Is the deposit guarantee a state guarantee?

NoRegretsCoyote said:
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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Sigh.

A guarantee is an undertaking to answer for the payment or performance of another party’s debt or obligation in the event of default by the person primarily responsible for it.

The State does not guarantee any deposits of Irish banks.

It really is that simple.
 
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Folks,

There is no need to fall out over this. But it is an important issue.

I am trying to understand it myself and to see what we all agree. Is everyone agreed on the following? If not, which bits do you disagree on?

It would be helpful to provide links to official sources.

Ireland

1) The state does not legally guarantee any deposits in Irish banks.
2) The Central Bank does not legally guarantee any deposits in Irish banks
3) There is not enough in the Deposit Guarantee Scheme to give everyone €100k if, for example, AIB collapsed.
4) There would be a huge shortfall in the DGS fund if AIB collapsed
5) The DGS could borrow the money and would be very likely to borrow the money. But they could, theoretically, refuse.

Other eurozone countries

The original thread was about Raisn.
Can we confidently say the above about Lithuania and Latvia?
 
Is it different from the An Post guarantee?

the Deposit Guarantee Scheme does not cover accounts held at An Post. However it should be noted that deposits held in the Post Office Savings Bank (POSB) are State Savings and repayment is a direct, unconditional obligation of the Irish Government. Further information on State Savings can be found at statesavings.ie
 
I have sent the following questions to the DGS


Could you clarify
1) Is the DGS a state guarantee?
2) What happens if a major institution defaults and there is not enough money in the DGS?
3) The DGS may borrow money but would not be obliged to borrow money. Is that correct?
4) Where are the rules of the DGS? Are they in primary legislation?
 
Brendan Burgess said:
Is it different from the An Post guarantee?
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Yes. But I'm going to be pedantic because people confuse them.

'State savings' are a state liability.

'An Post Money' is not, and is not covered by the DGS. This would be current accounts opened with An Post.

If people can't fully understand the situation in Ireland, what hope when you have with a bank you've never heard of where your deposit is placed with a branch of that bank in a different country to where their head office is located?
 
ClubMan said:
The An Post deposit account IS a State Savings product. You said that it wasn't.
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No I didn't. And you've proven my point, because you cannot see the difference.

I referred to 'An Post Money' current accounts.
You then sent a link to a 'Post Office Savings Bank' book based deposit accounts.

2 completely separate entities.
The latter is an obligation on the State. The first isn't.

I'll accept your apology.
 
Brendan Burgess said:
I have sent the following questions to the DGS


Could you clarify
1) Is the DGS a state guarantee?
2) What happens if a major institution defaults and there is not enough money in the DGS?
3) The DGS may borrow money but would not be obliged to borrow money. Is that correct?
4) Where are the rules of the DGS? Are they in primary legislation?
Click to expand...


The DGS is not a state guarantee but in reality it is because the Central Bank are allowed step and provide a 'Loan'
The DGS is allowed raise contributions from institutions to raise money and can also get CB and State funding for 'stability' purposes

The rules are here

 
If deposits started shifting to say Latvia over the next decade, but then they have a banking crisis similar to ours, what might the outcome be? Latvia's economy is 1% the size of Germany's (or <10% of ours), are the people of Latvia likely to accept the vast quantity of debt and austerity the government would need to take on to pay back deposit holders from other countries? The EU would probably step in, maybe, depending on the wider context.

This is why the question of what the DGS is matters, right? I've seen it described as an ironclad EU guarantee on other forums for example, a long way from a fund of 0.8% of deposits loosely backed by the economy of one small country in my example above.
 
Brendan Burgess said:
Folks,

There is no need to fall out over this. But it is an important issue.

I am trying to understand it myself and to see what we all agree. Is everyone agreed on the following? If not, which bits do you disagree on?

It would be helpful to provide links to official sources.

Ireland

1) The state does not legally guarantee any deposits in Irish banks.
2) The Central Bank does not legally guarantee any deposits in Irish banks
3) There is not enough in the Deposit Guarantee Scheme to give everyone €100k if, for example, AIB collapsed.
4) There would be a huge shortfall in the DGS fund if AIB collapsed
5) The DGS could borrow the money and would be very likely to borrow the money. But they could, theoretically, refuse.

Other eurozone countries

The original thread was about Raisn.
Can we confidently say the above about Lithuania and Latvia?
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1) Agreed. I think the discussion, perhaps in fairness to Sarenco, is that he was being black and white about it, whereas I was saying it amounts to one in reality.

2) Agreed.

3) Agreed.

4) Agreed. This would force the deposit guarantee to go looking for extra contributions from member banks or borrow somewhere. That wouldn't be feasible in the case of an AIB failure. The Central Bank would therefore, according to the law, have to decide whether it needed to urgently provide funds to avoid a serious run on banks if it didn't. But it would do so knowing that the Irish State is mandated to give it the money back. The State having to give it back is where I liken it to a State Guarantee as it ultimately ponies up the funds. The fact that it can try to get the funds back in due course from the dgs/banks does not dilute the argument in my view.

5) It could but from where - I think it's just the Central Bank - so back to point 4.

On that basis, I would think the Central Bank will confirm that the rules, will not say it is a State Guarantee. I think perhaps the Department of Finance should be asked for their view on whether they have 'guaranteed' it?

