Guarantee needed to stabilise financial system - Hurley

Central Bank Governor John Hurley said the Government's new bank guarantee plan was introduced to
"protect the stability of the domestic financial system".

At the launch of the Central Bank's latest quarterly bulletin Mr Hurley said the guarantee would allow Irish banks to "secure access to funds both domestically and internationally" and that the decision was taken following consultation with the Financial Regulator.

"For over a year now, the Central Bank has been monitoring the disruption in international financial markets. This was triggered by difficulties in the US subprime mortgage market and resulted in a protracted drying up of liquidity in a range of markets."

Mr Hurley said efforts to inject liquidity did not have the desired effect and that the failure to pass the US legislation saw events come to a hear last Monday.

"At that time, I had to inform the Minister that the risks to financial stability were becoming unacceptably high with knock-on effects for the wider economy. A major consideration was that the highly concentrated nature of the Irish banking system created a high risk of contagion," Mr Hurley said.

He said unlike other international banks, Irish-owned banks have "not had to write-off significant
losses on loans and investments so that bad debts and loan losses were not the key issues for our financial system last Monday evening".

For the Irish banks the issue was the unprecedented shortage of liquidity in financial markets.

He said the primary consideration was to ensure financial stability at minimum cost to the taxpayer.
Work on a the system of charges that "minimise moral hazard implications" was complex but should be completed by the weekend, he said.

Me Hurley added that if the correct decisions were taken now the medium term outlook for the economy was good.