Jill Kerby

Bank Guarantees?  They’ll Do Your Head In

Not only has our bank bail-out proven to be the most expensive of its kind in the world, but we also have the most complicated deposit guarantee system, thanks to the government’s decision back in October 2008 to throw a two year, 100% blanket guarantee over all the deposits and debts of the six main Irish banks: AIB and Bank of Ireland, Permanent TSB and the EBS and Irish Nationwide and Anglo Irish Bank and the now defunct Postbank.

That infamous two year deadline runs out at the end of this month (September) and it should come as no surprise that many ordinary bank users and depositors are completely baffled as to what security provisions exist now for their hard earned savings. 

So here goes. 

First, find a comfortable seat.  Then put on the kettle.  Try to keep the background noise and interruptions to a minimum for the next few minutes.  Break out the aspirin… the tangled web of Irish bank guarantees is enough to do your head in. 

 Guarantee Number 1 

Before all hell broke loose on what was a sunny September morning in 2007, Irish depositors were probably blithely unaware that their savings came under an EU-sponsored Deposit Guarantee Scheme that safeguarded just €20,000 of their money per person, one of the lowest deposit security rates in Europe. 

All the financial institutions that were authorised by the Irish Financial Services Regulatory Authority to operate in Ireland were covered by this guarantee. Up to September 2007, there hadn’t been a bank failure here or in the UK for 150 years and in an ironic sort of way, the €20,000 sum under guarantee here was a vote of confidence in our banking sector. 

And then the unimaginable happened.

The UK deposit taker, Northern Rock went wallop on that sunny September 14th as a consequence of the interbank credit crisis; a bank run then started in Northern Rock branches in the UK and here, and suddenly everyone was interested in the terms and condition of the Bank Guarantee Scheme.  The UK government, meanwhile, stepped in and nationalized Northern Rock, ensuring that ordinary depositors would get their money back.

The excitement was over…for the moment. But Northern Rock was a tipping point and the international banking and financial situation deteriorated throughout the remainder of 2007 and into the Autumn of 2008 with spectacular slides in bank share prices.  Then it was Lehman Brothers’ turn to implode.

Irish savers were now only too aware about how vulnerable the banking system here was to the toxic effect of the US subprime market, overheated property values and the hundreds of billions worth of complicated derivatives investments that were hived off from the mortgage bonds that had been sold on by the banks.

In early September, 2008, the Irish government, conscious of the growing unease about the banks raised the Deposit Guarantee Scheme sum from €20,000 to €100,000. We’ll call it Guarantee Number 2. Once again, all the financial institutions under the regulation of the Irish Financial Regulator plus the credit unions were included.

 Guarantee Number 3

 In reality, this rise in the guarantee and the growing awareness of how dependent the Irish banks – and Anglo Irish Bank in particular – were to the fast-freezing inter-bank market stoked up peoples’ fears.  As queues of worried savers started to form outside a number of Irish banks, on September 29th a two year, blanket, 100% deposit guarantee was declared: the Credit Institutions (Financial Support) Scheme (CIFS) was born and it effectively guaranteed over €400 billion worth of loans and deposits in the Irish banks.  The rest, as they say, is history.

 So where do depositors now stand as the 100% CIFS scheme runs out on September 29, 2010?

 First, all deposits up to €100,000 in Irish institutions supervised and regulated by the Financial Regulator remain guaranteed up to that amount with no end date.  The guarantees that apply to deposits in non-Irish banks by their own regulators – the Dutch Financial Regulator in the case of RaboBank’s €100,000 guarantee - also continue to apply.  But after that date, sums over €100,000 in Irish banks are no longer guaranteed under the CIFS scheme.

However…and this is why I suggested you make that nice cup of tea, the Government introduced yet another deposit scheme last December 2009 known as the Credit Institutions Eligible Liabilities Guarantee (ELG) Scheme 2009.

Further amended on June 28th, 2010 and last September 8th, this Guarantee Number 4 now guarantees all retail deposits in the participating Irish banks until December 31st, 2010.  It may also be significant to small and medium sized companies that the September 8th amendment also extended the ELG scheme to short term bank liabilities, including corporate and interbank deposits as well as debt securities, but only until December 31st, 2010.

Meanwhile the balance of personal fixed rate deposits over the €100,000 limit of the main Deposit Guarantee Scheme (DGS) for a period of no more than five years or until 2015, and then, only if the deposit was made after the bank joined the ELG scheme, but before December 31, 2010, when the current six month rolling approval of the ELG scheme by the European Commission is up. (The dates on which the Irish institutions joined the ELG are below.)

You might want to read that again.  Slowly.

In normal English, what this means is that if you have €150,000, for example, which you wish to leave with an ELG participating bank for, say, the next three years, the first €100,000 will be guaranteed under the DGS scheme with no end date.

The entire amount – all €150,000 - is also guaranteed under the CIFS scheme until the end of this month.  Finally, the €50,000 balance over the €100,000 will be guaranteed under the ELG scheme until the deposit term matures in September 2013. (Had you wanted to, the €50,000 could have been under the ELG deposit scheme for up to five years until 2015 when the ELG scheme comes to an end.)

Just keep in mind that if you had put more than €100,000 into a fixed term account before your bank joined the ELG scheme, the amount in excess of that €100,000 is not guaranteed.

So many promises

For what it’s worth, in the real world that most of our fellow Europeans inhabit and conduct their banking, 100% deposit and debt guarantees worth hundreds of billions of euro, just don’t happen, for the simple reason that no one is dumb enough there to believe that such a promise could ever be delivered.

Life is complicated and stressful enough these days.  So here’s a novel thought:  keep your money in a solvent bank.  Then enjoy the reassurance that a plausible deposit guarantee is in place.

Leave the fairy tales to the politicians and central bankers.

The dates at which the Irish banks joined the ELG scheme:

Source:  NTMA