Government guarantees all deposits in Irish banks

WHICH BANKS ARE COVERED BY GAURANTEE (30th September 2008)

The guarantee pledged by the Government today applies to six lenders - four banks and two building societies.
The move comes ten days after the Government increased the statutory limit for the deposit guarantee scheme for banks and building societies from €20,000 to €100,000 per depositor.

Today's move sets no limit to the funds guaranteed at the six named lenders. The guarantee expires in September 2010:

The banks and building societies covered are:

Allied Irish Bank
Bank of Ireland
Anglo Irish Bank
Irish Life and Permanent (Permanent TSB)
Irish Nationwide Building Society
Educational Building Society

The guarantee also extends to subsidiaries of these banks and building societies.

Other financial institutions, many of which are wholly owned by foreign institutions, are not covered under the new scheme.

They are:

National Irish Bank, which is owned by Danish bank Danske
ACC and Rabodirect, which are owned by Dutch bank Rabobank
Ulster Bank and First Active, which are owned by UK bank Royal Bank of Scotland
Bank of Scotland (Ireland) and Halifax, which are owned by the merged UK bank, Lloyds TSB/HBOS
IIB Bank, which is owned by Belgian bank KBC
Irish credit unions
Postbank, which is jointly owned by An Post and Belgian-Dutch bank Fortis

However, the foreign-owned financial institutions above are covered by the Government’s previous Deposit Protection Scheme on sums up to €100,000 or, if they are regulated overseas (NIB and Rabodirect), they can make a request to the Financial Regulator to be covered up to this amount.

NIB has applied to increase its protection to €100,000 and confirmed today that its depositors are now covered up to this amount, while Rabo has not applied to the regulator because they feel their Dutch parent bank is financially strong enough.
 
What it does mean is that Irish Banks can now not be allowed fail with this guarantee in place because the taxpayer will be left picking up a massive bill that would make the current budget deficit look like loose change.
That is the clear message. It would be a bit silly to allow a bank to fail and still pick up all its liabilities. In effect the government is now bound to nationalise any of the six if they get into trouble. I think they knew that anyway so they might as well face that inevitability now rather than wait for an actual failure.

The question of the "commercial" charge for this seems a bit silly to me. Insurance relies on the law of large numbers. Six is not a large number. If this guarantee bites no amount of funding or commercial charges will be anywhere near adequate. The government should charge something and let that be part of the solution to its budgetary problem, but forget any illusion that we are insured against the financial apocalypse.
 
I am waiting for the details of this plan but after hearing Brian Cowan speak, I am getting worried. He seemed confused about capital structures when I heard him earlier.

By the way, why hold Irish bank equity now if you have any doubts about any of the six banks survival because the Irish Taoisach has just announced you will lose if the worst comes to the worst and a bank needs to be rescued.

This all comes down to the banking sector and the government deciding all these problems are a liquidity issue. Personally, I think they are living in a dream world. There is international concern about Irish Banks solvency considering their current very low loan loss provisions and the future losses expected on Irish and UK property. This has the potential to bring this country to its knees. I am looking forward to hearing more........
 
reading some of the wording one point really sticks out and thats the part that states 'The guarantee also extends to subsidiaries of these banks and building societies.'

this seems to cover any investors investing in Irish subsidiaries of the 6 banks named. For example I know Anglo Isle of Man & BOI Isle of Man have announced that investments in their deposits are covered under this scheme as their parent co is Irish based. These providers have informed their existing clients that this is fact! This means it would cover Sterling deposits and not just euro
As this scheme covers corporate investments any Offshore company that invests in these deposits for their underlying client could be fully covered by the scheme as the deposit investments are registered in the company name and not the underlying clients name. Meaning any foreign client can get access to this guarantee through an offshore wrapper or by direct investment in a subsidiary - was that intended?.

