Ireland to set strict limits on banks availing of guarantee


IRISH POSITION:THE GOVERNMENT will set strict limits on the amount of deposits and borrowings that Irish banks availing of the State-backed guarantee scheme can take on.

Minister for Finance Brian Lenihan also said yesterday Irish banks' subsidiaries based overseas would not necessarily be covered by the guarantee to meet EU state-aid rules.

"There will be some limits. It cannot be unlimited in terms of the amount of deposits or borrowings that any particular institution can engage in," Mr Lenihan told journalists after a meeting with EU competition commissioner Neelie Kroes in Luxembourg.

"One of their concerns, naturally, is that their will be excessive borrowing by any particular bank . . . We intend to work on a formula that will ensure it doesn't distort capital movements between member states by uncompetitive behaviour." Irish officials are working on a mechanism to write into the State guarantee scheme that ensures that the asset and liability sheets of banks continue to reflect their historical performance.

This should ensure there is no sudden jump in liabilities because of additional borrowing taken on board on the strength of the State guarantee scheme.

The mechanism is being created to respond to fears expressed by Ms Kroes that the "unlimited nature" of the State guarantee could lead to distortions in the EU market.

The Government has already conceded that it will consider requests from foreign-owned banks with significant retail deposits in Ireland to join the guarantee scheme.

Mr Lenihan has also agreed not to automatically extend the State guarantee to Irish banks' subsidiary operations abroad.

"The State is entitled to intervene when a vulnerable bank poses a systemic threat to the national economy, and if an overseas subsidiary was part of that systemic threat then we would be able to intervene. But we will make a judgment on that on a case-by-case basis," said Mr Lenihan, who met British chancellor Alistair Darling on the margins of the EU finance ministers' meeting in Luxembourg for talks.

"We made it clear that they can't be allowed to distort the market in Great Britain," said Mr Lenihan, who added that the British chancellor now had bigger issues on his mind.

He was referring to reports that Mr Darling was preparing to consider injecting public money into British banks in an effort to recapitalise them.

Mr Lenihan said the issue of recapitalisation of banks had been discussed by several ministers at the meeting, and was actively being considered by some EU states. He said he did not think this policy was required in Ireland, but events were moving quickly.

"That is our position at this stage. But we are monitoring the position. It would be a brave person that could predict where the banking system would be in a week, two weeks' or three weeks' time," said Mr Lenihan, who praised an EU agreement yesterday to raise the minimum deposit guarantee for consumers to €50,000 from €20,000.

"As we saw in Ireland, consumers and ordinary depositors are moving their deposits from bank to bank.

"That pattern we saw in Ireland, and that pattern, according to other EU ministers, is happening in other European countries as well. We have to settle that down."