AIB, Bank of Ireland and Permanent TSB will no longer have to pay up to €1.1 billion a year to the Government in fees for the bank guarantee scheme following the announcement yesterday that it will end on March 28th.
The Minister for Finance Michael Noonan said the “time was right” to end the controversial guarantee, which was introduced on September 30th, 2008, to prevent the collapse of the Irish financial system.
He said this decision, which had been well flagged by the Government, would help the three banks to “get back to normal”.
About €73 billion of liabilities is currently covered by the scheme, including €55 billion in deposits.
Mr Noonan said the ending of the Eligible Liabilities Guarantee Scheme (ELG) would enable the banks to return to profitability, which in turn would boost the value of the State’s shareholdings in them over time.
Mr Noonan said it should also reduce the State’s borrowing costs and assist with our exit from the EU-IMF bailout programme at the end of this year.
The Minister said he did not expect a flight of deposits from the three banks as a result of the guarantee ending.
“We don’t believe any capital will move,” he said.
The guarantee had already been removed in relation to about €12 billion in eligible deposits in the UK with “no adverse impact”.
Biggest beneficiaries
AIB and Bank of Ireland will be the biggest beneficiaries from the ending of the scheme.
AIB paid €488 million in fees to the State in 2011. It has yet to publish the figure for 2012 but it paid €215 million for the first six months of last year.
Bank of Ireland paid €449 million in 2011 and had contributed €1.2 billion in total by the end of June 2012.
Its chief executive Richie Boucher has made no secret of his desire for Bank of Ireland to exit the scheme.
Mr Boucher has the strongest hand to play given that the State owns just 15 per cent of Bank of Ireland, compared with about 99 per cent in the cases of both AIB and Permanent TSB.
The Government earned €3.8 billion in fees from the guarantee up to the end of 2012.
It expects to receive €430 million this year and there will be residual payments over the next five years as various liabilities reach maturity.
Liabilities up to March 28th will be covered subject to a maximum of five years.
Mr Noonan said the loss of the fees from the scheme were worked into the arithmetic for last December’s budget and would have no “negative impact” on the country’s finances.
“We have been planning for this since late last year,” he said.
Bank of Ireland “welcomed” the ending of the guarantee.
In a statement, David Duffy, chief executive of AIB, said: “The ELG was introduced as a measure to stabilise the financial system at a time of unprecedented market turbulence, which is no longer evident.
“We welcome the announcement and expect this move will have a positive impact on the operating performance of AIB over time as the bank returns to long-term sustainability.”
Permanent TSB also backed the Minister’s decision.
A spokesman for the bank said: “This is a further sign that the Irish banks – including Permanent TSB – are now able to fund their ongoing activities in the market without the requirement for Government support and that’s to be welcomed by all.”
‘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.