Isn't it logical that we will see a lot of corporate investments (for individual clients) into deposits with these banks and a lot of money will come into wrapped products that allow cash deposits to be held. I'd think that unless the UK announce something similar then surely UK clients will invest into these deposits for the guarantees that they give.......same way Irish investors placed deposits into NR - or have I missed something here?
 
Ignoring the risk to public finances, I was struck by an idea while looking at some of the UK finance websites and the Times Online which are encouraging UK savers to open deposit accounts with the Irish banks who operate in the UK. We do not operate in a financial vacuum so any measure which makes some banks seem more secure and attractive just increases the squeeze on others.

There is a finite amount of deposit money. Even in these weird times people are not going to stick wads of cash under the mattress so the movement of deposit money is something of a zero-sum game. A measure like this encourages deposit savings to slosh around from one institution to another which will increase instability.

Northern Rock has been hovering up deposits recently and apparently are about to start turning away further funds or at least new accounts as they are reaching some limit or other.

If there is a massive movement of deposits into these 6 Irish institutions then the government is likely to have to get involved to stop them taking any more deposit cash (like the UK government is doing with Northern Rock) to prevent those outside the umbrella going to the wall. Another possibility is that the UK government will have to match our guarantee if our banks start hovering up UK deposit money.

In the end, having suffered the instability and uncertainty while people move their deposit money hither and thither, we'll be back to where we were with no increase in liquidity and the same level of bad loans, except we'll now either have an executive role for public servants in the running of the banks and/or increased moral hazzard among bankers who are allowed to operate with a degree of independence.

I really don't think they thought this through properly. I don't mind when the Irish government is the first to come up with policies like the plastic bag tax and banning smoking in pubs but I worry about this given the financial and economic ignorance displayed by all politicans and even among people I know who have reasonably senior rolls in the civil service.
 
Just watching Sky News and a reporter outside the Bank of Ireland was actually urging Britons to put money into Irish Banks and listing the ones that have branches in the UK.
 

Are we the only ones that see this???

IMO the banks will reciprocate (this move by the Govt) by easing lending criteria on mortgages.

I would wager my house on it.
 
Europe is unimpressed with us according to the FT but Lenihan had a ready answer which was the correct one. What did they want us to do?

"...Brian Lenihan, finance minister, said he had notified the European Commission of the plan but “a member state is responsible for the stability of its own banking system and I am responsible for the stability of these particular banks.

“In the absence of a Europe-wide system, there is an onus on the Irish government as the sovereign body with responsibility in this state to take action.”"

http://www.ft.com/cms/s/0/b514c10a-8f2e-11dd-946c-0000779fd18c.html


Murt
 
Two weeks ago the head of the Irish Banking Federation said that Irish banks were well capitalised and would comfortably ride out the credit crunch. Today, following news that several Irish banks were about to under, the Government stepped in and pledged EURO 400 billion to guarantee liabilities of the Irish banking sector. EURO 400 billion represents 37 years of government tax receipts. Ireland's credibility and income for a generation is being used to support a banking system that is essentially insolvent. Irish banks made massive gambles in financing property developers at the height of the property bubble, and many of those loans will wind up as bad debt - do you really think that Dunner will sell 37 floors of apartments at 2 million euro a pop, cos that's what needs to happen. Unlike with Northern Rock in the UK, the banks haven't been nationalised, but all the risk has been transferred to the taxpayers, which will encourage continued risky trading by the banks. The Irish Government have provided a guarantee that is nine times bigger than the national debt of the country. Ireland is in euroland and cannot inflate its way out of this debt. I am stunned and shocked and appalled and wondering how on earth I can protect my family from this lunacy.
 
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What guarantees are there for Irish savers with First Active (owned by Royal Bank of Scotland)
 
Interesting article from the nytimes about the Swedish banking crisis in the 90's posted on the property pin.
Effectively we're in the same position, the question now is whether we go Swedish or Japanese...
 
