Is the deposit guarantee a state guarantee?

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I have copied this post from another thread as it explains it well. Brendan



You need to have a basic understanding of how banks are funded to understand the DGS and whether there is risk.

If a bank gets into trouble, there is an order in which things get wiped out and/or converted to ordinary shares.

1. Existing capital 'common equity' (share capital retained earnings)
2. AT1 bonds
3. Tier 2 bonds
4. Deposits in excess of DGS
5. Covered deposits



The regulators have set minimum CET1 (1+2) and CET2 (1+2+3) ratios for all the banks, based on the risk of their assets. The bigger the bank, the more the regulators are breathing down their necks.

If things start to go bad, AT1 bonds get 'bailed in' to become shares. Then the tier 2, etc, until the bank has enough capital again. There would have to be a catastrophic event, with the regulators back turned for a long time before a DGS would be invoked for a large bank. You're talking about a complete bank failure.

In the case of an Irish 'pillar' bank, in my opinion you're looking at an entire country economic collapse before covered deposits are at risk.

If the DGS does get invoked, each country has legislation around their scheme. Yes, the schemes only hold cash of c. 1% of covered deposits, but they can also do an 'asset grab' of the assets of the bank and use the funds to pay out. They can also borrow money from the markets, and impose levies on the remaining banks.

The DGS has been used 5 times in Ireland, for Credit Unions.

Personally, I sleep easy at night putting my money on deposit with AIB or BOI.
Life is too short to be worried about giving my money to a sub prime lender or car finance operation I've never heard of somewhere in Europe.
 
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All Raisin accounts are covered by state guarantees from EU governments up to 100000 euro. Is the Irish government more or less likely to default on the guarantee than another EU state government is the question you need to ask yourself before investing.
 
S class said:
All Raisin accounts are covered by state guarantees from EU governments up to 100000 euro.
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Technically that’s not correct.

Each EU Member State has a deposit guarantee scheme that is funded by covered institutions in that Member State.

The amount of each DGS fund represents a very small percentage of the covered deposits in that Member State.

Our DGS is administered by the Central Bank but that doesn’t mean that it represents a State guarantee.
 
Sarenco said:
Our DGS is administered by the Central Bank but that doesn’t mean that it represents a State guarantee.
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The Central Bank is a state body so it is indeed a state guarantee.

Sarenco said:
The amount of each DGS fund represents a very small percentage of the covered deposits in that Member State.
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From memory it’s from 0.5% to 2% of covered deposits depending on the member state. Is this “very small”? In any case DGSs have the power to borrow if necessary to make good on commitments and can levy the banking sector afterwards to pay for it.

My point is that all EU DGSs are as good as each other and retail investors <€100k shouldn’t be worrying.
 
Sarenco said:
Technically that’s not correct.

Each EU Member State has a deposit guarantee scheme that is funded by covered institutions in that Member State.

The amount of each DGS fund represents a very small percentage of the covered deposits in that Member State.

Our DGS is administered by the Central Bank but that doesn’t mean that it represents a State guarantee.
Click to expand...

Technically, it really is correct. You referred to the DGS Fund, as if it is a finite Fund, ignoring completely the fact that EU legislation mandates Deposit Guarantee Schemes to have recourse to alternative funding to meet their obligations. In the case of Ireland, that alternative funding, (after potentially trying to hit the other banks for a few bob), is indeed the Irish State, subject to the Irish Central Bank ponying up first in the insterests of financial stability and being paid back by the Irish State.

NoRegretsCoyote said:
The Central Bank is a state body so it is indeed a state guarantee.


From memory it’s from 0.5% to 2% of covered deposits depending on the member state. Is this “very small”? In any case DGSs have the power to borrow if necessary to make good on commitments and can levy the banking sector afterwards to pay for it.

My point is that all EU DGSs are as good as each other and retail investors <€100k shouldn’t be worrying.
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Exactly. And combined with the inevitable State backstop, it's as good as you will get, barring a complete EU crash that we all hope won't happen again.
 
askabouttax said:
ou referred to the DGS Fund, as if it is a finite Fund, ignoring completely the fact that EU legislation mandates Deposit Guarantee Schemes to have recourse to alternative funding to meet their obligations. In the case of Ireland, that alternative funding, (after potentially trying to hit the other banks for a few bob), is indeed the Irish State, subject to the Irish Central Bank ponying up first in the insterests of financial stability and being paid back by the Irish State.
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Sorry but that is not correct.

A fundamental principle of the DGS framework is that they are funded by member banks, not taxpayers.

If a DGS has insufficient reserves to meet its obligations, then it can borrow to meet those obligations, with the member banks making ex-post contributions to discharge those loans.

The State can of course lend money to a DGS but is under no obligation to do so.
askabouttax said:
combined with the inevitable State backstop
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If there was already a State guarantee in place, why would the State backdrop be "inevitable"?

There are plenty of schemes where the State does indeed expressly guarantee third party obligations.

The DGS is not one of them.
 
Sarenco said:
The Central Bank administers the scheme but the funds come from the banks.
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The funds come from the banks by law based on the deposit base of the bank.

A state body (Central Bank) administers the scheme.

There is recourse to borrowing and ex-post levy on banks if there is a shortfall, again by law.

It is not vaguely akin to private insurance.

It is a state guarantee.
 
NoRegretsCoyote said:
The funds come from the banks by law based on the deposit base of the bank.

A state body (Central Bank) administers the scheme.

There is recourse to borrowing and ex-post levy on banks if there is a shortfall, again by law.

It is not vaguely akin to private insurance.

It is a state guarantee.
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Sorry but that post makes zero sense.

