So how has the Government changed the bank guarantee?

Minister for Finance Brian Lenihan has extended the two-year blanket guarantee agreed on that fateful night of September 29th-30th, 2008, from its original expiry date of September 29th, 2010, until the end of this year.

The only difference is that dated subordinated debt – the type of funding investors lend to banks for a risk premium – will not be covered after September 29th.

Why did the Government extend the guarantee?

Given the concerns in the financial markets about Ireland’s ability to meet its debts and to cover the rising cost of propping up Anglo Irish Bank, Irish financial institutions have found it almost impossible to raise unguaranteed funding. This was particularly so after the sovereign debt crisis struck heavily-indebted euro zone countries following Greece’s financial meltdown last May.

The extension gives the banks and building societies breathing space to raise funding particularly as this month they have to repay about €25 billion in debts raised under the original guarantee.

Why include corporate deposits?

Anglo complained last week that uncertainty around the future of the bank was threatening €11 billion held in corporate deposits at the nationalised bank.

Large companies and financial institutions would be reluctant to leave money with Irish banks without the the guarantee.

Both Anglo and AIB called for an extension of the blanket guarantee last month to stabilise the funding of the banking system.

So what is covered?

The three-month extension will cover deposits from large businesses and companies (corporate deposits) as well as deposits from other banks and financial institutions, and wholesale funding raised prior to September 30th, 2008, through the sale of bonds (IOUs) in the global debt markets.

These were all covered under the original blanket guarantee.

Why do the Irish banks need the guarantee?

During the property boom, Irish financial institutions – like many around the world – could not attract enough deposits to fund the borrowing frenzy and they themselves borrowed heavily.

The global financial crisis led to the closure of the money markets in September 2008. Lingering fears over Ireland’s financial positions means the banks still need the State guarantee to fund themselves to make up the shortfall between their deposits and loans.

Didn’t the Government extend a State bank guarantee already?

Yes, the Government introduced a longer-term guarantee called the Eligible Liabilities Guarantee (ELG) last December under which the domestic banks and building societies could raise funding on individual bonds of up to five years sold to investors who provide debt to the institutions. This scheme was extended from the end of this month until the end of this year.

What about everyday deposits members of the public have in the banks – are they covered?

Retail deposits of up to €100,000 will continue to be covered under the Government’s deposit guarantee scheme which does not have an expiry date.

Under the ELG scheme, on-demand deposits of more than €100,000 are guaranteed until the end of this year when the scheme ends. Term deposits of more than €100,000, which pay an interest rate for a set period of time, are covered up to a maximum of five years if they were agreed after the ELG scheme was introduced.

How much in bank debt will be covered under the guarantee?

The Department of Finance declined to give an up-to-date figure, saying that this information was commercially sensitive.

The blanket guarantee covered bank debts and deposits totalling €440 billion when it was first introduced. This has fallen sharply as banks lost deposits and turned to the European Central Bank for funding to meet the shortfall.

At the end of June, the department said the State was covering bank liabilities totalling €103 billion under the blanket guarantee and €153 billion under the ELG scheme. About a further €60 billion is covered under the State deposit guarantee scheme.

Why has subordinated debt been excluded?

The inclusion of dated subordinated debt in the original Government guarantee – about €12 billion at the time – was widely criticised as these investors get well paid for the risk they take on in lending to the banks. The Government had only guaranteed dated subordinated debt, which had a set repayment date. The banks have bought much of this debt back at a discount, but there remains about €8 billion of this debt across the domestic banks.

Critics of the Government’s bank-rescue plan have called on these risk investors to share Anglo’s losses with the taxpayer.

The removal of the guarantee allows the Government to start talks with investors on this issue.