Interesting article from the nytimes about the Swedish banking crisis in the 90's posted on the property pin.
Effectively we're in the same position, the question now is whether we go Swedish or Japanese...
thanks for posting that, i'd seen the 'swedish solution' mentioned in a number of articles as the best solution to the current crisis, including this interesting article from joseph stiglitz
http://www.guardian.co.uk/commentisfree/2008/sep/30/marketturmoil.wallstreet
but hadn't found a decent description of it
 
A few points....

One of the six banks has behaved prudently over the last few years. Another is a testosterone driven basket case and it is about time that it called time on the shed load of bad loans on its books. No need to name names, it is screamingly obvious which banks I am referring to - particularly in the second case.

There is talk today that the UK banking system is up in arms since now there is a temptation for their citizens to move their banking here, because even the dogs of Dublin 2 are suddenly triple A rated. It could only happen in Ireland.

Also, surely there is a huge temptation for those dogs to repackage their bad debt and sell it off 'sub-prime' style since it has the backing of the Irish government. i.e. Us! Will the Central Bank ensure this doesn't happen? Does the legislation guard against this? I don't think it does.

No one in the Central Bank has come forward to be interviewed. Incredible! Look at Bernanke and Mervyn King. Do you know what they look like? I'll bet you do. Would you recognize our governor in a photograph? I doubt it.

The Central Bank has fallen asleep at the wheel. Will heads roll? Are you serious?! This is Ireland. There is NO accountability. Joe and Jane Citizen ALWAYS pick up the tab.

It is a fact that there was a run on the banks on Monday because they are seen as riddled with bad debt. This debt is not being addressed. It has not been removed from their books. Therefore, they cannot borrow against it, and without the ability to borrow they can't do business. It's as simple as that. Presumably, the government and the Central Bank are hoping that the dogs will trade their way out of this in the next few years. We shall see.

Finally, interest rates tend to rise in tranches of 25 and 50 basis points (0.25% and 0.5%). My parents bought their first house when rates were around 15%. If the rate rose by 0.5%, they didn't bat an eyelid. Similarly, if the rate fell by 0.5%, they didn't go out and celebrate.

In these testosterone driven times, it was conveniently forgotten that if people bought their (highly priced because rates were low) house when Eurozone base rates were @ 2% and they rose by 0.5%, they were suddenly faced with a 25%(!!) leap in their repayments. (I know that no one bought at 2%, but I am exaggerating to make the point.) Did the market take this into consideration? Of course not!

My tuppence worth.............

D.
 
ps..........

The brilliant Swedish solution would involve holding those responsible to account: or at least hanging them out to dry. That is not going to happen here.

Cynic? Moi?

D.
 
when Eurozone base rates were @ 2% and they rose by 0.5%, they were suddenly faced with a 25%(!!) leap in their repayments.
This is only the case if you are talking about an interest only loan. For an annuity/repayment loan with repayments comprising capital and interest (and over time the latter becoming a smaller and smaller proportion of the total repayment) this is not true in the general case.
 
Is it just me or does the fact that no-one from the Central Bank is willing to discuss this publicly make it look like there is something to hide? Is there something in this that they are attempting to keep under the carpet until the bill goes through?
 

And how did they arrive at such a specific figure as €400bn?

[Note that both Sweden in the 90s and the US now gambled a fraction of GDP. We're looking at gambling, if I'm not mistaken, multiples of our entire GDP. I think I heard three years mentioned. But, please correct me on this.]

Doesn't such a specific and very large sum suggest to you that some or all of it will be spent?

Why not, say, €50bn and, in the event of a nightmare scenario, increase it if necessary.

€400bn is terrifying.

D.
 
Why not, say, €50bn and, in the event of a nightmare scenario, increase it if necessary.

€400bn is terrifying.

D.

Because it is a system guarantee. €400 billion is roughly the amount of liabilities that the 6 banks have and the amount isn't set in stone. Thats just the estimate. Likely to be more! They couldn't just say €50 billion because the market wouldn't know what liabilities were guaranteed and what weren't.