The State does NOT guarantee bank deposits.
 
It is a guarantee scheme administered by the state by law. Not by the banks or any other private entity under private contractual arrangements.

I am not doing any more semantics but to me this can be conveniently described as a state guarantee. A scheme does not have to have recourse to taxpayer resources to be described as such.
 
Sarenco said:
Sorry but that is not correct.

A fundamental principle of the DGS framework is that they are funded by member banks, not taxpayers.

If a DGS has insufficient reserves to meet its obligations, then it can borrow to meet those obligations, with the member banks making ex-post contributions to discharge those loans.

The State can of course lend money to a DGS but is under no obligation to do so.

If there was already a State guarantee in place, why would the State backdrop be "inevitable"?

There are plenty of schemes where the State does indeed expressly guarantee third party obligations.

The DGS is not one of them.
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I previously stated that you were ignoring the fact that Deposit Guarantee Schemes have to have recourse to alternative funding to meet their obligations. While you say the "State can of course lend money to a DGS but is under no obligation to do so", it is still the fact that the Government is indeed on the hook in prescribed circumstances, as I outlined earlier.

If the Irish Central Bank covers the shortfall in the interests of financial stability due to a shortfall in the fund needed for the payout, and tapping the banks for extra funds not being feasible if it's a large bank that failed, the Irish State would have to pay back the Central Bank and, subsequently, the State would have to set about trying to recoup the funds in the medium/very long term from the other banks, via the deposit guarantee fund.

The fact that the Irish State is mandated to pay back the Central Bank for lending to the deposit guarantee fund, and then would have to worry about getting it back in the long term, makes it from the perspective of the depositor, a State guarantee, as the money needed would be provided, and whether the State got the funds back or not, would mean diddly squat to the depositor that got his/her deposits back.

You said there are plenty of schemes where the State expressly guarantees third party obligations, but that the DGS is not one of them. It is (via the Central Bank).
 
askabouttax said:
I previously stated that you were ignoring the fact that Deposit Guarantee Schemes have to have recourse to alternative funding to meet their obligations.
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I haven’t ignored anything.

Yes, the Central Bank may provide urgent, short-term financing to the Fund in certain circumstances. But the key word here is “may” - the Central Bank is not obliged to provide any particular level of financing and it certainly doesn’t underwrite the Fund’s obligations.

Again, the DGS does not constitute a State guarantee.
 
So you accept now that there is a State Guarantee related to the deposit guarantee yes?

But you're now focussing on the non mandatory option for the Central Bank to provide funding if there was a shortfall?

You believe that the Central Bank, if it facilitated a bank to liquidate rather than going through resolution, and which would result in a call on the guarantee, in the knowledge that there would be insufficient funds in the deposit fund to make compensation, would then abandon the idea of funding the very guarantee scheme it operates on behalf of the State?

I would expect the funding is non mandatory because the State couldn't force a mandated funding on the Central Bank. The State very well knows that it is on the hook if an Irish Bank were liquidated resulting in a call on the guarantee, hence it being provided for in law that the Statement repay the Central Bank.

Call it what you want to, the mandating of the Irish State to repay the Central Bank after the Central Bank funded the fund (and the Central Bank would have to fund it, or cause an EU collapse in belief in depositor protection), leaves no doubt that this is a State Guarantee in all but name. At least until some EU DGS comes about, which doesn't look likely.
 
askabouttax said:
So you accept now that there is a State Guarantee related to the deposit guarantee yes?
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Eh, no. There is no State guarantee.

A fundamental principle of the DGS framework is that they are funded by the covered banks - not the taxpayer.
 
Sarenco said:
The State would have to expressly guarantee covered deposits at covered institutions.

We actually introduced a two-year State guarantee of bank deposits back in 2008.
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The only difference here is the provision that the Central Bank has to elect to fund the deposit guarantee first, if there is a significant shortfall. Then the State has accepted that it has a guarantee in place with the Central Bank to pay it back.

If AIB were to fail in a way that created a deposit guarantee scenario, with many billions of covered deposits, the Central Bank would have to pay and the State guarantee that it would repay the Central Bank would come into effect.

If we don't accept that the above would happen, then I don't know why we consider deposits in AIB covered. Because the only way they could be covered is through the indirect State guarantee. The State knows this, and it's effectively a State Guarantee. If it walks like a duck...
 
Sarenco said:
The State would have to expressly guarantee covered deposits at covered institutions.
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So unlimited recourse to Exchequer funds, right?

And your point is that the DGS is too limited in this regard as:
a) Fund is “very small”
b) borrowing from Exchequer or other sources to make up potential shortfall is not a given but merely a possibility
I hope I’ve summarised your argument correctly.
 
NoRegretsCoyote said:
So unlimited recourse to Exchequer funds, right?
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A guarantee doesn’t have to be unlimited, it could be capped.
NoRegretsCoyote said:
So unlimited recourse to Exchequer funds, right?

And your point is that the DGS is too limited in this regard as:
a) Fund is “very small”
b) borrowing from Exchequer or other sources to make up potential shortfall is not a given but merely a possibility
I hope I’ve summarised your argument correctly.
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I didn’t say that the DGS is too limited or that the Fund is very small.

The only point I made is that there is no State guarantee of deposits.

And no amount of linguistic gymnastics changes that simple fact.
 
Sarenco said:
A guarantee doesn’t have to be unlimited, it could be capped.
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So:

1) a scheme with capped recourse to Exchequer funds is a state guarantee
2) a state body administering a mandatory insurance scheme (with powers to borrow and then levy the sector ex post) is not a state guarantee

Is the minimum threshold to constitute a state guarantee the recourse to Exchequer funds?
 
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