On 1 June 2011, the European Commission (“Commission”) granted State aid approval for the extension of the Irish Credit Institutions (Eligible Liabilities Guarantee) Scheme (the “Scheme”) for a further six-month period (until 31 December 2011). The Commission also extended the relevant Spanish bank guarantee scheme: the fifth time that the Irish and Spanish guarantee schemes have been extended. The Commission has concluded that the extension of the support measures is in line with its guidance on support measures for banks during the financial crisis. In particular, the measures are deemed to be well targeted, proportionate and limited in time and scope and, as such, are deemed to be compatible with Article 107(3)(b) of the Treaty on the Functioning of the European Union (“TFEU”). During the application of the crisis rules for State aid to financial institutions, the Commission has been prepared to authorise guarantee schemes on banks’ liabilities for periods of six months only, in order to monitor developments and adjust conditions accordingly.

The Scheme was prolonged by the Oireachtas (the Irish Parliament and Legislature) in November 2010 until 31 December 2011 for all liabilities under the Scheme, but subject to continuing Commission State aid approval. The extension of the Scheme (covering Irish financial institutions such as Allied Irish Bank (AIB), Bank of Ireland and the EBS Building Society) means that bonds and deposits issued or rolled over before 31 December 2011 will be guaranteed under the Scheme up to maturity, subject to a maximum maturity of five years.

With a view to a return to normal market conditions, the Commission is seeking to gradually phase out State support to encourage the restructuring of banks and financial institutions with structural difficulties. To this end, the conditions attached to the Scheme changed in December 2010, with every bank in the EU having recourse to State support in the form of capital or impaired asset measures required to submit a restructuring plan.

The last few months have witnessed, generally across Europe but with some exceptions, a continued consolidation of economic recovery and further stabilisation of the interbank market. The extension of the Scheme, well ahead of its expiry date at the end of June, is likely to offer some certainty and comfort to investors. However, it should be noted that the EU Directorate General for Competition regards the bank guarantee schemes as justifiable only as an emergency response to the recent unprecedented stress in financial markets and only as long as those exceptional circumstances prevail. In this connection, the ultimate goal is to return to the normal State aid regime, based upon Article 107 of the TFEU.

Accordingly, it is anticipated that the normal State aid regime will resume as of 1 January 2012, market conditions permitting. Accordingly, Ireland may not be permitted to further extend the application of the Scheme beyond 2011 (although it is recognised that the fact that the pace of recovery is not uniform across the European Economic Area might impact in this regard).