Noonan announces end of guarantee to help get banks 'back to normal'

‘Normalisation’

The Irish Banking Federation said the Government’s decision “marks a further significant step in the normalisation of our banking system”.

The decision to end the guarantee will not affect the vast majority of deposit holders at the three covered banks.

These are protected by a separate deposit guarantee scheme, which applies to funds of up to €100,000 per institution for individuals and double that amount for joint accounts.

Almost 98 per cent of depositors at AIB, Bank of Ireland and Permanent TSB come within that threshold.

Q&A

What was the Eligible Liabilities Guarantee Scheme (ELG)?

Better known as simply the “bank guarantee”, it was introduced in controversial circumstances on September 30th, 2008, by the previous Fianna Fáil-led coalition to guarantee the liabilities of Ireland’s banks when our financial system was on the edge of collapse at the height of the global credit crunch.

It was one of a series of decision that led to the taxpayer spending €62 billion bailing out Irish-owned banks.

In simple terms, it was a blanket guarantee that the State would meet the obligations of the banks to depositors and bondholders in the event that they couldn’t meet their liabilities.

It was initially for a period of two years but was subsequently extended. The current scheme will be closed to new liabilities from midnight on March 28th.

Liabilities will continue to be guaranteed until their next maturity, subject to a maximum term of five years.

What was covered by the scheme?

It currently covers all deposits held by Bank of Ireland, AIB and Permanent TSB and certain bonds issued by the banks.

The State is currently covering about €73 billion in liabilities, of which €55 billion relates to deposits and the balance to bonds.

What does the ending of the guarantee means for retail depositors?

The deposit guarantee scheme (DGS) covers funds up to and including €100,000 per depositor, per credit institution. Double that amount is covered in the case of a joint account.

Credit union funds were never covered by the ELG scheme. However, members’ savings in credit unions are covered by the terms of the DGS.

How much were the banks paying in fees to be covered by the ELG scheme?

Last year, the three banks paid €1.1 billion to the exchequer for the guarantee.

How will the State now make up this shortfall?

The ending of the ELG was worked into the arithmetic for last December’s budget so there will be no nasty surprises for taxpayers as a result of it ending.

The State expects to receive €430 million this year in fees from the banks and there will continue to be some residual payments as the guarantee winds down over five years.

Minister for Finance Michael Noonan said yesterday that the ending of the ELG would benefit the State via lower borrowing costs on capital markets as the risk of a sovereign default lessens from no longer having to guarantee these liabilities.

It would also enhance the value of the State’s shareholdings in the three banks over time as they would now be able to move to profitability more quickly by not having to pay the fees associated with the scheme.