Further to our previous update on the Credit Institutions (Eligible Liabilities Guarantee) Scheme (the “Scheme”), which outlined the extension of the Scheme up to 30 June 2013 (or such earlier date as may be indicated by the Minister for Finance (the “Minister”) and communicated in the national press / media), on 26 February the Minister announced that the Scheme will end for all new liabilities from midnight on 28 March 2013.  After this date, no new liabilities will be guaranteed under the Scheme.  The ending of the Scheme is seen to be a significant step in the normalisation of the Irish banking system.

Background to the Scheme

On 29 September 2010, the Credit Institutions (Financial Support) Scheme 2008, which provided a blanket guarantee of bank liabilities and was introduced by the Minister on 30 September 2008, expired.  This blanket guarantee was succeeded by the Scheme which was officially commenced on 9 December 2009 and which applies to the following credit institutions:  The Governor and Company of the Bank of Ireland; Allied Irish Banks plc (which now includes EBS Limited as its subsidiary); ICS Building Society; Permanent TSB plc; Irish Bank Resolution Corporation Limited (formerly Anglo Irish Bank Corporation Limited); and certain named subsidiaries (each a “Participating Institution”).

The Scheme was due to expire on 31 December 2012 but, as set out in our previous update, the Scheme was extended until 30 June 2013 (or such earlier date as may be indicated by the Minister and communicated in the national press / media).  As set out above, the Scheme will now end for all new liabilities from midnight on 28 March 2013.

The Scheme

Pursuant to the Scheme, the Minister guaranteed all “eligible liabilities” (“Eligible Liabilities”) incurred by Participating Institutions.

Eligible Liabilities may be any of the following:

  • all deposits (to the extent not covered by the Deposit Guarantee Scheme (“DGS”) or similar deposit protection schemes in Ireland or any other jurisdiction – ie, in Ireland, certain retail deposits of up to €100,000 are guaranteed under the DGS which does not have an end date and is part of an EU-wide arrangement for deposit protection);
  • senior unsecured certificates of deposit;
  • senior unsecured commercial paper; and
  • other senior unsecured bonds and notes,

provided that (i) these are incurred by the Participating Institution during the period which runs from the date on which the Participating Institution joined the Scheme until the Scheme’s end date (ie, 28 March 2013) and (ii) where relevant, the liabilities do not have a maturity date in excess of 5 years.

In respect of Eligible Liabilities other than deposits, securities:

  • must not contain an event of default constituted by cross-default or cross-acceleration; and
  • must be single currency denominated in one of euro, pounds sterling or US dollars or any other currency approved by the Minister.  An Eligible Liability issued under a programme may be issued in any currency permitted by the programme documentation.

Effect of Termination of the Scheme

The Minister was keen to stress that the ending of the Scheme will not impact the vast majority of bank customers as their deposits are covered by the DGS which covers deposits up to and including €100,000 per depositor per credit institution or €200,000 in the case of a joint account. In practice, this means that almost 98% of bank account holders whose deposits fall below the €100,000 threshold, remain covered by a guarantee irrespective of any change to the Scheme. The DGS also covers members’ savings with their Credit Union and the ending of the Scheme will have no impact on Credit Union members’ savings with their local credit union.  It is important to note that liabilities incurred after January 2010 and before midnight on the 28 March 2013 will continue to be guaranteed until their next maturity, subject to a maximum term of 5 years.

It should be noted that a similar scheme has already been removed in the UK with no adverse impact. As a result, roughly €12 billion equivalent in previously eligible deposits have been released from the guarantee in the UK with no effect on deposit volumes there.  It is expected that the termination of the Scheme in Ireland will have a similar impact.

It is anticipated that the ending of the Scheme will also remove a costly distortion in the wider deposit market in Ireland and should improve conditions for the normal flow of credit in the economy.  It is also anticipated that the ending of the Scheme will remove €73 billion of contingent liabilities from the taxpayers. In return for guaranteeing such massive sums the State has received fees from the Participating Institutions. However the Minister stated that, when forecasting the budget, the Irish Government had assumed that the Scheme would end in February 2013 and, as a result, it is expected that the ending of the Scheme will not have a negative impact on the Irish budgetary position. The Minister also stated that he is “confident that the ending of the Scheme and the gradual removal of this liability from the taxpayer will also help to sustain Ireland’s re-entry to international markets”.

The Minister further stated that “The Irish banking system failed the Irish people and the mismanagement of the banks and the crisis has cost the Irish taxpayer €62 billion. All of the Government actions since taking office in March 2011, both at home and abroad, are designed to repair this damage and break the negative link between the banks and the State.  We are making significant progress in this regard and the ending of the [Scheme] for new liabilities marks another step forward.”