the banks return to profitability sooner, and so boost the value of the State’s shareholding in what – excluding Bank of Ireland – are State-owned banks. The enhanced value of the banks should make them more attractive takeover targets, and so help to ensure that the State, in time, recovers its investment in them.

For the State, the ending of the guarantee should also translate into lower borrowing costs on capital markets, as the risk of a sovereign default decreases. For retail depositors in the covered banks, the change should have no adverse impact. They remain fully protected by the existing, but separate, deposit guarantee scheme that covers amounts up to €100,000 for individual account holders, which is broadly similar to the level of protection that other EU member states offer.