A point worth considering, is that the Central Bank would likely never allow AIB to fail in this way i.e. resulting in a deposit guarantee situation. So it is something of a hypothetical argument (I hope). The fund seems more for using in credit union failures as it already has.
 
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Sunny said:
The DGS is not a state guarantee but in reality it is because the Central Bank are allowed step and provide a 'Loan'
The DGS is allowed raise contributions from institutions to raise money and can also get CB and State funding for 'stability' purposes

The rules are here

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And just to remember, that 'loan' from the Central Bank is only temporary, I think the State has to repay the Central Bank very quickly.
 
Zenith63 said:
This is why the question of what the DGS is matters, right? I've seen it described as an ironclad EU guarantee on other forums for example, a long way from a fund of 0.8% of deposits loosely backed by the economy of one small country in my example above.
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This is the key weakness of the current DGS regime.

No national deposit guarantee scheme has sufficient resources to deal with a large local banking shock, which could easily overburden a national DGS, taking account of the fact that the Directive only provides a vague voluntary borrowing facility between national DGSs.

Now you could anticipate that if a national deposit fund is depleted in the case of a large pay-out, the DGS would able to get a loan from the relevant national government and that would effectively act as a national backstop.

But what happens if a less wealthy Member State does not have the financial means to intervene as a backstop? Bear in mind that the Member State's borrowing costs are likely to spike dramatically if there is a local banking shock - look at Ireland in 2008.

We could have had a mutualised, EU-wide, deposit guarantee fund but the wealthier Member States (particularly the Germans) wouldn't wear it.
 
Sarenco said:
This is the key weakness of the current DGS regime.

No national deposit guarantee scheme has sufficient resources to deal with a large local banking shock, which could easily overburden a national DGS, taking account of the fact that the Directive only provides a vague voluntary borrowing facility between national DGSs.

Now you could anticipate that if a national deposit fund is depleted in the case of a large pay-out, the DGS would able to get a loan from the relevant national government and that would effectively act as a national backstop.

But what happens if a less wealthy Member State does not have the financial means to intervene as a backstop? Bear in mind that the Member State's borrowing costs are likely to spike dramatically if there is a local banking shock - look at Ireland in 2008.

We could have had a mutualised, EU-wide, deposit guarantee fund but the wealthier Member States (particularly the Germans) wouldn't wear it.
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This is my worry with Rasin and all those other new banks that people are using for deposits. People are just assuming that because it says protected by DSG then their money is completely safe and they are sending it all over europe. In reality , (in my opinion) if a bank in a lesser off country like Latvia or Lithuania went under and the DSG couldnt cover it then they would burn the foreign depositors no problems. I think we are seeing the beginning of an issue like this start now, everywhere i look is this "covered by guarantee" but its not!
 
Brendan Burgess said:
1) The state does not legally guarantee any deposits in Irish banks.
2) The Central Bank does not legally guarantee any deposits in Irish banks
3) There is not enough in the Deposit Guarantee Scheme to give everyone €100k if, for example, AIB collapsed.
4) There would be a huge shortfall in the DGS fund if AIB collapsed
5) The DGS could borrow the money and would be very likely to borrow the money. But they could, theoretically, refuse.
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1) The state does not legally guarantee any deposits in Irish banks.
2) The Central Bank does not legally guarantee any deposits in Irish banks


Correct on both points. “. A fundamental principle underlying DGS is that they are funded entirely by banks, and that no taxpayer funds are used.” Deposit guarantee schemes (europa.eu). Note the ‘no taxpayer funds are used’ bit.


3) There is not enough in the Deposit Guarantee Scheme to give everyone €100k if, for example, AIB collapsed.
4) There would be a huge shortfall in the DGS fund if AIB collapsed
5) The DGS could borrow the money and would be very likely to borrow the money. But they could, theoretically, refuse.

What happens when a bank fails is covered by the Single Resolution Mechanism that determines what happens. Single resolution mechanism (europa.eu).

There is a good post on this by @RedOnion, post #65, in this thread How relevant is the 100k guarantee | Page 4 | Askaboutmoney.com - the Irish consumer forum .
 
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Iceland differentiated between local and foreign depositors back in 2008.

But an EU Member State would be in breach of an EU Directive if they did that or if they lowered the covered deposit amount.
 
PMU said:
“. A fundamental principle underlying DGS is that they are funded entirely by banks, and that no taxpayer funds are used.” Deposit guarantee schemes (europa.eu). Note the ‘no taxpayer funds are used’ bit.
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In a scenario where the Central Bank paid up (assuming for whatever reason the Bank in question was liquidated, creating a deposit guarantee situation), the State has to pay it back to the Central Bank quickly, and then try to get the money back from the banks/scheme over a period of time. I suppose that is in keeping with the principle, but is it not arguable that in the first instance, the State would be using taxpayer funds - albeit hoping to recoup in time?
 
No one with a deposit less than €100,000 is getting burnt anywhere in Europe. Just because Germany wouldn't agree to a European wide scheme doesn't mean that if a financial crisis hit that they wouldn't change their tune very quickly. After the usual stomping of feet and demanding that we all become more like them of course.....

The DGS is almost like a currency. It is built on trust. If the DGS fails in one Country, it becomes pretty worthless in a lot more very quickly....
 
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